Coal In My Stockings? Yes, Please! The Bullish Tale Of Consol Energy (NYSE:CEIX)

Introduction

As we’re getting very near Christmas, it is time to use not less than one Christmas-themed title. On this case, I wish to focus on coal, one thing solely naughty children have a tendency to seek out of their stockings.

Though a number of lumps of coal is definitely ineffective, given {that a} ton of coal at present sells for roughly $130 per ton (you want to be actually naughty to make a buck!), there are some implausible coal shares that I’d love as a present.

One among these corporations is Consol Vitality (NYSE:CEIX), one in all America’s largest coal miners and an organization I’ve mentioned twice in 2023.

• On June 22, I wrote an article titled “Consol Vitality: A 7% Yield And Huge Buybacks.”
• On August 27, I wrote an article with the title “Consol Vitality Is Firing On All Cylinders.”

Whereas I definitely had my justifiable share of errors this yr, coal wasn’t one in all them, as CEIX shares are up greater than 50% year-to-date.

What’s fascinating is that coal costs are down this yr (see the chart above).

Consol Vitality advantages from robust worldwide demand, pricing advantages, operational excellence, and its potential to generate a great deal of free money movement used to reward shareholders.

On this article, I am going to replace my bull case, utilizing its newest earnings, new coal market developments, and long-term business tailwinds.

So, let’s get to it!

Coal Is not Lifeless

If there’s one factor I am getting used to, it is headlines predicting “peak coal.” This has occurred repeatedly over the previous ten years. To date, none of it was correct. The identical goes for oil and gasoline, by the best way.

Now, the Worldwide Vitality Company (“IEA”) – don’t confuse this with the U.S. Vitality Inflation Administration (“EIA”) – got here out with a report that coal demand will peak in 2023.

As reported by Bloomberg, world efforts to spice up clear power and curb carbon emissions are set to affect the trajectory of coal consumption, reaching a peak of over 8.5 billion metric tons this yr.

Now, the EIA predicts a gradual decline, with demand slipping to eight.3 billion tons by 2026, signaling a turning level for coal.

The latest COP28 convention witnessed worldwide local weather negotiators agreeing to transition away from fossil fuels, marking a historic shift within the world power combine.

The U.S. and the European Union drive this variation, with coal consumption anticipated to say no by over 20% from 2023 to 2026.

Nevertheless, slower declines are noticed in Asia, notably in China, which makes use of over half of the world’s coal.

My private opinion is that when financial progress rebounds, we are going to probably see a shift in these expectations.

Proper now, Chinese language development and housing are in an enormous droop. The identical goes for its shoppers. Europe, too, is seeing huge industrial headwinds.

On this surroundings, it’s a lot simpler to name for peak demand.

Having mentioned that, even when the report is right, the bull case for coal is not half unhealthy, as the availability aspect is what at present drives costs.

In a latest coal-focused article, I highlighted how the availability aspect has changed into a significant bullish issue, utilizing Goehring & Rozencwajg comments (emphasis added):

Over the previous decade, no business has been extra capital-starved than world coal. And but, coal demand continues to confound skeptics by displaying sudden energy. Coal-related equities actually “caught fireplace” within the third quarter. The S&P 1500 Coal & Consumable Gas Index surged 55%, the best-performing commodity-related fairness group. For these unencumbered by ESG pressures, we proceed to suggest coal fairness publicity. From via to peak, coal equities have been the best-performing sector in each commodity bull market since 1900. This sample appears to be repeating itself. Since June 2020, coal equities have superior nearly 2000%, trouncing the 110% return of the S&P North American Pure Useful resource inventory index, the 70% return of the S&P World Pure Assets inventory index, and the 46% return of the S&P 500.

In different phrases, even when demand had been to say no progressively, coal corporations can use above-average costs to generate worth.

Consol Vitality’s Strategic Shift Is Genius

With a market cap of $3 billion, CEIX is one in all America’s largest coal producers.

What makes CEIX particular is its deal with “progress” markets.

• In 2017, the corporate generated greater than 60% of its revenues from the home energy technology market, a section that has been in regular decline since 2007.

• Within the first half of this yr, the corporate decreased U.S. utility coal publicity to lower than 25%. Now, greater than half of its income comes from export demand! Near a 3rd of its revenues come from export industrial demand, which is an enormous deal.

As a part of its export focus, within the third quarter earnings name, Consol Vitality talked about that its CONSOL Marine Terminal set a report throughput tonnage of 14.3 million tons, aiming for 19 million tons by year-end.

Through the third quarter, the corporate offered 60% of complete volumes into export markets, specializing in industrial and crossover metallurgical markets. Notably, a cargo of PAMC (Pennsylvania Mining Complicated) coal was delivered to a South Asian nation for the primary time, with a second cargo deal already signed.

The corporate additionally efficiently offered its first direct cargo into Indonesia, reflecting important demand progress for crossover merchandise in Southeast Asia.

Indonesia’s coke-making capability is anticipated to double by 2025.

The crossover metallurgical entrance noticed elevated demand, with 630,000 tons shipped, pushed by the commissioning of the fifth longwall on the Enlow Fork mine.

The spine of its export progress is Norfolk Southern (NSC), one of many two main railroads within the East. I personal this railroad, so I’ve not less than some oblique publicity to CEIX’s success, as export progress depends on environment friendly rail transportation.

Talking of PAMC, the common money value of coal offered per ton in 3Q23 was $38.36, down from $39.77 in 3Q22.

The advance is attributed to the fifth longwall’s mounted value leverage.

Since 2009, CEIX has invested greater than $2.4 billion into this mining complicated, which produced near 24 million tons final yr.

Moreover, the Itmann complicated additionally confirmed improved manufacturing, producing 91,000 tons in 3Q23. Challenges in mining charges had been addressed by working two of three tremendous sections as a result of a difficult labor market.

As soon as the principle growth is full, effectivity and manufacturing charges are anticipated to enhance.

Itmann offered 123,000 tons within the quarter, contributing to a year-to-date complete of 357,000 tons. CONSOL Marine Terminal achieved a throughput quantity of 4.3 million tons, supporting the aforementioned technique to maneuver extra PAMC tons into rising export markets.

In 3Q23, the corporate offered 6.1 million tons of PAMC coal, realizing a median income per ton of $70.34.

Elevated stock ranges on the finish of the quarter had been attributed to timing points associated to export vessel loadings, with expectations of a gross sales tailwind within the fourth quarter. Partial buyouts of contracted volumes contributed $16.4 million to miscellaneous revenue.

The Good Information For Shareholders Continues

On high of robust 3Q23 gross sales, the corporate elevated the ahead offered place, with 21.5 million tons contracted for 2024 and 10.8 million tons for 2025 at engaging costs.

It is also upbeat about future costs.

Whereas the home energy technology market had underwhelming demand within the third quarter, total energy technology remained robust in the summertime of 2023.

In the meantime, anticipated elevated LNG export demand and decreased rig comps are anticipated to help improved pure gasoline costs, subsequently boosting coal demand and costs.

In consequence, the corporate stays optimistic about its gross sales portfolio optimization and the energy in API2 (import coal costs) ahead costs.

It reaffirmed the full-year anticipated common realized core income per ton offered at a spread of $76 to $80 per ton.

On high of fine steerage, the corporate is lowering debt and rewarding shareholders.

Throughout 3Q23, the corporate generated $120 million of free money movement, lowering gross debt and attaining a goal gross debt stage of roughly $200 million.

The steadiness sheet remained in a web money place, which implies there isn’t any want for the corporate to make use of money to scale back gross debt.

Therefore, roughly 77% of the 3Q23 free money movement, totaling $93 million, was devoted to repurchasing practically a million shares of CEIX inventory at a median worth of $95 per share.

Yr-to-date share repurchases stand at 4.1 million shares, which interprets to just about 11% of the general public float as of year-end 2022.

Going ahead, we are able to count on the corporate to prioritize buybacks, as the corporate believes that is essentially the most engaging and accretive kind to spice up shareholder returns.

Valuation

Placing a valuation on shares that depend on the worth of an underlying commodity is hard, particularly as a result of analysts count on coal costs to average within the coming years.

Utilizing the info within the overview under:

• CEIX is at present buying and selling at a blended P/E ratio of 5.1x. Its normalized P/E ratio is 8.4x.
• This yr, EPS is anticipated to develop by 50%, adopted by an anticipated decline of 10% in 2024 and a 6% decline in 2025.
• I count on precise outcomes to be a lot better than anticipated if we get a backside in financial demand.
• Nevertheless, even utilizing these numbers, the inventory worth has room to enter the $120 to $130 vary. The present consensus worth goal is $107.

For sure, please bear in mind that coal investments are extremely risky.

I made a decision to not purchase CEIX due to my intensive oil and gasoline publicity. I have to be cautious and can’t add an excessive amount of cyclical publicity.

Nevertheless, if this inventory had been to see a significant correction subsequent yr, I’d take into account shopping for some shares for my buying and selling account.

Takeaway

Regardless of predictions of “peak coal,” Consol Vitality stands out, boasting a 50% YTD share worth improve.

The corporate’s strategic shift in direction of export markets, particularly in Southeast Asia, is proving sensible for each volumes and pricing advantages.

With a record-breaking throughput tonnage, profitable worldwide offers, and improved manufacturing, CEIX is capitalizing on the worldwide demand for coal.

Notably, the corporate’s sturdy ahead gross sales place and dedication to shareholder rewards via buybacks paint a promising future.

Whereas coal investments have to be dealt with with excessive care, I proceed to be bullish on CEIX.