Key Takeaways

CNX Resources' conservative production strategy could hamper revenue growth if natural gas prices unexpectedly rise and the company cannot quickly capitalize.
Focus on free cash flow over aggressive production indicates a cautious financial approach that may limit rapid earnings growth and lead to undervaluation issues.
Strategic hedging, production optimization, and strong asset performance support CNX Resources' stable cash flow and potential earnings growth amidst market volatility.

Catalysts

About CNX Resources

An independent natural gas and midstream company, engages in the acquisition, exploration, development, and production of natural gas properties in the Appalachian Basin.What are the underlying business or industry changes driving this perspective?

CNX Resources' future production levels are uncertain due to the flexible approach in their activity program for the second half of the year, which may lead to lower than expected revenue growth if gas prices remain volatile, hindering consistent production output.
The company does not have immediate plans to increase activity levels despite the opportunity, which could lead to stagnation in revenue growth if natural gas prices improve unexpectedly and the company is not positioned to capitalize quickly.
Although hedges protect the company from immediate pricing fluctuations, the widened natural gas differentials could eventually impact net margins adversely if not addressed, especially as only 15% of volumes are exposed to open pricing changes.
The company remains focused on free cash flow per share over production growth, signaling a more conservative financial strategy that may lead to slower earnings growth than anticipated by some analysts forecasting more aggressive production increases.
Despite positive initial production performance from Apex wells, the company's cautious stance on overall production levels and lack of significant changes to their strategic activity may contribute to sustained free cash flow levels but not necessarily a significant rise in earnings, possibly resulting in undervaluation concerns.

CNX Resources Earnings and Revenue Growth

CNX Resources Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

This narrative explores a more pessimistic perspective on CNX Resources compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
The bearish analysts are assuming CNX Resources's revenue will grow by 9.6% annually over the next 3 years.
The bearish analysts assume that profit margins will increase from -18.7% today to 29.2% in 3 years time.
The bearish analysts expect earnings to reach $606.9 million (and earnings per share of $4.2) by about May 2028, up from $-295.1 million today. The analysts are largely in agreement about this estimate.
In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 5.2x on those 2028 earnings, up from -15.5x today. This future PE is lower than the current PE for the US Oil and Gas industry at 11.3x.
Analysts expect the number of shares outstanding to decline by 5.56% per year for the next 3 years.
To value all of this in today's terms, we will use a discount rate of 6.89%, as per the Simply Wall St company report.

CNX Resources Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?

CNX Resources is effectively mitigating risks associated with fluctuating market prices by hedging 85% of its production, which contributes to stable free cash flow projections despite market volatility. This strategic hedging can ensure that revenue remains consistent even in times of price uncertainty.
The significant number of turn-in-lines and planned completions suggest potential stability or growth in production levels. This ongoing production might support stable earnings, particularly as the company aligns production activities to optimize free cash flow per share rather than focusing purely on volume targets.
Despite some noise in cash tax figures due to hedging, CNX Resources anticipates remaining a de minimis cash taxpayer until reaching $3 billion in cumulative free cash flow several years down the line. This situation allows for stronger net margins and earnings retention in the near term.
The management's recognition of in-basin demand potential from power generation and data centers indicates possible future stabilization or improvement in demand, which could narrow differentials and boost overall revenue through local sales.
Strong performance of newly acquired Apex wells beyond initial expectations bodes well for production output and operational efficiency, potentially leading to improved earnings and higher net margins from this more productive asset base.

Valuation

How have all the factors above been brought together to estimate a fair value?

The assumed bearish price target for CNX Resources is $21.2, which represents two standard deviations below the consensus price target of $30.42. This valuation is based on what can be assumed as the expectations of CNX Resources's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $41.0, and the most bearish reporting a price target of just $21.0.
In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $2.1 billion, earnings will come to $606.9 million, and it would be trading on a PE ratio of 5.2x, assuming you use a discount rate of 6.9%.
Given the current share price of $31.53, the bearish analyst price target of $21.2 is 48.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.