03-Jun-16
10:12 ET |
SCALP |
ScalpTrader *Spec Plus Idea
- Before going any further, if you can't stomach the idea of a 50% overnight loss, then don't worry about reading the remainder of this.
- CNX Coal Resources (CNXC 8.61 +0.43) is a Coal producer. Most of the industry has gone bankrupt. CNXC is structured as a MLP, so the goal is to provide high distribution payments to holders.
- At its current level of distributions, CNXC yields an eye-popping 25%.
- Yields don't get above 20% unless there is serious concerns about the sustainability of said distribution. In the most recent quarter, CNCX's distribution coverage ratio was a measly 0.4x, which means that distributable cash flow generated by operations covered just 40% of what the co paid out.
- So we have established that Coal has been a bad business to be in of late and that CNXC is paying out more than it is bringing in. This is why I put this in the *Spec Plus category. That said, I'm personally scaling into shares in this area.
Here are some of the reasons that I think CNXC could be one of the few Coal companies to avoid slashing its distribution and/or going bankrupt near-term.
First, this is a tiny company without the massive debt overhang of most Coal companies. CNXC is a recently formed MLP that was spun off by CONSOL Energy (CNX) to manage & further develop all of CNX's active thermal coal ops in Pennsylvania. Total market cap is $189 mln and co has debt of about $200 mln. The plunge in Nat Gas prices contributed to a sharp decline in Coal prices in Q1, which led CNXC power plant customers to delay receiving contracted volumes due to low burn/high stockpiles. However, CNXC expects to realize the dollar value of these contracts over the course of the year, which is why it has maintained the quarterly distribution of $0.5125 per unit.
On the conf call, the co indicated that it sets the distribution based on what it thinks is sustainable for the year. CNXC is expecting volumes to trend back to normal levels and is benefitting from strong expense reductions. Moreover, the co is willing to use such levers as utilizing its credit line ($200 mln of availability) to help fund the distribution coverage gap. The reason that CNXC is so confident in its distribution is based on the co having much of its Coal volumes under contract with large power providers. For 2016, 2017 and 2018, the company has 97%, 70% and 52% under contract. My biggest concern with CNXC is the paltry distribution coverage. The co certainly thinks it has a plan to navigate itself back to health, but after seeing so many MLPs blow up over the past year as they were forced to slash distributions, I've learned to be careful when I see weak distribution coverage and lots of promises on why the distribution is sustainable. I've seen more than a few MLPs make this promise only to cut distributions within a quarter or two. On the flip side, CNXC is a very small company with a very strong sponsor with potential for strong future growth. Also CNXC lacks the major debt/pension overhang of its Coal peers. Another thing that makes me bullish in the short-term is that Natural Gas prices have surged in recent days, which should provide near-term support to Coal prices.
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25-Jul-16
15:31 ET |
SCALP |
ScalpTrader Spec Portfolio Update: CNXC -- Trimming 1/3 of position (11.02 +0.05)
- CNX Coal Resources (CNXC) is scheduled to report earnings after the close today.
- With Nat Gas prices having surged during the qtr, my expectation would be that results come in just fine and that company maintains its $0.5125 quarterly distribution.
- Stock has advanced 28% since our entry on June 3 at $8.61.
- Distribution yield at time of purchase was 25%. Current distribution yield is 18.5% at the current stock price.
- I think it is reasonable to assume that stock can trade at a 12-14% distribution yield.
- Although we are not there yet, I think it makes sense to trim back a piece of the position given 1) potential for earnings-related volatility, 2) the co's exposure to fluctuations in Nat Gas/Coal prices.
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03-Nov-16
14:19 ET |
SCALP |
ScalpTrader Spec Portfolio Update: CNXC -- Locking in profits on 1/2 of remaining position for +111% (including a 6% quarterly distribution payment). (17.70 +0.45)
- We've caught a very nice ride on this Coal MLP. We were buying CNXC when the co was considered distressed. Now analysts are tripping over each other to raise price tgts on it.
- Personally, I think the current valuation is a tad rich. Moreover, with Nat Gas prices potentially having peaked for the short-term, I'm concerned that the stock could see some profit-taking on the assumption that thermal coal pricing will follow Nat Gas lower.
- Note that record date for the next distribution payment is Nov 10. Stops on remaining position in the $15.00 area.
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