In addition to increased demand for thermal coal in 2011, the switch from coal to natural gas by domestic utilities is predicted to be steady to increasing next year. One company poised to take advantage of these trends that also has attractive valuations is CONSOL Energy (CNX), says Jim Rollyson, an analyst at Raymond James Financial, Inc.
“[For CONSOL Energy] we came out with coal operations trading for something in the neighborhood of three times EBITDA versus the peer group average in the 5.5 or so times — so meaningful implied upside there,” Rollyson said. “If I did the reverse approach and said we’ve marked the coal up for this 5.5-times range, what does that leave for value that the market is giving them credit for on the E&P side? The answer is basically that the company’s proved gas reserves would easily account for the remaining value.”
CONSOL Energy has shipped some of its thermal coal to China as a lower-grade metallurgical coal, and it is positioning itself to tap into the estimated 1.5 Bcf per day of switching from coal to natural gas by domestic utilities in 2011, Rollyson says.
“They’ve been a coal company that also had a natural gas business. They significantly expanded that by buying the Dominion (D) assets back in late April, beginning of May,” Rollyson said. “If you’re kind of a hardcore energy guy and you look at everything that’s now encompassed with inside the company in terms of an asset base, you can come up with some pretty good numbers that suggest that the stock is undervalued relative to what they own.”