The result of his strategy has been substantial long-term returns. Since inception in 1987 his Partners Fund returned 1257.67 percent, for the last five years (4.42 percent) and the last three years 102.9 percent. In the first quarter of 2012 he was in an up period, returning 12.91 percent.
CONSOL Energy, Hawkins’ new pick, is a Pittsburgh-based coal and natural gas producer and one of the leading diversified energy companies in the U.S. It sells its Appalachian coal to electricity generators and steelmakers worldwide. Its natural gas division has grown to engage in both exploration and production, including in the Marcellus Shale and Utica Shale region.
Hawkins enjoys seeing large price dips on his high-quality companies, considering them opportunities to increase his positions with a margin of safety. This was likely the case with CONSOL Energy. It has lost almost half of its market cap in two years and opened Friday at $27.66 per share, near its 52-week low of $26.46 and off of its high of $55.02.
There have been several primary depressants on the stock price of Consol recently: a warm winter, a weak economy and low natural gas prices. Low natural gas prices, combined with perennial concerns about the environmental impact and cleanliness of coal, have caused more U.S. electric generators to switch to natural gas. These generators used over 93% of total domestic coal in the first nine months of 2011, according to the U.S. Energy Information Administration (EIA).
Coal production rose in 2011, causing a surplus that is forcing miners to slow production in 2012. U.S. coal production this year fell to below its five-year range in March, the EIA reports. CONSOL Energy experienced a surplus as well, but has already contracted all of its thermal coal for 2012, though it has idled some operations, it said in its first-quarter statement.
Despite the recent dip, there are several things about the company that might attract a long-term investor such as Hawkins. Most notably, the company is diversifying into the fossil fuel detracting from coal sales – natural gas. It has slated projects in both the Utica Shale and Marcellus Shale, where an estimated 500 trillion cubic feet of natural gas is trapped.
The company began its Utica Shale exploration of 20,000 acres in Ohio in 2011 through a strategic partnership with Hess Corporation. It is already a leading producer in the Marcellus Shale. Combined, the company has access to natural gas reserves of over 3.5 trillion cubic feet.
With the new wells CONSOL expects to drill in 2012, it has projected it will produce 160 Bcfe of natural gas for the year, an increase of nearly 12 percent, compared to pro forma production of 142.9 Bcf the previous year. Its 2013 target is 200 to 220 Bcfe after more drilling.
The quality of the company’s operations also interests Hawkins. CONSOL has a strong cash position of $1.9 billion, with $7.5 billion in long-term liabilities in debt. It generated positive cash flow for the last three years including a ten-year peak of $893 million in 2011. It has also kept wide margins. Its five-year net profit margin is 9.12 percent, comparing favorably to rival Arch Coal (ACI)’s 5.8 and near Peabody Energy (BTU)’s 10.2 percent.
CONSOL has a P/E ratio of 10.8, P/S ratio of 1.1, dividend yield of 1.8%, and annual average earnings growth of 23.3% over the past 10 years. GuruFocus rated Consol Energy the business predictability rank of 2.5-star.
Initially, CONSOL was a relatively small position in Hawkins’ portfolio at 0.9 percent in the first quarter before he boosted his stake. It larger move he is making into the energy sector, with several oil and gas companies now in his portfolio: He owns 13.07 percent of Chesapeake Energy (NYSE:CHK), 13.42 percent of Quicksilver Resources (KWK) and .2 percent of Murphy Oil (NYSE:MUR).
Hawkins commented on his diversification strategy in his first quarter letter: “Owning 18-20 companies across a number of industries provides the diversification to reduce company-specific risk and minimizes the risk of loss by limiting holdings to only the most qualified businesses, managements, and discounts. To introduce significantly more stocks would compromise the best-in-class criteria that are so crucial to preserving principal and generating excess return. We generally keep single industry exposure below 15%.”
See Mason Hawkins’ portfolio here. Also check out the Undervalued Stocks, Top Growth Companies, and High Yield stocks of Mason Hawkins.