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Greenlight Capital Boosts Stake in Consol Energy

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Greenlight Capital buys Consol shares worth ~$113.7 million

As seen in the table below, Chesapeake Energy (CHK) and Cimarex Energy (XEC) were the worst and best performers, respectively, in the E&P (exploration and production) subsector within the Energy Select Sector SPDR ETF (XLE) last week. At the same time, Consol Energy (CNX), in the coal subsector, rose 2.5%.

Initial losses on Chesapeake’s shares were triggered by the firm’s announcement last week to scrap its dividend payment and redirect it toward capital expenditure.

David Einhorn’s hedge fund Greenlight Capital purchased 6,669,126 shares of Consol Energy between July 20 and July 22, raising the fund’s stake in CNX to 12.9% from 8.9%.

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Long-term contracts could possibly help Consol ride out depressed fuel prices

In a letter to investors earlier this month, Greenlight Capital noted that Consol Energy was a significantly underperforming stock in its 2Q15 portfolio. The letter added that long-term contracts guarantee CNX locked-in prices for most of 2015 and for roughly 50% of production between 2016 and 2018.

Diversification into natural gas probably helped Consol fare better

Consol Energy has been increasing its emphasis on natural gas assets, and this has led to a higher share of revenues from the natural gas segment. As we explained in an earlier article, Why Coal Firms Face a Bleak Future, given the growing global emphasis on clean fuels, Consol Energy’s move is justified.

Peabody Energy (BTU), which produces mainly coal, suffered greater losses than its more diversified peer over the past few quarters. While Consol posted EPS (earnings per share) of $0.31 and $0.34 for 4Q14 and 1Q15, respectively, Peabody posted EPS of $-1.92 and $-0.65 for 4Q14 and 1Q15, respectively.

As seen in the above chart, while Peabody has fallen from a peak of ~$70 in 2011 to ~$1 presently, Consol Energy is in a relatively better position.

Consol Energy reports 2Q15 loss of ~$603 million

Consol Energy posted a net loss of $603 million for 2Q15, which translates to a loss of $2.64 per diluted share. In 2Q14, the company posted a net loss of $25 million. The net loss this quarter includes an unusual yet highly significant item—a pretax impairment charge amounting to $829 million in the firm’s carrying value of its shallow oil and natural gas assets, primarily due to sustained downtrends in fuel prices.

In the next part of this series, we’ll discuss how oil majors such as BP (BP) are keeping major new projects on hold in order to protect dividend payments.

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