This is from an X shareholder in CNX Resources we mentioned in a previous blog.
“I was recently reading or listening to something – I can’t quite remember – where Buffett was saying that one of the best businesses to own would be an oil producer that stopped drilling. And just returned all excess cash flow to shareholders. OXY is pretty close. Clearly a Permian business and an Appalachian gas company’s assets are planets apart, but the cash allocation isn’t.
CNX doesn’t remind me of anything I’ve seen before because I think Nick and team won’t stop buying stock. No matter what. The only way they stop is if the price goes up. A lot. You and I know that most managers stop buying stock the second macro or micro goes wrong. Cue ALLY: “we love it in the 40’s, but in the 20’s we are stopping our return program due to uncertainty.” I’m fairly certain CNX won’t do that. Which makes it completely unique.
The irony of the situation is that you and I would best be served with a stock that went absolutely nowhere over the next 5 years. We’d best be served if the stock actually went down. Actually, we’d best be served if we could turn the stock market off and allow Nick to buy all the shares from everyone else except us! The elementary math is just shocking when you go out 5 years. By that time, they could have 75 million or 50 million shares outstanding. They could be doing anywhere between 400m and 800m in cash flow. I always take the lower end of anything, 8 dollars a share in owners cash flow. Slap a shitty multiple on that and it still works. Or keep the market cap the same and divide by 50.
Anyway, I have two job responsibilities: 1) don’t love money and 2) generate an adequate return over time. Sometimes I only want to own this.”
Well, under the heading of we would prefer responses that tell us how dumb we are so might learn something, we will take it!
My comments back to him(slightly cleaned up):
The point of my whining is that there are 3 other things in play here for CNX. The first and most important is the lack of takeaway pipeline capacity from the Marcellus means the net pricing to them just ruins the math of the big fat upside case. Politics trump math – nothing we can do about it since we cannot vote in those states. It is good upside from here, but there is unrequited valuation love that seems destined to remain unrequited.
The second is in regard inventory….if you can’t fully benefit from positive natural gas demand and pricing to the fullest degree, then what really is your drillable inventory? Are the numbers accurate on paper, but again destined to be unrequited with legitimate stock value? You could be depleting much faster than you think? This all leads “what is terminal value of the company post Plan A”
A point on capital allocation. I have come to the conclusion that buying back stock in a declining terminal value business is inferior to paying out huge variable dividends. Yes, they appear now to be shrinking shares faster than they are depleting assets, but that is hard to sustain. So if terminal value is nearer to zero than $16, is this equivalent to a closed end fund that is paying you high dividends, an increasing amount of which are really return of your capital?
The real point of our piece was how “excited” we can get when we see messaging that obviously appeals to our investment approach and philosophy, which is much more rare than you think. The question is: is CNX just really good at messaging us or are they or we very right on terminal value of low cost natural gas in their footprint?
