One of David Einhorn (Trades, Portfolio)’s top five positions is CONSOL Energy (CEIX, Financial). The fund manager has owned a position in the stock (in one way or another) since the fourth quarter of 2017. He increased the holding by 11% during the second quarter of 2022.
Einhorn first started buying this current position in the fourth quarter of 2020. During the quarter, the stock traded for an average price of $7.21 per share.
Since then, shares in CONSOL have jumped to around $76 as the price of coal has surged. The fund manager has reportedly been reducing his position as the stock has increased in value, booking profits in a buoyant market, but the recent quarter's buy is interesting to note.
A company that had been left for dead
CONSOL is an interesting business. Only the very brave would have thought this business had a future two years ago. The Pennsylvania-based producer and exporter of high-Btu bituminous thermal and crossover metallurgical coal was struggling with high costs, low coal prices and the growth of clean energy.
In 2020, the company reported normalized income of -$85 million, a dramatic decline from the $97 million reported for 2019. Profits recovered in 2021 but failed to hit the level reported in 2019. The company earned just under $52 million in 2021.
The company’s biggest problem was debt. Debt was around 100% of equity at the end of 2021. It paid $63 million in interest costs that year.
However, as coal prices have surged, so has CONSOL’s bottom line. In the second quarter of this year, the corporation reported normalized income from operations of $185 million. It used a good chunk of this capital to reduce total net debt by $110 million from the first quarter.
And with the company flush with cash, Einhorn thinks it’s only a matter of time before management starts returning this windfall to shareholders:
“CONSOL Energy. The shares ended the quarter at $49.38. Though it trades at a nosebleed 2.6x book value, we expect the company to generate approximately $50 per share in after tax-free cash flow by the end of 2023. Capital returns have not yet begun, but we expect they will shortly...
Over the short term, having few others practicing value investing probably does not help us. Over the intermediate term, we believe this set up could generate potentially exciting performance. For example, it might get very interesting if CONSOL Energy returns its entire market capitalization to shareholders in the next two or three years.”
What's next for CONSUL?
Some investors might want to avoid this company because of its association with coal. That’s perfectly understandable. Burning coal is contributing to global warming. Nevertheless, we cannot ignore the current global energy situation and the short-term surging of coal prices.
The world is fighting over coal resources as a cheaper alternative to expensive natural gas in light of the Russia-Ukraine war, and it doesn’t look as if that is going to end any time soon.
There’s always going to be a chance that the market will turn, leaving CONSOL in a difficult position. Even in this case, the company‘s current windfall will allow it to reduce debt substantially and prepare for the energy transition while returning huge amounts of capital to investors.
Then there’s also the potential for additional cash returns. If the corporation even comes close to returning $50 per share in cash next year, as Einhorn predicts, the stock looks cheap at $76 per share. That's just one year of potential cash returns. If the company repeats this performance two years in a row, the stock’s current valuation just looks downright crazy cheap.
For investors who are brave enough to invest in such a short-term and risky energy sector play, I think it might be worth considering this coal producer.