CONSOL Energy’s relative valuation
The below table shows different fundamental ratios for the S&P 500 (SPY) upstream companies that have a similar production mix and have overlapping geographical areas of operations.
CONSOL Energy (CNX) has a higher forward EV-to-EBITDA ratio of ~7x when compared with Southwestern Energy (SWN), another natural gas producer in the Marcellus Shale, which has a forward EV-to-EBITDA ratio of ~6x. But when compared with other oil and natural gas producers like Noble Energy (NBL) and Cimarex Energy (XEC), which have forward EV-to-EBITDA ratios of ~8 and ~11, respectively, CNX’s valuation appears to be cheaper. Pioneer Natural Resources (PXD) has a forward EV-to-EBITDA ratio of 10x, which is again higher when compared with CNX’s. Overall, CNX’s valuation appears to be at the lower end when compared with its peers. The average EV-to-EBITDA ratio for the upstream industry is ~12.2x.
Even when compared with price-to-book or price-to-sales metrics, CNX appears much cheaper with numbers of ~0.34x and ~0.55x, respectively.
Why is CNX trading at a discount?
In the above table, it is clear that companies with higher leverage or lower current ratio are trading at a discount to book value, or have lower price to sales. A possible explanation for this could be a fear of an energy-driven debt crisis if commodity prices stay low for longer than anticipated. Also, given a path of rising interest rates at a time when energy companies are so indebted and are scrambling for access to capital, interest expenses for highly leveraged companies can rise further.
As of 3Q15, CNX has a much higher debt-to-equity ratio of ~76% and the lowest current ratio of 0.52. Thus, it is trading at a discount to its peers.