2024-01-07 09:20:41 ET
Summary
- CNX Resources is an American independent exploration and production company focused on natural gas production in the Appalachian Basin.
- The company's stock has underperformed peers but has shown improvement recently.
- Natural gas prices are expected to increase due to a winter storm and growing demand, which could benefit CNX Resources.
- CNX Resources devotes a considerable portion of its free cash flow to share buybacks and rewarding shareholders, so the increased FCF from rising gas prices should benefit shareholders.
- The company's stock is incredibly cheap relative to the broader market.
CNX Resources Corporation ( CNX ) is an American independent exploration and production company that focuses on producing natural gas in the Marcellus and Utica shales in the states of Ohio, Pennsylvania, West Virginia, and Virginia:
CNX Resources
This is generally a good place to be, as the Appalachian Basin is the richest source of natural gas in the United States and one of the richest sources in the world. In addition, the demand for natural gas is expected to grow over the coming years.
Unfortunately, CNX Resources' stock has been somewhat of a laggard in recent years. Over the past three years, CNX Resources has seen its stock price appreciate by 82.51%. That is substantially better than the performance that the S&P 500 Index ( SP500 ) has delivered over the same period, but the company has dramatically underperformed peers such as Range Resources ( RRC ) and EQT Corporation ( EQT ):
The company's performance has been improving somewhat recently, though. As regular readers may remember, we last discussed CNX Resources in late October immediately following the release of its third-quarter 2023 earnings report. The company's stock price has generally outperformed each of its peers since that date, although it has underperformed the broader market:
The company's stock still delivered a loss during a period of time in which most stocks in other sectors were rising though, which is rather disappointing. However, there could be some reasons to expect that this is about to change. Natural gas prices started to trend upward this past week due to the large winter storm that is expected to hit the Northeast over the next few weeks, and the demand from the liquefied natural gas industry has shown some growth. There is still an enormous supply glut of natural gas that needs to be burned off, but there is some reason for optimism. This is especially true if the impending winter storm is not an isolated event and certain areas of the United States end up experiencing a much colder winter than has been seen over the past few years. This is what forecasters are currently expecting.
As such, it makes sense to revisit CNX Resources and see if purchasing this company could make some sense today in light of these new developments.
About CNX Resources Corporation
As mentioned in the introduction, CNX Resources is an independent exploration and production company that operates primarily in the Marcellus and Utica Basins of Appalachia. This is one of the wealthiest sources of natural gas in the world, with the United States Geological Survey estimating that the Marcellus natural gas trend contains 214 trillion cubic feet of technically recoverable natural gas in 2019. There are some sources that put the total reserves of the region higher than this, such as Chesapeake Energy's ( CHK ) estimate of 410 trillion cubic feet but the figure from the United States Geological Survey is currently considered to be the most reliable estimate.
The general resource wealth of this region positions the company quite well in terms of total reserves. An energy company's reserves are frequently overlooked by investors, but they are critically important due to the fact that the production of natural gas is by its very nature an extractive process. CNX Resources literally obtains the products that it sells by pulling them out of reservoirs that are located in the ground. These reservoirs only contain a finite number of resources, so the company must continually discover or otherwise acquire new resources, or it will eventually run out of products to sell. As of December 31, 2022 (the most recent date for which data is currently available), CNX Resources Corporation has total proved reserves of 9.807 trillion cubic feet of natural gas equivalent. In the most recent quarter, the company produced an average of 1.5590 billion cubic feet of natural gas equivalent per day. Thus, its reserves are sufficient to allow the company to produce at its third-quarter 2023 level for approximately 6,290 days. That is roughly seventeen years, which is a very reasonable reserve life. This is actually a bit longer than many of the company's natural gas-focused peers in Appalachia possess, so there is no reason to be concerned here. In fact, the company can probably increase its production a bit and still be in good shape. That would reduce its reserve life somewhat, but as long as the company keeps its reserve life at twelve to fourteen years, it will still compare well with its peers.
However, CNX Resources has not been especially interested in growing its production. As we can see here, the company's average daily production has been fairly steady over the past year:
Q3 2023 | Q2 2023 | Q1 2023 | Q4 2022 | Q3 2022 | |
Average Daily Production (mmcfe/d) | 1,559.0 | 1,474.2 | 1,509.6 | 1,528.4 | 1,590.9 |
This is partly due to the very low natural gas prices that have been plaguing the market for a while. As we can see here, the market price of natural gas was fairly high over most of 2022 but started to plunge in earnest in September of that year:
The price has yet to rebound, obviously. I explained the reasons for this in a blog post last year:
The reason that we have been seeing such a weakness in natural gas prices this year is because of a supply glut. In short, the United States is substantially oversupplied with natural gas right now due to two factors:
- The Freeport LNG fire in June 2022 shut down the plant until February of this year. That plant consumes a substantial amount of natural gas and the shutdown meant that it was no longer purchasing and consuming gas for the duration.
- The United States experienced a warmer winter than normal, so natural gas was not consumed by residential and business users as usual. Thus, the usual supply drawdown that typically occurs every winter did not occur.
Due to the law of supply and demand, natural gas prices typically decline when there is a surplus of the compound relative to the demand. This is true with crude oil as well, which is why crude oil prices fell sharply when the pandemic broke out in 2020 and people stopped traveling as much as usual.
In that same blog post, I stated that American exploration and production companies like CNX Resources that focus on natural gas elected not to pursue production growth, which would only add to the supply glut. Rather, they were simply trying to maintain their production in order to generate free cash flow and use the money to strengthen their balance sheets and provide a return to shareholders until the supply glut was eventually burned off. I discussed that in my previous article on CNX Resources so there is no real point in repeating those statements. Suffice it to say that the company has enjoyed some success in this area, as its net debt-to-equity ratio has been improving over the past few quarters:
Q3 2023 | Q2 2023 | Q1 2023 | Q4 2022 | Q3 2022 | |
Net Debt-to-Equity Ratio | 0.59 | 0.58 | 0.67 | 0.80 | 1.23 |
This is something that is very nice to see, especially given the risks of debt in today's high-interest world. I explained these risks in a recent article . CNX Resources has been able to avoid the worst of the effects of rising interest rates and has in fact managed to slightly decrease its net interest expenses since 2021:
Thus, the company's strategy is working to improve its financial strength even in the absence of production growth. It does seem likely that it will begin increasing production though once the natural gas glut finally dissipates and prices begin to increase.
As might be expected from the company's success at improving its finances in the low natural gas price environment, CNX Resources is able to produce profitably with prices at today's levels. In its third-quarter earnings report, the company stated that its cash flow breakeven level is $1.17 per thousand cubic feet of natural gas equivalent. That is the level that is needed for the company to cover all of its costs of operations, so anything above that results in it generating extra cash flow that can be used for other purposes. Obviously, natural gas prices have not traded at such low levels for quite some time. The lowest price in the past three years was $1.991 per thousand cubic feet which was set on March 29, 2023:
Thus, the company has been able to be consistently free cash flow positive even with prices at the level that we have seen over the past year or two. The company stated in its most recent earnings report that it has generated $1.8 billion in free cash flow since the start of 2020, which it has used to reduce its debt and buy back $1.1 billion worth of its own stock. Unfortunately, the company has not yet restored its dividend that it suspended in the middle of the last decade but that could be an eventual possibility. For now, though, the company is unlikely to be a popular choice among income-focused investors.
Improvements In The Natural Gas Space
In the first trading week of 2024, the price of natural gas at Henry Hub increased by a whopping 15.1%:
One of the biggest drivers in this price appreciation is the winter storm that is hitting the Northeast this weekend. As Zero Hedge points out :
Millions of Americans from the Carolinas to Maine are under winter weather alerts ahead of what could be the biggest snowstorm to hit the Mid-Atlantic and Northeast in at least a year.
This snowstorm is expected to bring nearly twelve inches of snow to parts of the region, which makes this the largest snowstorm that some parts of this region have seen in well over a year. After all, as I mentioned earlier, the winter between 2022 and 2023 was very mild and several areas that normally receive decent amounts of snow ended up with next to none.
According to the U.S. Energy Information Administration , the two primary uses of natural gas in the United States are electric generation and space heating. This makes sense since a reduction in the need for space heating due to last year's warm winter is one of the driving factors behind the natural gas oversupply that is currently seen in the country. The Northeast is one of the most heavily populated regions of the nation (as is the Mid-Atlantic), so we would naturally expect that the consumption of natural gas will increase at least over the next few days or so while the storm and the accompanying cold weather pass through. This is generally considered to be the primary driver behind the increase in natural gas prices that occurred over the past week.
A single storm will not increase the demand for heating sufficiently to burn off the excess natural gas supply that still exists in the nation's storage facilities. However, there could be some reasons to expect that the next few months will be colder than we have seen over the past few years. This is especially true in the Northeast, as well as the very heavily populated Bos-Wash Corridor. AccuWeather provides a winter prediction on its website:
This winter's weather in the Northeast is expected to be very different than last winter across most of New England and the Mid-Atlantic.
The site goes on to state that the region will likely experience colder weather and heavier snowfall this winter than last winter. This should result in higher natural gas consumption in the region than has been the normal consumption level over the past few years. As we have already seen, natural gas producers such as CNX Resources have not been increasing their production so this higher level of consumption should reduce some of the supply overhang in the market. This should have a positive impact on natural gas prices.
The Case For CNX Resources
It should be fairly obvious how this should have a beneficial impact on CNX Resources. After all, a higher price for natural gas should result in the company having higher cash flows all else being equal. That should have a positive impact on the company's stock price, which we have in fact already seen. The company's stock price is up 1.97% since the start of the year, which is better than the 0.96% decline of the S&P 500 Index:
We will almost certainly continue to see the stock price appreciate if the predictions of a cold winter and rising natural gas consumption prove to be correct. The higher stock price will provide the company with money that it could use for buying back its own stock or potentially even growing its production. Any production growth would almost certainly require that the company see signs of a significant tightening of the supply and demand balance though, and that might take more than one cold winter. However, the continued growth of liquefied natural gas exports and the growing natural gas demand from the electric generation sector could have that result over the next few years.
The company has thus far made no statements about the reinstatement of a dividend. As such, investors may have to be satisfied with a stock buyback and the capital gains that should accompany the improvement in the company's free cash flow.
Valuation
According to Zacks Investment Research , CNX Resources will grow its earnings per share at a 5.56% rate over the next three to five years. That gives the company a price-to-earnings growth ratio of 2.07 at the current price. This, unfortunately, looks a bit expensive relative to the company's peers. We can see this here:
Company | PEG Ratio |
CNX Resources | 2.07 |
EQT Corporation | 0.55 |
Range Resources | 0.38 |
Comstock Resources ( CRK ) | N/A |
Chesapeake Energy | N/A |
Antero Resources ( AR ) | N/A |
Admittedly, Zacks believes that Comstock Resources, Chesapeake Energy, and Antero Resources will all see negative earnings per share growth over the next five years. That is pretty hard to believe considering that the other three companies are expected to deliver earnings growth and they all have pretty similar fundamental drivers. It is also a bit hard to believe that EQT and Range Resources will grow their earnings per share at a substantially faster pace than CNX Resources, which the Zacks valuation figures imply. After all, realistically all six of these companies should see improving financial performance as natural gas prices go up.
A look at the company's forward price-to-earnings ratios tells a different story in terms of valuation. Here is where Zacks Investment Research puts the forward price-to-earnings of all six of these natural gas producers:
Company | Forward P/E Ratio |
CNX Resources | 11.52 |
EQT Corporation | 11.08 |
Range Resources | 10.75 |
Comstock Resources | 6.03 |
Chesapeake Energy | 16.01 |
Antero Resources | 10.00 |
Admittedly, CNX Resources is not the cheapest company here using this metric, but it is not the most expensive either. It is still trading significantly below the forward price-to-earnings ratio of the S&P 500 Index, which currently sits at 21.56 according to the Wall Street Journal. Thus, CNX Resources looks to be significantly undervalued at the current price, especially when we consider that this company has not seen the tremendous share price run-up of EQT Corporation and Range Resources over the past three years. Thus, it may have a bit more upside potential as its free cash flows grow and it continues to buy back its own stock.
Conclusion
In conclusion, there could be some reasons to believe that natural gas prices are going to begin to improve as a cold winter in a highly populated area causes consumption to increase and exploration and production companies hold output steady in order to avoid making the supply glut worse than it already is. We have already started to see natural gas prices increase due to a winter storm in the Northeast and we could see prices continue to go up as the winter continues to progress. CNX Resources is able to generate positive free cash flow with prices at their current levels, and it will see its cash flows increase as natural gas prices increase. When we combine this with a strong balance sheet and an earnings multiple that is considerably below the market, we should be able to earn some capital gains by buying the stock today.
For further details see:
CNX Resources: Favorable Weather Conditions Create An Opportunity For Gains