CNX Gas (CXG)

TOP CONTRIBUTORS

Mark Deluzio

Andrew Lewis

CNX Gas Corporation (NYSE:CXG) is a vertically integrated natural gas producer. Its main revenue stream comes from the sale of self mined natural gas to energy generators and wholesalers such as BP and ConocoPhillips. CXG extracts this natural gas from land that it owns, processes it for sale, and then ships it to customers using its transport network of pipelines. CNX Gas Corp is the 44th largest U.S. natural gas company by production volume.^[1]

The company was originally a subsidiary of CONSOL Energy (CNX), but was spun off in a public offering in 2005. CNX Gas was founded to extract coalbed methane from CONSOL's longwall coal mines. This relationship is still very strong today as 27% of CXG's production is in connection with CONSOL. ^[2] This is beneficial for CXG because CONSOL has already discovered the proven reserves and CXG saves money on exploration costs. CONSOL still retains an 81.5% stake in the company. Recently, CONSOL made public its intentions to buy back the remaining public shares in a stock-for-stock swap. It is doing so because it believes that the market is not valuing CXG properly.^[3] CXG shareholders have resisted the buyout, and threatened to lawsuits against CONSOL should they continue the buyout. On March 25, CONSOL formally terminated the buyout offer.

Business & Financial Metrics^[4]

In 2009, CXG generated a net income of $164.5 million on revenues of $683.4 million. This represents a 31.2% decrease in net income and a 13.4% decrease in revenues from 2008, when the company earned $239.1 million on $789.4 million in revenue.

Key Trends and Forces

Continued Global Growth

World economic growth is at an all time high. A byproduct of this growth is a large spike in energy demand. As this increase in demand of the past few years has driven Oil Prices to record highs, the spot and futures market prices for natural gas have followed. This is mainly due to the growing demand for electricity. As described below, natural gas is most dependent on this sector to maintain demand. As more developing nations are industrialized and developed at the current breakneck rates, more power plants and factories will consume natural gas. China is now a net importer for coal, and has begun to work on using alternative fuels to power its rapidly developing electricity grid.

Oil Demand/Price Inflation

Although the pricing patterns of oil and gas commodities are similar, they are not as linked as some may think. Because the end use distribution of the two is so different, the prices may deviate a great deal. Nearly 2/3 of the petroleum distillates end up in automobiles.^[5] Thus, the demand environment is much different. Because so much of the demand for oil comes from transportation, natural gas often has a reactive pricing environment. IE- When oil becomes expensive in the summer because of increases in auto travel demand, natural gas looks cheap to the industrial sector. Although traditionally the price relationship is 6:1 in crude oil's favor, it has widened to nearly 10:1. This 6:1 ratio is derived from the heat content of each commodity. One barrel of crude oil generates approximately 6 times as many BTU of heat as a Million cubic feet of natural gas.^[6] But as described above, the demand for each goes beyond just heat generation and their prices can deviate a great deal. Although we are at a wide point in the relationship, natural gas prices equaled crude oil's 13 times this decade.^[7]

Liquefied Natural Gas Imports

Effect on U.S. Suppliers like CXG

Just a few short years ago liquid natural gas (LNG) importation was an almost non-existent market.^[8] This represents an increase of LNG from 1.1% to 3.8% of total U.S. marketed supply.^[9] Great strides in LNG technology and economies of scale have made the LNG industry much more accessible to both sides of the market. As the chart to the right illustrates, the U.S. Energy Information Administration expects LNG imports to surpass Canada pipeline imports by 2015.^[10] As Canada's natural gas reserves continue to be depleted, this market will become an even larger player in the U.S. natural gas industry. The ease and efficiency at which these LNG imports can enter the U.S. market will prevent significant realized price appreciation by U.S. based suppliers.

Global Trade and Current Market Conditions

There are two significant pressures that are keeping the price of natural gas at its slow upward march. The significant increase in U.S. natural gas exploration and production is keeping the price from moving up toward global averages which are 20-30% the U.S. spot price. The massive migration of LNG imports towards more demand driven markets in the Eastern Hemisphere is keeping the price from moving down to much lower historical averages dictated by domestic supply level growth. Despite the fact that current LNG prices and economies of scale are making importation much more feasible for buyers and suppliers, increased demand from nations such as Japan and India is causing the level of U.S. LNG imports to fall year over year.

Competition

CNX Gas competes with companies like:

• Questar (STR)
• Range Resources (RRC)
• Quicksilver Resources (KWK)
• Cabot Oil & Gas (COG)

Notes

1. ↑ U.S. Energy Information Administration Annual Report, page 10
2. ↑ 2007 CNX Gas Corp Annual Report, page 31
3. ↑ http://phx.corporate-ir.net/phoenix.zhtml?c=66439&p=irol-newsArticle&ID=1101131&highlight=
4. ↑ CXG 2009 10-K pg. 33  
5. ↑ U.S. EIA, Energy Breakdown for 2006
6. ↑ http://www.freerepublic.com/focus/f-news/2005893/posts
7. ↑ http://www.freerepublic.com/focus/f-news/2005893/posts
8. ↑ U.S. Energy Information Administration
9. ↑ U.S. Energy Information Administration
10. ↑ U.S. Energy Information Administration, Natural Gas Outlook