Friday, May 30, 2008

Bookkeeping: Closing Consol Energy (CNX) to Winnow Down Coal Names

I am looking to narrow the names in the fund to constantly stay with a focused strategy; that said, I do buy mini baskets in my favorite sectors; generally 3 names. In coal I currently have 4 (not to mention 2 names that are not primary coal producers but also have exposure). So I am looking to cut 1, and decided on Consol Energy (CNX) which has been one of my top 10 winners in the fund [May 1: Top 10 Winners & Losers] Note in the past month the gain from CNX has gone from $16.9K to $21.4K.

All the coal names are mixtures of metallurgical (going into steel) versus thermal (traditional power source you think of when you think of coal). Both sides of the equation are seeing strong increases, but the metallurgical has really taken off; and those names with more exposure to metallurgical have seen the biggest stock spikes over the past few months. Here is a chart of a bevy of coal names over the past 3 months so you can see even within this rising tide, we have speedboats, sailboats, and rowboats :) This was the reasoning behind by decision to flip out of Peabody Energy (BTU) and into Alpha Natural Resources (ANR) back in early April [Apr 8: Changing Coal Allocation - Peabody Energy Out - Alpha Natural Resources In]

Now in the portfolio we've owned 2 speedboats (which I am keeping due to higher metallurgical coal exposure), and 2 rowboats (nice rowboats by the way - but more of an exposure to thermal coal), so I am applying the exact same thinking as to which of the 2 rowboats to cut out - Arch Coal (ACI) or Consol Energy (CNX); aside from the metallurgical coal to thermal coal mix, I also want to have as much production that is not yet priced (under contract), anticipating higher prices in the future. I'll admit, this is one period of time I wish I had a major investment bank research report showing me all this sector data in 1 spot, since this is a bunch of digging to find it all, across 8 to 10 companies.

But in a general sense, looking at Consol's latest earning report we see the following for 2009/2010

2009 Tons Estimated 70-74 M
2009 Tons Priced 44.6
% Priced (approx) = 62%

2010 Tons Estimated 76.6-80.6 M
2010 Tons Priced 24.2
% Priced (approx) = 31%

Compared to Arch Coal, which in its latest earnings has some data (it's not so clean) but I am estimating something around 140 to 150M in tonnage for 2009 and 2010 (this is my guesswork, could be higher/lower but should be ballpark)

Of that in 2009, 75-85M is unpriced and in 2010, 95-105M

If my estimates on tonnage are accurate this would give % priced of (approx) 43% in 2009, and 33% in 2010. So if completely, accurate the companies have similar 2010 production unpriced, but Arch has more 2009 production unpriced, hence as coal prices continue to rise month by month, they should see more upside in 2009.

Again, I like the whole sector - one can do well with any coal stock I believe, but I am just trying to decide among these 2 horses, as to which should be the Third Musketeer. I might add a 4th Musketeer down the road as there are some other potential targets in this sector, but not until we see a meaningful contraction from this epic move... Alpha Natural Resources is now up 60% in a month for example.

So with that said, I am closing Consol Energy in the $97s, and will concentrate on the other 3 names (I bought a little Arch Coal today to keep some of the exposure to the sector consistent). This has been a very good stock for us (and I continue to like it); we've owned it since September 13th, 2007 before everyone and their mother jumped on the coal bandwagon. [Coal Stocks Quietly in a Bull Market] This is the chart since September (keep in mind we had major market corrections in November 07, January 08, and March 08 so this performance is that much more impressive)

Now that guys like Larry Kudlow are jumping on the bandwagon it makes me near term bearish, as I got when Neil Cavuto uttered the words "Intrepid Potash", which pretty much marked the top within 48 hours for the fertilizers ;) [Apr 22: Cutting More Fertilizer]

Usually a significant event like a new IPO in the sector or a large buyout marks a near term top in a sector - I am not saying this Intrepid Potash (IPI) IPO is the thing, but I have not seen a level of bullishness in a sector as I've seen here, since the solar days of fall 2007. Even Neil Cavuto was talking about the Intrepid IPO last night. That scares me, and when these things reverse I'm going to call it the Cavuto top (granted, he did not know how to pronounce "potash" either).

When these talking heads jump on a group... after a massive run (coal has just had one, just like fertilizer had one from late March to late April), I start shifting to the sideline (as I've now done with coal) from my previous overweight stance. Doesn't mean the stocks are done; but risk/reward starts to turn more towards risk in my book. So we called that fertilizer version the Cavuto top; we'll see if this is the Kudlow top. ;)

Long Arch Coal, Massey Energy, Alpha Natural Resources in fund; no personal positions

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