New Technologies And Uncertain Returns Cast A Shadow Over Future Financial Stability

Key Takeaways

• Ramping up the New Technologies division and engaging in environmental attribute sales introduces costs and complexities that may negatively impact net margins.
  
• Maintaining production levels and investing in deep Utica wells suggest a conservative growth strategy and potential financial stability risks due to capital expenditure.
  
• Expansion in new technologies and strategic hedging, alongside stable service costs and regulatory tailwinds, could significantly boost CNX Resources' revenue and margins.

Catalysts

An independent natural gas and midstream company, engages in the acquisition, exploration, development, and production of natural gas properties in the Appalachian Basin.

• The ramping up of the New Technologies division may increase operational costs before it contributes significantly to revenue, potentially impacting net margins negatively in the short to medium term.
  
• Initial offerings and customer trials in the New Tech division suggest an early-stage venture that may not result in immediate, significant revenue contributions, potentially affecting overall revenue growth expectations.
  
• The company is maintaining its production levels without further curtailment, hinting at a conservative growth strategy that might limit revenue growth if natural gas prices increase.
  
• Investments and explorations in the deep Utica wells represent significant capital expenditure with uncertain returns, potentially affecting the company's cash flow and financial stability in the near term.
  
• The engagement in environmental attribute sales and the development of third-party revenue opportunities, while innovative, introduces new operational complexities and uncertainties that could impact net margins if the market demand or regulatory landscape shifts.

Assumptions

• Analysts are assuming CNX Resources's revenue will grow by 17.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 39.2% today to 15.9% in 3 years time.
• Analysts expect earnings to reach $346.6 million (and earnings per share of $2.66) by about September 2027, down from $524.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.8x on those 2027 earnings, up from 9.1x today. This future PE is greater than the current PE for the US Oil and Gas industry at 10.1x.
• Analysts expect the number of shares outstanding to decline by 6.34% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.02%, as per the Simply Wall St company report.

Risks

• The expansion of CNX Resources' New Technologies Group, particularly the AutoSep OFS business and compressed natural gas (CNG) innovations, could lead to significant revenue growth if these services gain market traction, impacting revenue positively.
  
• The successful deployment of CNG to third parties could open new revenue streams for CNX Resources in various sectors like power generation and industrial use, potentially leading to an increase in earnings.
  
• A stable service cost environment, as indicated by the expectation of flat service costs for the remainder of the year, could help maintain or even improve net margins by managing operational expenses effectively.
  
• The anticipation of favorable guidance for coal mine methane under the 45V hydrogen tax credit could unlock new project opportunities, enhancing CNX Resources’ long-term revenue and cash flow prospects.
  
• The company's strategic hedging approach, aimed at managing commodity price volatility while keeping some exposure to price movements, could benefit net margins if natural gas prices increase, leading to higher-than-anticipated revenues.

Valuation

• The analysts have a consensus price target of $26.1 for CNX Resources based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $32.0, and the most bearish reporting a price target of just $20.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.2 billion, earnings will come to $346.6 million, and it would be trading on a PE ratio of 11.8x, assuming you use a discount rate of 8.0%.
• Given the current share price of $31.49, the analyst's price target of $26.1 is 20.7% lower.
• 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.