We think there may be a market opportunity to achieve a sale of the coal business on favorable terms or, alternatively, to effect a spin-off as our leverage ratio comes down to a level that allows each business to stand on its own. At the same time, we will continue to evaluate dropdowns of additional undivided interests in the Pennsylvania Mining Complex.
During the ensuing conference call, CEO Nicholas DeIuliis called the separation a ‘top strategic priority’ for 2017:
As stated in the Analyst Day, under the right conditions, we would separate the E&P and remaining coal businesses in 2017. Just over a month later, we sit here today viewing a separation of the businesses as a top strategic priority for 2017. There are different ways to achieve this split. And in this morning’s earnings release, it was noted that we’re pursuing 3 parallel paths. One being an outright sale, second being a spinoff and the third being additional drop downs of undivided interest in the CNXC. Ultimately, we believe that the separation of the businesses can happen this year in one of these 3 forms. The path we choose, that’s going to be the 1 that offers the best, the highest NAV per share proposition for our owners. Our efforts are underway. We’re going to run a competitive process and the best coal team in the business is ready to go.
Why those three options?
The 3 processes we’ve laid out, what we’re trying to do is we’re trying to give ourselves the most looks across these different avenues to effectuate separation and choose the 1 that we feel has got the best NAV per share proposition moving forward. And we want to do that in a way where it’s a competitive process. So we’ve got a horserace, so to speak, that’s ongoing. When you look at the M&A side, I think one of the biggest attributes that would make that attractive to a potential buyer is not just the asset base itself and how it’s Tier 1 and 1 of 1, but the team there operating it. So when you look at what the opportunity set is out there in the coal space, there’s been so much topsy-turvy, up-down roller coaster rides here over the last 2 years in the coal space within the United States and globally, frankly. If you look at that team, coupled with that asset, that would be an outstanding platform to build upon subsequent to just the Pennsylvania mining complex. So I think that reflects a couple of things, like we said: Getting as many different looks as we can across these avenues, a competitive process to make the best NAV per share decision, but also recognizing, and that one in particular, you’ve got an operating team and coal mining complex that would be a great platform to build upon moving forward.
One of the key issues is the leverage on the business:
Jacob Gomolinski-Ekel
Got it. And then in terms of the leverage ratio, so it sounds like you would have to get to that 2 — given the 2.5x requirement for share buybacks, I would imagine something similar for the spin?
Nicholas J. DeIuliis
Yes. I mean, I think right now we’re on a path irregardless of the separation that we’re going to get to that 2.5x by year-end. And obviously our goal is to generate higher free cash flow to accelerate that to give us the flexibility that we have all 3 of our options including stock buyback to be in there. With the separation, that could accelerate the leverage ratio decline, and we’ll view that as optionality. And if that’s the case, then we can execute a stock buyback even sooner.
At this point in time, it feels like coal’s obituary has already been written. Cheap natural gas and a coming onslaught of renewables! Slowing worldwide growth! Crushing torrents of regulations! All of those headwinds led to a crash in the commodity price and countless bankruptcies, including to some of the industry’s largest players. Talking about investing in a coal company was tantamount to pitching a leper colony to a real estate developer.
Even at the nadir, the funeral processions felt a bit premature. After all, the assets weren’t worthless and coal (even thermal coal) was still needed. The extreme negativity (and shale prospects) even attracted Greenlight’s David Einhorn to the company and the outspoken hedge fund manager still maintains a sizable stake (~8% ) in the company. Things have since improved and the past year or so has witnessed a rebound in prices and the election of a new and more sympathetic President (and many suspect EPA). This past weekend’s WSJ noted that there are at least six, yes six (!!!), coal related IPOs currently in the works which was unimaginable a year ago. I guess it helps to have a President publicly talk up your industry. Given the change in sentiment, Consol (and the bankers pushing those other IPOs) are probably doing the right thing by trying to sell ‘high’. While the fundamental issues haven’t changed, the outlook is certainly better than it’s ever been.
That is why a sale might make sense for Consol in this instance. Despite the potential tax issues, a one time exit could be more attractive versus a long, drawn out spinoff or periodic drop downs into its majority owned MLP. If an attractive offer materializes, management may decide to just get out quickly and cleanly before anything changes again.
Disclosure: Author holds no position in any stock mentioned.
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