Description

     There is limited liquidity to this idea. If you need size, read no further.   

     On April 06, 2016, thistle933 submitted an excellent write-up on Alliance Holdings GP LP. If you have any interest in the coal business, I recommend that you read it. If you have any interest in this idea, I recommend that you read it.

     CNX Coal Resources LP (CNXC) has a few issues that dim its investment attractiveness. First, it is an MLP. MLPs have not done well in the past year, and there are misgivings about the structure. Second, CNXC does not control the assets that it owns. Consol Energy (CNX) dropped a 20% undivided interest in three of its mines into CNXC in return for cash and shares. Third, CNXC produces thermal coal for electric utilities. Coal is a pollutant and our government has been doing its best to discourage its use. As a consequence, older utility plants that used coal as their fuel have shut down or are in the process of shutting down. Demand has weakened and will not be robust in the future. However, as thistle has elucidated, there is a continuing need for the power generated by coal-fired utility plants and a decent market for coal continues to exist. Fourth, the IPO of CNXC was a disaster. The company came public a little less than a year ago, 6/30/2015, at $15.00. It now trades at at $7.00. Last, there are only 11.6 million public shares outstanding, and of those Greenlight Capital owns 5.5 million (47%) and Consol Energy owns 1 million (9%). In addition, there are 11.6 million subordinated units all of which Consol Energy owns. The public float is 6.1 million shares - about $43 million. Average daily trading volume is 68,000 shares or $500,000. Despite these shortcomings, I think that there is value in the shares.

     In 2015 CNX formed an MLP to hold a 20% undivided interest in its PA mining operations consisting of interests in three mines. In consideration for this, CNX received value of $331 million consisting of $179 million of debt repayment, 1.6 million shares of LP interests and 11.6 million subordinated LP interests. The mines are:

The Bailey Mine with 54.4 million tons of proven and probable reserves with an average gross heat content of 12,900 BTUs per pound and 4.1 pounds of sulfur per million BTU (high sulfur content). The mine operates two longwalls and annual capacity is 2.3 million tons a year to CNXC. In 2015, 2014 and 2013 CNXC's share of production was 2.1 million tons, 2.5 million tons, and 2.2 million tons.

The Enlow Fork Mine with 63.2 million tons of proven and probable reserves with an average heat content of 12,900 BTUs per pound and 3.4 pounds of sulfur per million BTU. The mine operates two longwalls and annual capacity is 2.3 million to CNXC. In 2015, 2014 and 2013 CNXC's share of production was 1.8 million tons, 2.1 million tons, and 2.0 million tons.

The Harvey Mine with 40.7 million tons of proven and probable reserves with an average heat content of 13,100 BTUs per pound and 3.4 pounds of sulfur per million BTU. The mine operates one longwall and annual capacity is 1.1 million tons to CNXC. In 2015, 2014 and 2013 CNXC's share of production was 0.7 million tons, 0.6 million tons, and 0.1 million tons.

These mines are located in close proximity to one another. They are served by central washing and transportation facilities. The transportation facility can load 9,000 tons of coal an hour onto Norfolk & Southern and CSX rail cars. The BTU content of these mines is slightly higher that coal from the Illinois Basin while the sulfur content is slightly less. Since 2006, CNX invested $2 billion in these mines. CNX estimates that the mines have 26 years of productive life left with little capital investment required.

The output from these mines is transported primarily by rail although some tonnage is shipped by water. 72% of sales are to electric utilities, 24% has gone to export and 4% to other domestic users. Duke Power and GenOn are the company's largest utility customers. During the last three years sales prices averaged $56.36, $61.88 and $63.93 a ton. Costs per ton were $41.9 and $43.74 and $44.53, so the company continues to generate good earnings. As of their 1/28/2016 conference call, CNXC has been able to sell out 2016 production, 2017 production was 61% contacted and 2018 was 49% contracted at a price of around $50.00 a ton. For 2016, the company estimates that sales will be between 4.4 million and 5.2 million tons and EBITDA will be between $57 and $67 million.

     Greenlight Capital is a well known hedge fund run by David Einhorn. As of 12/31/2015, his fund is shown as holding 12.9% of the outstanding shares of Consol Energy, CNXC's parent. On 11/13/2015 he made a presentation on CNX contending that it was undervalued both as to its natural gas business and its coal business. The presentation can be found on Google. Greenlight likes CNXC's assets. When CNX proposed the formation of the MLP, Greenlight stepped in to backstop to the offering. The fund committed to a minimum allocation of 2,000,000 shares and a maximum of 5,000,000 at $15.00 a share. They ended up with 5,000,000 shares. Given the unpopularity of energy securities and, coal securities in particular, CNXC's stock took a almost straight path south declining to a low of $6.13 on 2/11/2016.

     As part of the securities offering, CNX set a "minimum quarterly distribution" of $0.5125 or $2.05 on an annual basis. Distributions will be made as follows:

First, 98% to the common units and 2% to the GP, until the common has received the minimum quarterly distribution of $0.5125 per unit plus any arrearages from prior quarters;

Second, 98% to the subordinated units and 2% to the GP, until the subordinated units have received $0.5125 or $2.05 on an annual basis

Third, 98% to all units, pro-rata, and 2% to the GP, until each unit has received $0.58938 or $2.35752 on an annual basis

Fourth, 85% to all units, pro-rata, and 15% to the GP, until each has received $0.64063 or $2.5652 on an annual basis

Fifth, 75% to all units, pro-rata, and 25% to the GP, until each unit has received $0.76875 or $3.075 on an annual basis

Thereafter, 50% to all unit holders, pro-rata and 50% to the GP

     The subordinated units will convert into common units "after the date that we have earned and paid distributions of at least (i) $2.05 (the annualized minimum quarterly distribution) on each of the outstanding common units and subordinated units and the corresponding distributions on our general partner's 2% general partnership interest for each of the three consecutive, non-overlapping four quarter periods ending on or after June 30, 2018 or (ii) $3.08 (150% of the annualized minimum quarterly distribution) on each of the outstanding common units and subordinated units and the corresponding distributions on our general partner's 2% general partner interest and the related distributions on the incentive distribution rights for any four-quarter period ending on or after Jone 30, 2016, in each case provided there are no arrearages in payment of the minimum quarterly distributions on our common units at that time."

     For the years 2015, 2014 and 2013 CNXC had $54.4 million, $89 million and $75.3 million of cash flow after capital expenditures of about $30 million a year and interest expense of $8.5 million, $6.9 million and $2.1 million. For 2016 the company is estimating their 20% share of mine output to be between 4.4 million to 5.2 million tons and EBITDA of $57 million to $67 million. Interest expense is about $8 million and capital expenditures are expected to be between $24.5 million and $27.5 million. Accordingly, cash flow should be $25.5 million to $31.5 million. At the low end of the forecast, the GP will earn $510,000 on its 2% interest, the public units will receive $2.05 ($23.8 million) and the subordinated units will get $1.2 million or $0.10 a unit.

     As part of the original public offer, CNXC has been given the right of first offer on the remaining 80% of the Bailey, Enlow Fork and Harvey mines owned by Consol. In addition, CNXC was granted a right of first offer on three other assets.

Baltimore Marine Terminal - The marine terminal is located south of Baltimore. It connects rail shipments from the mines to ocean going vessels bound for Asia and Europe. metallurgical coal is its main cargo although it can handle thermal. It has a throughput capacity of 15 million tons a year.

Buchanan Mine -  The mine is located in Mavisdale, VA. It produces premium low volatility metallurgical coal for domestic and export markets using longwall mining. It is among the most efficient in the US.

Cardinal States Gathering System - This is a 110 mile pipeline servicing 3,940 active wells on 155,000 acres in VA, KY, and WV. It transported 202MMcf/d for the three months ended 3/31/2015.

     Overall, CNXC's operations are of good quality and professional managed.

Catalyst

     At $7.25 CNXC yields 28.3%. The yield is somewhat protected by the subordinated units held by CNX, but the margin is close. As thistle has pointed out, thermal coal is priced off of natural gas. If the market for that improves, there is room for improvement in the dividend and the price of the stock. In the meantime, you hold a long option for little or no cost.