CONSOL Energy Inc. (NYSE:CNX)’s biggest issue is that it doesn’t feel that it’s getting the respect it deserves. The company believes that its assets are being undervalued by the market, and it’s looking at ways to boost that value. According to CEO Brett Harvey, “everything’s on the table” including a breakup of the company.
This isn’t a new theme for the company. CONSOL Energy Inc. (NYSE:CNX) did split off its coal bed methane subsidiary, CONSOL Energy Inc. (NYSE:CNX) Gas, in 2005, only to take it back in-house five years later. Now, it might be splitting that business off again or selling other assets within its portfolio to unlock value. This could turn out to be a great move for the company, especially if it gets creative.
For example, the company has pointed out repeatedly that it’s no longer interested in growing its coal business either organically or by way of acquisition. Starting next year, the company will only spend $300 million-$350 million per year in maintenance capital as it turns the coal business into harvest mode. In my opinion, that makes it a great candidate for an MLP structure similar to Alliance Resource Partners, L.P. (NASDAQ:ARLP)s . MLPs tend to be valued higher by the marketplace because of the steady income produced; Alliance Resource Partners, L.P. (NASDAQ:ARLP), for example, currently yields 6%. CONSOL could use the copious cash flows from coal to produce a nice income vehicle if it structured its coal business as an MLP.
In addition, the company has several strategic assets that might fit better elsewhere. For example, its Baltimore coal export terminal might also fit better within an MLP sructure. Kinder Morgan Energy Partners LP (NYSE:KMP), which is spending $450 to expand its own coal export terminal capacity along with other coal assets, might find this asset to be of interest. A purchase of CONSOL’s coal terminal would add to Kinder Morgan Energy Partners LP (NYSE:KMP)’s export capacity, while adding the stable income stream from CONSOL’s current coal export operations.
Another asset that might be more valuable to a strategic acquirer is CONSOL’s water division. The company owns a variety of water treatment assets used to process and recycle water for its coal and natural gas businesses. This business would be a nice strategic fit for a company like Nuverra Environmental Solutions Inc (NYSE:NES). Nuverra Environmental Solutions Inc (NYSE:NES) has been consolidating water assets over the past few years, and therefore CONSOL’s 102 wastewater treatment plants throughout Appalachia would go far in advancing Nuverra Environmental Solutions Inc (NYSE:NES)’s commitment to protecting the environment by offering water solutions to producers. Furthermore, it would diversify its business into coal.
CONSOL has a range of other options in addition to the ones I’ve mentioned, making one thing clear: There is value that’s just waiting to be unlocked. The good news is that investors won’t have to wait long — the company expects to announce something as soon as next quarter. Unlocking value to embrace a new identity tends to be well rewarded by the marketplace, so investors who are interested in this type of situation might want start digging a little deeper to see what other hidden assets CONSOL has before the market discovers what exactly CONSOL is doing.
The article This Identity Crisis Could Unlock Huge Value for Investors originally appeared on Fool.com is written by Matt DiLallo.
Fool contributor Matt DiLallo owns shares of Nuverra Environmental Solutions. The Motley Fool recommends Alliance Resource Partners, L.P. The Motley Fool owns shares of Nuverra Environmental Solutions and has the following options: long January 2014 $4 calls on Nuverra Environmental Solutions and short January 2014 $3 puts on Nuverra Environmental Solutions.
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