Validation Of Coal Mine Methane As Hydrogen Feedstock Will Open New Opportunities

Key Takeaways

• Successful CMM validation and strategic expansion into new sectors like power generation could drive revenue growth with regulatory clarity.
  
• Efficiency and strategic well use could maintain production with minimal capital investment, enhancing earnings and margins.
  
• Regulatory uncertainties, market pricing, and dependency on key projects may impact CNX Resources' technology investments, revenue opportunities, and expansion of CNG/LNG services.

Catalysts

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

• Successful validation of coal mine methane (CMM) as a low carbon intensity feedstock for hydrogen production could drive revenue growth if regulatory clarity allows for necessary investments, particularly in the New Technologies segment.
  
• Efficiency gains from Utica CPA development and a low decline base suggest the company can maintain production with capital expenditures below $500 million, which could enhance net margins.
  
• The strategic use of drilled but uncompleted wells (DUCs) from the Apex acquisition presents an opportunity to maintain production levels with limited capital investment, potentially improving earnings.
  
• Potential expansion into new sectors such as power generation and data centers for CMM could open additional revenue streams, bolstering future earnings.
  
• Optionality to accelerate production in the second half of 2025 if natural gas prices increase, providing potential upside to revenue depending on market conditions.

CNX Resources Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CNX Resources's revenue will grow by 29.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from -7.7% today to 26.4% in 3 years time.
• Analysts expect earnings to reach $672.0 million (and earnings per share of $4.9) by about March 2028, up from $-90.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $751 million in earnings, and the most bearish expecting $593 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.0x on those 2028 earnings, up from -52.3x today. This future PE is lower than the current PE for the US Oil and Gas industry at 12.7x.
• Analysts expect the number of shares outstanding to decline by 2.87% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.29%, as per the Simply Wall St company report.

CNX Resources Future Earnings Per Share Growth

Risks

• Uncertainties regarding regulatory developments, such as the potential changes in the 45V rules and the need for clarity around restrictions, may delay or impact CNX Resources' investments in new technologies, possibly affecting future earnings from this segment.
  
• The company's capital allocation remains contingent on market pricing and industry conditions; uncertainties in natural gas prices could impact production levels and revenue from exploration and production activities.
  
• The monetization of coal mine methane is subject to future policies and recognition, which are uncertain; failure to achieve favorable conditions could result in missed revenue opportunities in environmental attributes.
  
• Dependency on specific projects, such as the Apex acquisition, could create variability in capital expenditures and production volumes, possibly affecting net margins if expected efficiencies and synergies are not realized.
  
• CNX Resources' ability to expand its CNG/LNG and oilfield services business is still unproven, with the potential delay in commercialization impacting anticipated contributions to free cash flow.

Valuation

• The analysts have a consensus price target of $31.0 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 $48.0, and the most bearish reporting a price target of just $22.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.5 billion, earnings will come to $672.0 million, and it would be trading on a PE ratio of 8.0x, assuming you use a discount rate of 8.3%.
• Given the current share price of $31.8, the analyst price target of $31.0 is 2.6% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.