CONSOL Energy (NYSE:CNX) mines coal and drills for oil and gas. But it also owns the infrastructure used to move coal, including barges and a port. These are boring but vital assets that shouldn't be overlooked, and CONSOL isn't the only coal company that owns them.
In its second quarter earnings release, CONSOL states that it "stepped up its asset sale process to include coal and gas transportation infrastructure." Moreover, the company is "evaluating" its corporate structure, looking for ways to unlock value for shareholders.
Essentially, CONSOL doesn't believe its assets are being properly valued by the market. That's not unreasonable, since the stock is currently trading for around 1.5 times book value when it has historically traded for more than three times book value. Part of the problem is clearly the overhang of a tough coal market, so corporate actions of some sort, either asset sales or spinoffs, would likely help to highlight the value, and perhaps speed up the growth, of the company's oil and gas business.
What it owns
In addition to its core coal and drilling businesses, CONSOL also owns Fairmont Supply Company, CNX Marine Terminals, 21 towboats, five harbor boats, and approximately 600 barges, among other assets. Less than 40% of Fairmont's $244 million in sales were to CONSOL in 2012. About 40% of the material that passed through the CNX Terminal was mined by other companies. And of the almost 20 million tons of commodities handled by CONSOL's boats, only about 8 million came from CONSOL. The transportation assets had revenues of $126 million in 2012.
These assets only made up a small portion of CONSOL's over $5.4 billion in revenues last year, but they have financial and strategic value that is being overlooked by Wall Street. And their revenue streams are less affected by volatile commodity price swings. Selling these assets shouldn't be too difficult and could be an important catalyst for a higher share price as the company reinvests proceeds in its core businesses. Investors should keep an eye on this process.
Not looking to sell
However, CONSOL isn't the only company that owns such assets. For example, coal infrastructure assets account for about 15% of Natural Resource Partners' (NYSE:NRP) top line, and about half of the revenue it derives from businesses other than coal royalties. This limited partnership, however, isn't looking to monetize these assets; it wants to expand its non-coal businesses to further diversify its revenues.
To that end, it recently bought additional oil and natural gas interests and a 49% interest in a large soda ash business. Through the first six months of the year, Natural Resource Partners' "other" businesses grew 15%, leaving the top line down just 1% despite a 25% drop in coal prices. Increased mining activity on its properties not only helped offset coal pricing weakness, but also increased the amount of coal going through the company's handling facilities. And, the first half shows that the partnership's diversification efforts are paying off.
The rest of 2013 will be hard for the partnership because of coal's malaise, but when prices recover, Natural Resource Partners will be a stronger and more diversified player. The company is worth a look for more aggressive income investors—particularly because of its non-coal assets.
A midstream giant
Then there's Kinder Morgan Energy Partners (UNKNOWN:KMP.DL), which is best known for its midstream assets. However, it currently has about $450 million worth of coal terminal expansion projects in the works. The company owns about 110 terminals that handle liquid and bulk materials (around 80 are dry bulk), and 35 train loading and unloading facilities. This business represents about 15% of Kinder Morgan Partner's top line.
The company's coal terminal expansion efforts set the partnership up to benefit as more miners look to sell coal internationally, specifically to Asia. Moreover, Kinder Morgan is looking to create a coal royalty business, much like Natural Resource Partners. Although coal is a relatively small part of the company's business today, investors should keep an eye on the efforts here. With an around 6.4% yield, Kinder Morgan is a diversified way to invest in coal without taking on the risk, or the stigma, of a coal-focused company.
It requires a lot to get coal from the ground into a steel mill or a power plant, and mining is only one piece of that process. CONSOL sees potential in selling its infrastructure assets so it can invest in its core businesses, which could help reshape the way investors view the company and spur growth. Natural Resource Partners and Kinder Morgan, meanwhile, still like the types of businesses that CONSOL is looking to offload. Although they aren't exciting, they fit nicely within the toll-taker model that each employs to support generous distributions. That said, Kinder is the more diversified and less risky of the pair.