Natural Gas Names Look A Bit Short Term Toppy (Consol Energy)

There has been recent speculation the Oil/Gas rally which began in med December 2009 is coming to an end . Reason being, CNX may have over paid for Dominions Marcellus shale assets at the top of a soft(demand) market. Current nat gas demand is still relatively weak considering the cold winter and snow storms, UNG is still falling through the floor breaking 52 week lows amost every week. The current race for acerage in the Marcellus shale formation is heating up, possibly a bit premature.



According to Citi Capital Market Research;

The 10% decline in CNX today partly reflects disappointment over
price vs the opportunity to fold-in CXG. Applying the same math that CNX
presented in their hand out, CXG ended 2009 with 1.9 Tcf of reserves and
valuating this at $2.25/Mcf yields $4.28 bln, greater than CXG's EV of $4.1 bln on
March 12th. In addition, this would assume no value for CXG's 250k Marcellus
acres. Another tough comparison is the fact that CXG added 0.5 Tcf of
reserves in 2009 with a drilling cost of only $0.39/Mcf.

Clearly investors did not view the announced transaction in the same light that
management did, sending CNX shares down 10% vs a 2-5% decline for its
peers. Most of the coal investors we spoke with expressed concern over the
potential earnings dilution, additional debt, and incremental earnings volatility
because of the added natural gas exposure (gas tends to be more spot oriented
than multi-year coal contracts). Of course the added gas leverage could turn
into a meaningful positive in a rising price environment.

The Report goes onto say;

In our opinion, most of the disappointment comes down to price relative to
expectations and the opportunity to fold-in the 17% minority interest
outstanding in CXG. Applying the same math that CNX presented in slide 4 of
their handout, CXG ended 2009 with 1.9 Tcf of reserves and valuating this at
$2.25/Mcf yields $4.28 bln, greater than CXG's EV of $4.1 bln on March 12th.
In addition, this would assume no value to CXG's 250k Marcellus acres.
Another tough comparison is the fact that investors were probably spoiled by
CXG's ability to add 0.5 Tcf of reserves in 2009 with a drilling cost of only
$0.39/Mcf.

My nutshell interpretation of the report findings is; the deal did have shareholders in mind, the deals real purpose is to add 41 Bcf of annual production to CNX's existing base of 100 Bcf at a "discounted" rate. Consol's price action monday coupled with topping /outbought marke condition in natural gas names (CHK, COP, D) suggests a pullback is not out of the question. The purchase of the Marcellus assets by Consol in my opinion acts as a contrarian indicator. I believe current Marcellus shale asset holders and the media have over hyped the short term potential of shale, potentially driving up marked asset values. A "hot" market always brings out the smart sellers and not so smart buyer.

Posted in: CNX,Market