2023-08-23 22:13:11 ET
Summary
- Revenue, operating income, and net income (LTM) are at record highs since 2014. Gross, EBITDA, and net margins (LTM) have been expanding for three quarters in a row.
- Net debt (quarterly) is in a long-term downtrend and is 18% below its Q4-2019 peak. Meanwhile, P/S and P/B multiples (quarterly) are both below 1.
- The firm recently authorized an extra $1b in available share repurchases; its total repurchases since Q3-2020 now stand at ~30% (over $1b) of the company.
- Despite risks including geographic concentration and exposure to water pipeline regulations, CNX’s strong financials, tendency to repurchase shares, and trending stock price present an interesting opportunity for investors.
About
CNX Resources Corporation ( CNX ) explores and develops natural gas properties in the Appalachian Basin. As its FY-2022 10-K explains:
CNX Resources Corporation… is a premier independent natural gas and midstream company… The majority of our operations are centered on unconventional shale formations, primarily the Marcellus Shale and Utica Shale, in Pennsylvania, Ohio and West Virginia… Our Shale properties represent our primary operating and growth area in terms of reserves, production, and capital investment. We have rights to extract natural gas from Shale formations in Pennsylvania, West Virginia, and Ohio from approximately 531,000 net Marcellus Shale acres and approximately 609,000 net Utica Shale acres at December 31, 2022. Additionally, we operate and develop Coal Bed Methane ((CBM)) properties in Virginia.
In the most recent quarter, revenue from selling petroleum products (natural gas, NGLs, and oil) accounted for 30.6% of total revenues, while gains on derivative instruments accounted for ~64%. Within petroleum product revenues, natural gas accounted for ~86% while NGLs accounted for ~11.6%.
Strong Financials & Low Multiples
Revenue, operating income, and net income (LTM) are at record highs since 2014. Free cash flow (LTM) is close to making a post-2014 record as well, according to data from StockRow .
Gross, EBITDA, and net margins (LTM) have been expanding for three quarters in a row and now stand at 86%, 78%, and 49%, respectively.
Asset turnover (quarterly) is at a record high since 2014. The firm’s number of common shares has fallen 28% from its Q3-2020 level. Net debt (quarterly) is in a long-term downtrend and is 18% below its local peak in Q4-2019. CNX’s debt/assets ratio has been hovering in the 28-30% range since Q2-2016.
The firm's P/S and P/B multiples (quarterly) are both below 1, now sitting at 0.75 and 0.73, respectively. Its EV/OCF multiple (quarterly) is close to a record low since 2014.
Potential Catalysts
CNX recently authorized an extra $1b in available share repurchases (with no expiration), per the latest earnings transcript . It has repurchased 2% of outstanding shares in Q2-2023 and its total repurchases since Q3-2020 now stand at ~30% (over $1b) of the company.
Management said that recent efficiency improvements allowed it to expedite the timing of four Marcellus wells, and they expect those to be operational before this year’s end. It also said that in the CPA Mamont area the firm recently drilled its deepest and longest Utica well. In southwest PA, CNX drilled two Marcellus wells, each with at least a 19,500-foot lateral length.
The firm said well economics in the recent quarter were favorable and can withstand lower pricing environments. It also noted that it has avoided “high fixed-cost midstream arrangements” that pose extra risk and often lead to tough decisions down the line.
Management stressed that it still plans on lowering the company’s balance sheet risk over the long term, mainly by reducing overall debt levels and carefully managing debt maturities.
Finally, CNX has federal and state NOL carryforwards which allow it to potentially reduce the its future tax liabilities. By FY-2022’s end, the firm’s federal and state carryforwards amounted to $0.9b and $1.8b, respectively. Some of those have no expiration date, while others have expiration dates sometime between 2023 and 2041.
Risks
Since CNX’s producing properties are largely concentrated in the Appalachian Basin, the firm is particularly sensitive to changes in regional supply and demand, per the firm's recent 10-K . Production from this area often exceeds regional demand, which means locally-sold natural gas products tend to sell at a discount compared to benchmarks such as the Henry Hub price. Any future rises in regional production and/or cancellations of interstate pipelines could exacerbate this risk.
In November of 2017, the firm announced completion of its spin off of CONSOL Energy; as a result, CNX is liable as a guarantor of some of CONSOL’s liabilities. By the end of FY-2022, the firm said those liabilities have an approximate value of ~$120m.
CNX uses hydraulic fracturing processes to exploit shale formations, so it is especially dependent on water access and regulations on water pipelines. Future changes in the regulatory landscape could impair CNX’s ability to dispose of and access water and harm its operational results.
The firm is involved in multiple legal proceedings and has a history of paying settlements as a result of its operations. In December of 2021, CNX pleaded “no contest” in response to criminal charges related to understating the number of pigging operations that took place at a pipeline maintenance station in Washington County, PA. The firm agreed to pay more than $600k to The Municipal Authority of Westmoreland County. In 2019, CNX reached a settlement with The Pennsylvania Department of Environmental Protection, agreeing to plug over 100 natural gas wells and to finance plugging costs by posting a $1.48m performance bond.
Like all firms engaged in natural gas production, CNX is likely to suffer during general economic downturns, because downturns tend to be accompanied by a significant drop in fuel demand. Also, its results could suffer during public health emergencies such as the COVID-19 pandemic, which can also lead to reduced fuel demand. Public health threats could cause the midstream service providers that CNX depends on to pause their operations in order to contain outbreaks.
Execution
Buying a stock is a bet on where its price goes, not necessarily the fundamentals of the business. Since there is statistical evidence of price trends in equity markets, long investors who apply a scientific mindset may benefit from focusing on stocks that are in uptrends or are close to starting a new one.
CNX is now in an uptrend after having recently broken above its 200-day rolling average on June 6 of 2023, per Finviz. Since then, the stock has climbed ~30%.
Zooming out, the stock is still 43% below its peak from back in 2014, indicating substantial potential upside.
It may be sensible to consider a bet on this stock only while the uptrend remains in play, perhaps by requiring that a simple trend signal is active; for example, requiring that the price be above its rolling average (30, 50, 100, 200-day, whichever has stronger evidence).
Bottom Line
CNX’s record profits, depressed valuations, recent deleveraging, and tendency to repurchase shares make it an interesting opportunity for investors. While its price continues to trend, the stock could be a reasonable bet for investors with a momentum-inspired strategy to consider.
For further details see:
CNX Resources: Growth, Value, Buybacks, And Deleveraging