Consol Energy’s top investor urges spinoff of gas operations

By TIM LOH and NAUREEN S. MALIK
Bloomberg

Less than 12 hours after Consol Energy indicated it would report a second-quarter loss, its biggest shareholder called on the company to spin off or sell its natural gas operations.

Southeastern Asset Management, Consol’s largest shareholder, said in a filing on Monday that it plans to meet with the company’s management and others about a “potential monetization” of the gas unit. 

The Memphis-based firm disclosed a 21.1% stake in the coal and gas producer, up from 19.6% at the end of March.

“We believe these assets alone are worth demonstrably more than the Company’s total equity capitalization today,” O. Mason Hawkins, CEO of Southeastern, said in a filing with the Securities and Exchange Commission on Monday.

The letter bookended a tough day for Consol, a Canonsburg, Pennsylvania-based energy company that surprised investors earlier on Monday by saying it will report a loss for the second-quarter. Consol’s shares fell to $16.66, the lowest close since October 2004, and some of its bonds approached a level investors call “distressed.”

Consol values “the opinions of all of our shareholders, and certainly a major shareholder such as Southeastern,” Brian Aiello, a Consol spokesman, said by e-mail. “We are confident in the strategic direction we are in the process of executing and look forward to working with Southeastern, and all of our shareholders, to continue to unlock the inherent value of Consol Energy.”

While facing record-low prices for coal from its Appalachian mines, Consol is also dealing with a slide in natural gas prices. The shares have slumped more than 50% this year as it seeks to scale back coal operations and expand gas production.

Coal Downturn

The transition has been complicated by the fact that coal is in the midst of the worst downturn in decades. Consol reduced the price of its coal units last month before an initial public offering of its CNX Coal Resources LP master-limited partnership. That reflected the dearth of investor interest in a shrinking industry.

The company’s gas operations face several challenges. Consol didn’t hedge against a potential fall in gas prices last year as aggressively as other producers, said Evan Mann, a credit analyst at Gimme Credit Publications.

“Relative to other natural gas players, I thought they would outperform, but now I’m rethinking that,” Mann said.

Jeremy Sussman, a New York-based analyst with Clarksons Platou Securities, described Consol’s Marcellus operations as a “massive underperformance” compared with its peers.

Another problem: there’s simply too little pipeline space for Consol to get its gas to far-flung customers who’d be willing to pay more for it.

Lowest Price

“As an Appalachian producer, they are receiving the lowest price on the map for their gas,” said Teri Viswanath, director of commodities strategy at BNP Paribas in New York.

Spot gas prices at the Dominion North Point pool, which includes deliveries to the Leidy compressor station in Pennsylvania, have averaged $1.45/MMBtu so far this year on the Intercontinental Exchange. By comparison, the benchmark Henry Hub in Louisiana, the delivery point for New York futures, averaged $2.80.

Consol’s debt has meanwhile tumbled. The company’s $1.85 billion of 5.875% notes due in April 2022 fell 2.5 cents to 76.5 cents on the dollar to yield 10.9% in New York on Monday, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. They touched 74 cents, the lowest since they started trading in December.

The extra yield investors demand to hold the debt rather than similar-maturity U.S Treasury bonds was as high as 9.8 percentage points, compared with the 10 percentage points that’s considered distressed.

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