Who May be Next to be Acquired by a Major?

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Consol Energy, (NYSE: CNX), is the largest producer of coal east of the Mississippi and a top east coast producer of conventional and unconventional natural gas. In 2010 Consol made a transformative $3.5 billion acquisition of gas assets from Dominion Resources.  Shareholders questioned the strategy of a 100 + year old coal company expanding outside its area of expertise. Within months the acquisition looked like a loser as gas prices fell precipitously. In the deal Consol picked up a substantial block of Marcellus shale acreage and several hundred thousand acres in the Utica.

Doubters have been proven wrong. Since Consol's acquisition the list of global majors involved in U.S. oil and gas shale plays continues to grow. That list includes, Chevron, Conocophillips,Total SA, Encana, Exxon, Occidental Petroleum, Marathon Oil, Hess Energy, Anadarko Petroleum, BP, BHP, (NYSE: BHP) Shell, Statoil, Atinum Partners of Korea, Reliance Industries of India, and China National Offshore Oil Corp., Sinopec and Repsol.

Meanwhile, Consol's coal segment has demonstrated excellent staying power. Admittedly, the company recently announced an earnings miss, but Consol has one of the best coal franchises in North America. Consol has a preeminent low-vol coking coal asset in the U.S. with production capacity of 5 million tons per year. And, Consol has high margin Northern Appalachia coal mines that remain profitable even in today's market. 

Most of the companies listed above have the financial wherewithal to acquire Consol without batting an eye. But why should they? Well to start, 7 of the top 10 super-majors are already active in the U.S. shale markets. The industry in the U.S. now rivals that of the Canadian Oil Sands industry, producing 1.8 million barrels of oil per day.  As in the U.S., dozens of large public and private companies have staked a claim in the Oil Sands.

Just because a super major or top 20 E&P company has shale assets in the U.S. doesn't mean they have large acreage or have enough to move the needle of company-wide earnings. The easiest and most prudent way to grow continues to be via acquisition. Yet the number of attractive targets of decent size is declining. That is why I believe that Consol is more and more attractive as a takeout candidate.

Foolish readers are smartly wondering why an E&P company would buy Consol given its substantial coal business. In my opinion a large E&P company could acquire Consol and deal with the coal business by 1) spinning it off to shareholders, 2) allowing the management team to continue running a top notch coal business, 3) using Consol's coal business as a platform to acquire other coal assets in the U.S., thereby diversifying into coal at the bottom of the coal market.

Perhaps this is wishful thinking, a company buying assets at the bottom of the market! Alpha Natural Resources, (NYSE: ANR), Arch Coal, (NYSE: ACI) and Walter Energy(NYSE: WLT) were not that savy.  Each made ill-timed acquisitions in 2011 that they are paying dearly for today. Alpha acquired Massey Energy's troubled portfolio of east coast mines. Alpha got more trouble than they bargained for with Massey, having to spend much more time and money to integrate Massey's assets only to shut a lot of them down this year.

Arch Coal acquired Intl. Coal for it's pipeline of coking coal projects. However, now Arch is saddled with $4.5 billion of debt and little current coking coal production. It will take 2-3 years and a lot of capital to bring new coking coal mines into production. Walter made a bold step into Canada to acquire Western Coal.  The problem is that Western's coal assets are higher cost and lower quality than Walter's premium U.S. coal mines. 

BHP is a great example of my thesis on Consol. BHP diversified from coal and iron ore into E&P in Australia and shale plays in the U.S. At a time when coal and iron ore prices are under significant pressure, BHP's most profitable segment by far is its E&P business. Cost inflation from oil and gas that crimps profits in coal and iron ore is mitigated by increased profits in E&P. The same benefits would accrue to Teck Resources and many others by acquiring Consol.    

Consol's stock has outperfomed almost all U.S. coal producers and a lot of natural gas producers. As investors acknowledge that Consol is a real player in the shale plays, global natural resource companies will be noticing as well. Note to all super-majors reading this post, now is the time to acquire Consol Energy not after the stock price has doubled.  

 




MockingJay2011 owns shares of Alpha Natural Resources, Walter Industries, and CONSOL Energy. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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