Source: CONSOL Energy
CONSOL Energy (CNX -3.53%) is having a bit of an identity crisis. The company can't decide if it's a coal company or a natural gas company. It's also not very fond of the value investors have placed on its stock, because investors apparently don't know how to identify CONSOL. Because of this, one thing has become is clear: CONSOL doesn't like the direction it's heading, which means that big changes could be on the horizon.
CONSOL's biggest issue is that it doesn't feel that it's getting the respect it deserves. The company believes that its assets are being undervalued by the market, and it's looking at ways to boost that value. According to CEO Brett Harvey, "everything's on the table" including a breakup of the company.
This isn't a new theme for the company. CONSOL did split off its coal bed methane subsidiary, CNX Gas, in 2005, only to take it back in-house five years later. Now, it might be splitting that business off again or selling other assets within its portfolio to unlock value. This could turn out to be a great move for the company, especially if it gets creative.
For example, the company has pointed out repeatedly that it's no longer interested in growing its coal business either organically or by way of acquisition. Starting next year, the company will only spend $300 million-$350 million per year in maintenance capital as it turns the coal business into harvest mode. In my opinion, that makes it a great candidate for an MLP structure similar to Alliance Resources (ARLP -0.28%). MLPs tend to be valued higher by the marketplace because of the steady income produced; Alliance, for example, currently yields 6%. CONSOL could use the copious cash flows from coal to produce a nice income vehicle if it structured its coal business as an MLP.
In addition, the company has several strategic assets that might fit better elsewhere. For example, its Baltimore coal export terminal might also fit better within an MLP sructure. Kinder Morgan Partners (NYSE: KMP), which is spending $450 to expand its own coal export terminal capacity along with other coal assets, might find this asset to be of interest. A purchase of CONSOL's coal terminal would add to Kinder Morgan's export capacity, while adding the stable income stream from CONSOL's current coal export operations.
Another asset that might be more valuable to a strategic acquirer is CONSOL's water division. The company owns a variety of water treatment assets used to process and recycle water for its coal and natural gas businesses. This business would be a nice strategic fit for a company like Nuverra Environmental Solutions (NESC). Nuverra has been consolidating water assets over the past few years, and therefore CONSOL's 102 wastewater treatment plants throughout Appalachia would go far in advancing Nuverra's commitment to protecting the environment by offering water solutions to producers. Furthermore, it would diversify its business into coal.
CONSOL has a range of other options in addition to the ones I've mentioned, making one thing clear: There is value that's just waiting to be unlocked. The good news is that investors won't have to wait long -- the company expects to announce something as soon as next quarter. Unlocking value to embrace a new identity tends to be well rewarded by the marketplace, so investors who are interested in this type of situation might want start digging a little deeper to see what other hidden assets CONSOL has before the market discovers what exactly CONSOL is doing.
