The lump of coal being offered by Consol Energy is leaving shareholders wanting. Splitting its gas business off from mining the black rock could boost the energy company’s $9-billion (U.S.) market value by half. Instead, Consol decided today just to sell five older coal mines. It’s no disaster, but it’s an early Christmas gift its investors could have done without. The stock hardly budged on the news.
Housing these two fossil fuels under one roof is not without merit. Coal and gas are rival fuel sources in electricity generation, so owning both can provide a natural hedge against price swings in either commodity.
In addition, there’s some strategic merit to the company’s $1.1-billion mines sale. It allows Consol to dispose of lower-growth coal assets, along with responsibility for $2.4-billion of retirement benefits, and retain mines with access to international markets where demand has been growing faster.
Shareholders, however, appear to regard such combinations as conglomerates and give them a discount. Since ConocoPhillips and Phillips 66 split into separate exploration and refining companies in May last year, their combined value has soared 40 per cent. That beats the increase in rival Chevron’s shares more than threefold.
Let’s assume Consol followed a similar path. Put its gas unit on the same 13 times 2014 EBITDA as rival driller Antero Resources, and its enterprise value would be $6.5-billion, according to Tudor Pickering. Meanwhile, its coal mining operations could be worth $10-billion, after applying Alpha Natural Resources’ 10 times multiple to its $1-billion of EBITDA, an estimate prior to today’s sale.
Strip out $3.3-billion of net debt and that gives a market capitalization of around $13-billion – 50 per cent more than where Consol currently trades. Chief executive officer Brett Harvey clearly reckons it’s better to have less volatile profits than pure coal miners like Peabody or gas companies like Range Resources. For now, at least, shareholders disagree.