$CNXC

[Richard M]

Einhorn picked up a lot in the IPO of this coal MLP.  Yields $2.05 a share and IPO'd at $15.

$14.57 today.  That's a 14.14% yield.  If you make the assumption (sensibly, in my eyes) that a company doesn't IPO assets if they are unable to make at least two years of distributions...

That's 28.3% downside protection over the next 2 years.  Distros paid quarterly so 3.5% drop protected inside 3 months.  (and then the distros equate to even larger % drops).

Make it 3 and you're at 42% downside.

First rule of investing:  Don't lose money.  All other alternatives are drastically more palatable.  :)

Nice thing about this is if it ever turns around, you're still making 14% a year AND sitting on decent capgains.

Just went in.

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Richard Mordini

[Andrew Stepner]

I really like this idea.

I view Einhorn as a somewhat poor market timer but he equally seems elite at identifying value plays and I like to follow him where I can. This seems to be quite a sensible bet. Note that when the stock was at 15 he pointed out a dividend yield over 13.5% and free cash flow yield over 17%. So a bit of cushion for the dividend in that they are not paying out 100%, right?

The key line from his Q2 letter seems to me to be "At that value, distress is priced in, though it is far from evident that distress actually exists." If Einhorn thinks there is a margin of safety then I feel fairly comfortable.

My main question is what price to try to enter at.

Stock is now down to 14.10 and the div yield is up to 14.5%. Yet the price has been in somewhat of a downtrend. Part of me wants to wait to see a bottom form before buying in.

Will it drop further so I can buy it lower??

Stepner

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[Richard M]

If you're trying to fine tune it so much, probably not a good investment for you.  This is where I bought in at 14.2% yield and if it drops significantly I will just buy more.  Tailor your starting position to be happy if it goes up but want to buy more if it goes down. 

From the letter, they also have 2015 prices locked in and a bunch of 2016-2018, so I'm very confident they can get the distros for 2 years, offering the 28% downside protection.  I mean, even if the company shits the bed and halves the dividend thereafter, that's another 6.9% further downside protection.  You'll have picked up over $5 of distros on a $14ish purchase.

Our other significant loser in the quarter was CONSOL Energy (CNX), which fell from $27.89 to $21.74. While natural gas prices were stable during the quarter, coal prices fell about 10%. Near-term this is not a significant concern, as CNX prices are locked in under long-term contracts for almost all of 2015 and about half of 2016-2018 production. Assuming unhedged forward pricing for coal and natural gas, our long-term resource run-off model values CNX at about $35 per share. This is based on depressed commodity  prices and does not give credit for the company’s implementation of zero-based budgeting, which should further improve its position as the low-cost supplier. From a strategic perspective, the company recently completed an IPO of a master limited  partnership for its coal business. Because investor appetite for coal is exceptionally small at the moment, the offering was met with tepid demand. We were able to purchase shares at a 25% discount to the proposed range. The new entity, CNX Coal Resources (CNXC), has an initial dividend yield of over 13.5% and a free cash flow yield of over 17%. At that value, distress is priced in, though it is far from evident that distress actually exists.

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Richard Mordini

[Prentiss Nelson]

At first I was sure there was something missing in this, but the more I look into it, the better is sounds.  From the S-1:

The subordination period will end on the first business day after the date that we have earned and paid distributions of at least (i) $2.05 (the annualized minimum quarterly distribution) on each of the outstanding common units and subordinated units and the corresponding distributions on our general partner’s 2% general partner interest for each of three consecutive, non-overlapping four quarter periods ending on or after June 30, 2018 or (ii) $3.08 (150% of the annualized minimum quarterly distribution) on each of the outstanding common units and subordinated units and the corresponding distributions on our general partner’s 2% general partner interest and the related distributions on the incentive distribution rights for any fourquarter period ending on or after June 30, 2016, in each case provided there are no arrearages in payment of the minimum quarterly distributions on our common units at that time.

Basically, they are on the hook for $2.05 for three years, unless they can shell out $3.08 for two consecutive years.  Otherwise the subordinated shares which CONSOL owns continue to receive distributions after the common units.  You can assume that they will do whatever they can to make sure that happens.  

[Richard M]

A slight tweak and slight confusion:

Tweak - looks like the $3.05 is just 1 year (4 quarter period ending on or after June 30, 2016 would just be 1 period, although since they are not paying a distro immediately in Q3 (for Q2) these would be pretty large quarterly distros to hit $3.05).

Confusion - since the subordinated shares get paid "after," but really they get paid together.  But if they stay subordinated, I guess that just means if there aren't enough funds AND they decide to distribute funds, the subordinated shares get jipped?  Otherwise I guess I don't know what the bad part of subordination is; maybe if it's acquired or something.

I think that they started the ball moving on this process, saw terrible demand, and momentum/bankers caused them to continue through with it and bake in more protections.  The other thing could be that their activist hedge fund holder expressed interest in the MLP and thought it was a good idea and they were scared to stop the process given Einhorn owns so much of CONSOL itself?

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sent on the go

[Prentiss Nelson]

Correct and correct. 

-  i still thinks it's 2014 more often than not

- right. While there is still the subordination, they have to make the $2.05 annual payment to the common units holders (49% of the units) and half the management fees, before they can make any distros to the subordinated unit holders. 

Next they pay up to $2.05 to the subordinated unit holder and the other half of the management fee, 

then they pay everyone pro rata, the excess distributions, if any

Sent from my iPhone

[Prentiss Nelson]

As for why they went through with it, i think it's a strategic move to get consol out of the coal business by effectively ipo'ing all their coal assets while also pushing out some debt. 

Sounds like they have had trouble being valued as a coal company rather than what they want which is to be valued as a nat gas company. I think this helps them make the case more by having a someone arms length relationship to the coal assets. Obama has waged war on the coal industry so it's going to be in the dumper for the time being, so anything consol can do to get away from it helps. Even if the ipo had a little trouble getting out. 

This thing will probably trade at a discount to other mlps since nobody wants anything to do with coal for now, but the div looks enticing enough to stay with it for the time being. 

Sent from my iPhone

[Richard M]

That's a good take. Probably more correct.
The way I see it:
Downside you break evenish due to distribution.
Flat you beat the market with 14%.
Upside you trounce the market with cap gains and increasing distribution meaning you'd be clearing 17 or 18% every year.

Only real question is whether to reinvest distros for compounding or bank them for downside protection. I'll probably bank them to avoid being a hog.

sent on the go

[Andrew Stepner]

Richard, I want to push back and challenge your point that I shouldn't try to time my buying point on CNXC: "If you're trying to fine tune it so much, probably not a good investment for you"

My contention is that it is quite important when you buy. (And the timing of your sell is also important).

For example I made a big mistake with $BXE. I bought BXE after Klarman/Beaupost bought in. It was supposed to be deep value at $3 when I bought it. Its now below $2. I am down over 33%. It may have been cheap at $3 but I could have done a lot better by waiting before I bought.

I made the same mistake on $FNMA.

To me markets are not 100% efficient. I believe that human nature generates stock price movements. I believe that human nature has patterns and this leads to stock market patterns. I don't think it leads to 100% likelihoods, but I view it as non-random thus you could say it is at least >50% likelihoods (if you can identify them).

To me this is why trends can persist and momentum trading can be profitable. As such, if a stock is dropping, then I feel that it pays to let it keep dropping before you buy it. Likewise I think it pays to let your winners run (i.e. try to wait til they level out before you sell).

So IF CNXC is dropping then I want to see if I can buy it lower. To me this is an important component in improving my returns.

Stepner

[Richard M]

I agree that the timing is important.  My thought here is that at 14% this is a "broad side of the barn" type play and if it goes down, buy more.  The yield is so rich the risk would be missing it.  That's the thesis I moved forward with.  They say you can't time the market, but you and I both try to.  But with 14% I stopped thinking about it and bought the right amount where I'd buy more if it fell.  Having 2 or 3 or 4 lots of stock yielding 14%, 15%, and 16% is awesome compared to 1 lot yielding 13%.

Today it's below $14.  If it goes down again tomorrow I'll add to my position.

[Andrew Stepner]

That's fair.

Just to clarify: the way I look at it is if I have a 55% chance that I'll buy it lower and a 45% chance I'll buy it higher, then I want to take that chance. The hard part to me is getting the % likelihood right.

Stepner

[Andrew Stepner]

Do you guys know anything about CNX or SUNE? Both are major Einhorn holdings (~6% and ~9% of his port). Both have tumbled.

CNX are the ones who spun off CNXC. CNX is down to 13 from a high of 47 last summer.

SUNE is down to 10 from a high of 33. Seems like Einhorn bought in around 15-20. There is also SEMI. Seems like SEMI was a semiconductor spinoff and SUNE is now focused on solar.

You guys have any view on these?

Stepner

[Richard M]

Nope, except CNX had a terrible quarter and CNXC has been bouncing all over the map...even intraday.  (it will trade bt $15 and $13 in a single day.)

My thesis on CNXC is that once it pays its first dividend, the yield will stop showing up at #N/A, and instead show >15%...and it will be "discovered" and get bid up.  Even a 10% yield means $20 unit price.

[Andrew Stepner]

CNX and SUNE are now priced about 50% down from what I quoted them at in August. CNX down to 7.5 and SUNE down to 5.

At some point these have to be a bargain but I have NO IDEA how to value them. Its a potentially big opportunity but I am hesitant to try to catch a falling knife. How do you value these things?

[Andrew Stepner]

Actually I just found this extended SUNE thread on twitter which kind of renders my question moot:

https://twitter.com/BrattleStCap/status/664673679872278528

My takeaway is:

1) The decline may be self fulfilling. They will probably need more capital but may not have the means to get it with the stock price so low. The "complex structure" makes it a possibillity to get to $0 which is quite a bit of risk.

2) The thing is really complex to analyze. Its probably not worth my time to figure it all out, especially when the conclusion may be "don't touch it".

Its certainly an interesting one though.

[Richard M]

Greenhorn discusses their accounting in his last letter. Says that's where the opportunity is. May want to check that out

sent on the go

[Andrew Stepner]

Thanks for the rec. Einhorn actually has a long deck on $SUNE from last year here:

https://www.greenlightcapital.com/922676.pdf

Problem is that the content may be out of date. The twitter thread that I linked to suggests that the stock decline may have changed their ability to continue and it is in part based on the complexity of the situation.

[Andrew Stepner]

New Einhorn deck from yesterday on CNX:

https://www.greenlightcapital.com/929842.pdf

Its fairly interesting. Spoiler: he's bullish on CNX. Kinda makes me wonder if I should trade in some of my CNXC for CNX.

[Richard M]

I kept building up on CNXC (it fell to as low as $6 in January...with a $2.05 distro that was >33% annually), picking up mine $7-10.  Stepner was way-correct on watching and fine tuning his entry point because that >14% yield got crazy high with the oil spanking with this trading below $10 AND doing so after they paid their first distribution removing a remote fear that this was some epic secret scam. 

Today at $16.25 I was a big seller of over half my position.  The next ex dividend date is going to be the first week of November.  My thesis is that CNXC could fall much more precipitously than it's potential rise and I want to have dry powder to get back in.  I had some high-basis shares (>$14, see first email) so it's sort of a reverse dollar-costing as I can't imagine it staying up high forever.

To get into the tax reasons:

I sold my higher-cost units, so my taxable gains will be low.

I kept my low-cost units, which are realizing a great yield AND have high unrealized...short term gains.

So if the stock stays high through early next year, those short term gains will go long term and I'll be happy as I'm up over 100% since February, plus another ~25% in distributions and counting.

If the stock falls before that point, I can buy back in at a much lower point with the funds I just took off the table.

That's fair.

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Richard Mordini

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Richard Mordini

[Andrew Stepner]

Yeah, I wish I had more aggressively taken my own advice and sold out back then so I could maybe have bought lower. Ultimately I want to avoid the tax complexity and have sold it off recently.

Such a wild swing in the stock and I assume many others like us are selling now that it has gotten back to prior highs. It has surprised me that it hasn't yet really met resistance in the $15-16 area as of yet.

[Richard M]

Random update here:

After trump was elected these things surged to over $22.  Back to around $15.  But I got my K-1...and the distributions are so big, and the company operates at a loss (noncash charges) that my capital account was depleted by 30%.  Curious as to what happens if my capital account goes below zero and the company has losses (which is nice right now because I get to deduct a loss, furthering tax benefits)...

Well there's a whole bit on distributions after zero basis then count as capital gains, but the losses are "lost"...unless you buy more units to increase your capital account.

Posted here for informational purposes:  http://beta.investorvillage.com/smbd.asp?mb=5028&mn=12494&pt=msg&mid=8762983

So I would guess that if you reinvest dividends you are OK (distributions will have offsetting purchases) but with CNXC and coal's iffy long term future I don't love that idea.

have a great wkd.

[Andrew Stepner]

Too complicated for me. I got out this year.

[Richard M]

Consol rebranded CNX and then spun out their coal businesses as $CEIX, which is the GP for the $CCR (formerly $CNXC) coal mlp.

They've hit the distribution for the last 4 years of $2.05, meaning unitholders have received $8.20 in distribs.  Fell to $6 and then up to $22 in 2016 (a year after first email).

Management feels pretty strongly that they are running this thing safely.  They refinanced debt more cheaply, they have a lot of take-or-pay contracts, and they discussed upping repurchases this half of the year.  CCR, at $14, is yielding 15%.  CEIX upped auth to $200M from $175 and have $112M avail under the program....20% of market cap for CEIX.

Earnings call https://finance.yahoo.com/news/consol-coal-resources-lp-ccr-212429811.html

Lucas Pipes -- B Riley FBR Inc. -- Analyst

Got it. Perfect thank you very much for that. And then on the share repurchase program first congratulations on having a lot of dry powder in the current environment and then David, how can -- what's the cadence on that. Do you expect to use that up over the remainder of the year is that maybe the more than evergreen use it opportunistically. Would very much appreciate your perspective on how you intend to utilize this program? Thank you.

James A. Brock -- Chief Executive Officer and Director

Yeah I think we just -- we've said that we will be more aggressive in the second half than in the first half and I think if you think about why? One is that we've got our balance sheet in a fairly good shape and now our debt repurchases are going be continue but at smaller levels and so now we have more availability of free cash flow to spend on share repurchase as well as the cash sitting on our balance sheet. So I don't think we're going get very particular in how much we're going to buy, but just to say, we up the -- we up the authorization for a reason. Our stock is come down very materially and now we see as us -- as the owners here that this is really a great opportunity for us to step in and buy a bunch of stock.

Jim McCaffrey -- Chief Commercial Officer

All right.

David M. Khani -- Chief Financial Officer and Director

Yeah. I think when you look at our capital allocation process that we've used ever since we spun out in late 2017 right now where our share prices trading today, I mean we believe as well as the Board that is way undervalued. So it would be hard to find the return on capital is probably going to be harder than share repurchases now.

Now, with that said, we'll look at everything is out there with the dry powder, as you say, that we have left to remain in, but we expect to be much more aggressive on our share repurchase in the second half of the year.

The CCR auth is only $25M and they nibbled 7k shares at $17.35 in May which is nothing.  But stock is 25% lower now.

A key note here.... they are building another mine for metallurgical coal (to refine metal) not thermal.  Mentioned they are picking up equipment on the REAL cheap from other struggling mines.  This begs the question that I'd be surprised they'd have trouble making the distribution if they are actually doing some light expansionary capex.

Watching very closely here.  Coal should actually be somewhat recession insulated because a slowdown would slow the transition away from it.  The new mine they estimate to have a 25 year life.  So 15% is a 6.7% payback. With market uncertainty going on, I'm setting alerts to be notified at $10 and below.  It happened before (was $6 and yielding 33% in Jan 2016 and hit $22 post Trump election).  Interestingly if you got it at $6 in Jan 2019 you're "only" up about 100% in 3.75 years plus another 100%ish from the distributions.  So really the key would be to set a Sell Limit order for upper teens or $20 and exit when overvalued.

That's fair.

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[Andrew Stepner]

Thanks for the update. No real view from me, I kind of try to stay away from the materials/commodity/energy space due to lack of knowledge. (Unless you have any plays on oil prices dropping).

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[Richard M]

I got distracted and came back and CCR is $8.80 and hit a low of $8.05 recently.  Setting an alert for dropping below $8 if there is a broad market selloff.  We saw this once before when it was $6 and it got back to $15

Ex div dates are months Feb May Aug and Nov so there'd be some risk.  Also risk they cut distribution of course.

2nd Quarter Call:

This morning, CCR reported net income of $14.4 million, adjusted EBITDA of $27.6 million and distributable cash flow of $16.8 million.

This compares to $19.4 million, $33.6 million, and $22.3 million respectively in the year ago quarter.

The second quarter of '19. CCR generated $21.9 million in net cash flow from operating activities, after accounting for $10 million in capital expenditures, $14.4 million in distribution payments, we borrowed $3.5 million in the intercompanies loan with CEIX.

During the quarter, CCR had a negative cash [Phonetic] change in working capital $5.3 million, which resulted in borrowings on the intercompany loan. Nonetheless, CCR finished the quarter with $110 million of liquidity, a net leverage ratio 1.6 times and a distribution coverage ratio of 1.2 times.

We have also previously announced that all of the CCR subordinate units owned by CEIX will convert on a one for one basis to common units on August 16, 2019. We believe the year-to-date distribution coverage, contracted position and low leverage on our balance sheet should provide added comfort to our unitholders regarding the long term sustainability of our current distribution.

Third Quarter:

CCR reported net income of $7 million adjusted EBITDA of $20 million and distributable cash flow of $9.2 million.

This compares to $8.6 million $21.8 million and $10.7 million, respectively in the year-ago quarter.

In the third quarter '19 CCR generated $20.4 million in net cash flow from operating activities. After accounting for $11.3 million in capital expenditures and $14.4 million in distribution payment our net debt increased by $6.2 million.

This is typical for us during the third quarter which is normally our weakest quarter of the year. Year-to-date we maintained a 1x distribution coverage. CCR finished the quarter with a net leverage ratio of 1.6x essentially flat from last quarter. Now let me provide you with an outlook for 2019. As stated before our guidance philosophy continues to measure risk and capture a multitude of outcomes in our guidance ranges which protects us against unforeseen situations. We reaffirm our full year 2019 guidance based on our year-to-date results and expectations for the fourth quarter.

Analyst question and discussion:

So -- and I think what you're kind of also getting at is our distribution policy for CCR because obviously if we cut the distribution we would be able to pay down that debt. And I think what we will -- we look at that every quarter but we effectively look at the distribution on an annualized basis and we will continue to do that. And so -- but we do look at it every quarter. So right now we are at a 1x coverage. And so we did not feel like there was a need to cut the distribution this stuff.

Jimmy A. Brock -- President and Chief Executive Officer

Yes. And Lucas we have responsibilities for CEIX and CCR. And today's point we look at that on an annualized basis. But basically it comes down to a board decision. So we look at that every quarter whether or not we generated a coverage enough to pay distributions or on an annualized basis are we going to be at the one coverage mark and that pretty much drives our decisions.

Lucas Pipes -- B. Riley FBR -- Analyst

Very, very helpful. And maybe, just one quick follow-up. If in the event that the distribution coverage ratio at CCR goes below 1x that's -- I mean that's where you kind of would draw the line and would reduce the distribution back to a 1x coverage or maybe more than that?

David M. Khani -- Executive Vice President, Treasurer and Chief Financial Officer

So, I would say that's an important factor because we need to look at the sustainability of that distribution. But we also look at the level of leverage and liquidity inside the company too. So it's a multitude of factors. But I think one of the key ones is the coverage ratio.

It's currently yielding 24%, which seems very alluring heading into 2020.  Even if they cut it in half it's yielding 12%.  Will move with the election though.

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Richard Mordini

[Andrew Stepner]

Any updated views on $CEIX?

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[Andrew Stepner]

I think I am going to get long $CEIX based on the pitch from Einhorn/Greenlight.

I am late on the $CEIX recovery, but this falls within my "missed it" philosophy. I discussed this here dating back to 2015 (let me know if you want the reference), but basically I expect to "say" "I missed it" multiple times. So if I buy after only the first "I missed it" then I expect plenty of upside to potentially be left.

Also, I like the logic on investing in Coal which is very "problematic" and anti-ESG. (I find ESG dubious).

My Greenlight notes:

1. 10/19/22 Q3 2022 Greenlight Letter
1. "CEIX shares rose from $49.38 to $64.32. As we wrote last quarter, we expect the company to generate approximately $50 per share in after-tax free cash flow by the end of 2023. The company paid its first dividend of $1 per share in August and also announced a policy of distributing at least 35% of its free cash flow to its shareholders. We would emphasize the “at least” part and see room for the percentage to expand as the cash flows materialize. Coal markets have remained quite strong and visibility is improving, such that 2024 looks to us like another strong year.
2. Listed as seemingly their 2nd largest holding
2. 8/1/22 Q2 2022 Greenlight Letter
1. "Though it trades at a nosebleed 2.6x book value, we expect the company to generate approximately $50 per share in after-tax free cash flow by the end of 2023. Capital returns have not yet begun, but we expect they will shortly"
2. https://d2gr5kl7dt2z3t.cloudfront.net/blog/wp-content/uploads/2022/08/15233056/Greenlight-2022-August-1.pdf
3. Mentioned by David Einhorn on Fast money Halftime Report on CNBC 10/20/21
1. "It's about a $1 billion market capitalization, and we actually think that they could have $1 billion of profits over the next 12-18 months."
4. Greenlight Letter 7/26/21 (Q2 2021)
1. "We own CONSOL Energy (CEIX), the lowest cost, most efficient miner in Appalachia, which is poised to benefit from rising coal prices. It trades at 12x consensus earnings estimates that look stale to us, as they do not reflect recent coal price gains."
2. "There is almost nothing less popular than thermal coal. From 2011 to 2020, U.S. coal production declined by 51%. U.S. demand has fallen as we’ve shifted to alternative sources of electricity. As unpopular as coal is though, it still makes up about 20% of U.S. electricity generation. Globally, coal demand is growing modestly as China and India add power generation capacity faster than the West is reducing it. Even so, reduced oil and gas drilling has caused natural gas prices to advance and coal prices are following. Seaborne thermal coal prices are up 140% year-over-year and at the highest levels since 2011, and Northern Appalachia thermal coal prices are catching up, rising 23% in the last month alone."
3. https://www.valuewalk.com/wp-content/uploads/2021/07/Qlet2021-02-1.pdf

"$50 per share in after-tax free cash flow by the end of 2023" still seems quite cheap to me even with the stock up to $73.

Am I underestimating risks with the coal market? Or is the term "free cash flow" misleading here? Just seems like a big margin of safety and I don't know why it looks so cheap.

Stepner