31 July 2022
Background
I first bought the shares in June 2021. It was a value call for me back then. I thought close to 20% FCF yield was cheap enough and planned to sell the position when the price reached $25 or so.
It almost reached that level in early June this year. However, I have not sold any shares. In fact, after closely following the company for over a year, I have developed a stronger conviction and decided to increase my position in the company. Three weeks ago, I bought more shares at a $16.3 price, increasing the weight of CNX in my portfolio to 8% (average cost of $14.28/share).
Summary of my investment case on CNX
CNX is a low-cost gas producer run by a team with a strong track record of value creation, which has generated $460mn organic FCF in 2021 and is on track to deliver over $600mn in 2022 (FCF yield of 14% and 19%, respectively). Even more importantly, the company is spending its FCF on paying down debt and share repurchases. It bought back 12.9mn shares in 2021 ($245.2mn) and repurchased 12.4mn in YTD ($248.5mn), reducing its share count by 6% since the start of the year. At the same time, unlike many other E&P companies, CNX has been growing production and expanding its reserve base. The company has also consistently reduced its costs.
I think a more reasonable valuation for CNX would be a 10-15% FCF yield based on a normalised FCF per share of $4, suggesting around a $33/share valuation (~100% upside). There is an additional upside to long-term FCF coming from production growth, net debt reduction (reduced interest expenses), lower share count (per-share FCF), better hedge price as the forward gas price moves higher in a tighter market and potential cost optimisation (higher productivity).
You can see a more detailed analysis of unit costs and profitability of CNX in my write-up in My Portfolio section.
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