Consol Energy Deconsolidates, Spins Off Coal Assets and Becomes CNX Resources

The election of the Trump administration seemingly brought new life to the coal industry and the companies still operating in the space are taking full advantage. One example is Consol Energy’s (CNX) plan to spinoff its coal assets in order to create a gas focused E&P company. The spinoff was formally approved by its board of directions last month and the spinoff is all set for November 28th. After the close, shareholders as of November 15th will receive 1 share of the new Consol Energy, for every 8 shares of ‘CNX’ currently owned. Shareholders need to be a little bit careful here because the Coal SpinCo will actually keep the company name, Consol Energy, but not the current ticker. Instead, the new Consol Energy coal company will trade on the NYSE under the ticker ‘CEIX’, while the E&P company will change its name to CNX Resources Corporation and keep the current ‘CNX’ ticker. Additionally, as part of the transaction, the coal company controlled MLP CNX Coal Resources (CNXC) will change its name to Consol Coal Resources and change its ticker from ‘CNXC’ to ‘CCR’.

Here is a more detailed picture of what is contained within the ‘coal company’:

The coal business will be comprised of the Pennsylvania Mining Complex (consisting of the Bailey Mine, the Enlow Fork Mine and the Harvey Mine and the related coal preparation plant), the Company’s ownership interest in CNX Coal Resources LP, a publicly traded master limited partnership that owns a 25% undivided interest in the Pennsylvania Mining Complex (NYSE: CNXC), the coal export terminal at the Port of Baltimore, undeveloped coal reserves located in the Northern Appalachian, Central Appalachian and Illinois basins, and certain related coal assets and liabilities.

The company has been shedding coal assets for years, but in early 2017 the company identified the separation of its coal business as a ‘strategic priority’. It wasn’t clear what avenue of separation the company would pursue though. The company engaged two (!) investment banks, Credit Suisse and BoA, which seemingly indicated a sale was the preferred route. Unfortunately, the company was unable to find a ‘suitable’ buyer for the assets, despite, according to CEO Nick DeIuliis, both strategic and financial buyers being interested:

First, in terms of the strategics, even though many saw the intrinsic value of the coal assets, none were able to pay fair value for them. That’s because either the strategic was starting and struggling with a stressed balance sheet and could not obtain financing or it suffered a bit of a credibility deficit with its equity ownership, in many instances, who were not too long ago creditors. This weakness we saw from the strategics in the sale process, that’s an opportunity for us in a spin world. As I mentioned earlier, CoalCo will have the strongest financial position in the industry, which is currently populated with opportunity for M&A. So strategics, I’d sum them up as willing, but not able.

Second, when you look at the financials, there we were dealing with a situation where the potential buyers were used to being liquidity providers to distressed entities. That translates usually to discounted valuations, which may be or more applicable to the rest of the coal industry or back in 2015, but certainly, that isn’t the case for CONSOL Energy today. So I’d sum up the financials at able, but not willing.

In the end, we received multiple bids for the sale of the Pennsylvania mining complex. None of them delivered compelling results…

So…’spinoff’ became the winner by default. It’s nice when the decision is effectively made for you, although it certainly doesn’t scream ‘great business’. That doesn’t mean the stock won’t have value though – look at the strong performance at the coal entity from the recent Nacco Industries (NC) spinoff – which is actually the parent company – which has gained ~30% in just about a month of trading.

The new Consol will be led by company veterans Jimmy Brock and Katherine Fredriksen who will serve as CEO and President respectively. Consol’s current EVP & CFO David Khani will assume the same roles at the new coal company as well.

The spin is coming soon, but if you can’t wait until the end of the month, a ‘When-Issued’ market is expected to be in place on or around November 14th. That should give some indication of what value the market is assigning to the coal business.

Disclosure: Author holds no position in any stock mentioned.