When David Einhorn’s Greenlight Capital initiated a position in Consol Energy last year, many in the financial press instantly branded the trade a bad idea.
Then, when Einhorn updated his thesis on Consol back in November, he drew, even more, criticism as the stock was down by around 70% from Greenlight’s initial entry price.
David Einhorn, Greenlight Capital at Sohn 2016 [LIVE]
Einhorn blamed this decline on the fact that investors continued to associate with Consol as a coal producer without taking into consideration the group’s high-quality gas portfolio — a 446,000-net-acre position in the Marcellus shale, and another 109,000 net acres in the Utica shale. Einhorn believed that as Consol implements its plan of allocating future capital towards these high-quality natural gas assets, the market will see a lot more value in the company’s shares.
Consol Energy – Undervalued
The figures seemed to support this conclusion. Einhorn’s calculations showed that the coal business alone was worth close to the November enterprise value of the entire company. On top of the coal business, Einhorn’s figures showed that Consol’s natural gas assets were worth $6.6 billion, a figure he arrived at through both a discounted-cash-flow and value-per-comparable-acre approach.
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All in all, Greenlight’s founder told the market he believed Consol was worth $36.52 per share — based on November’s figures and commodity prices at the time. At the time of Einhorn’s November presentation, shares in console were trading at around $7.50.
A change of heart
Seven months later and it seems that Einhorn has had a change of heart. According to Bloomberg, Greenlight Capital sold 7 million shares of Consol Energy last Wednesday at $15.01 apiece according to a filing with the Securities and Exchange Commission on Friday. As of May 12, the fund owned 29.4 million shares of Consol as of May 12, making it the company’s third-largest shareholder, according to Bloomberg’s data.
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Consol’s shares have more than tripled in value since falling to their lowest level in more than two decades during January. After touching a low of $4.99, the stock spent most the first quarter rallying making it one of Greenlight’s most profitable positions during the first quarter. In Greenlight’s first quarter letter to investors Einhorn wrote:
“CONSOL Energy (CNX) bounced from $7.90 to $11.29. We have a long way to go to recover our losses and earn a profit on this position, but we continue to believe that last year’s stock collapse was far worse than the fundamentals warranted. This quarter the company announced additional successful drilling results, improved its cash flow profile, and de-levered by selling its met coal assets.”
So, it seems that up until the middle of May this year Einhorn remained confident about Consol’s outlook and future performance. The question investors now have to ask is: what’s changed?