The very low-cost American pure fuel producer CNX Sources (NYSE: CNX) at present has a market capitalization of about $2.9 billion.
Towards that, the corporate is anticipated to generate $700 million in free money stream in 2022.
For anybody at present shopping for shares of CNX, meaning they’re locking in a free money stream yield of 24.13%.
Wow!
Free money stream is the surplus cash {that a} enterprise is throwing off. That is money that doesn’t have to be reinvested within the enterprise to maintain operations. These funds can be utilized to pay dividends, repurchase shares or scale back debt.
Sadly for us, CNX isn’t at present paying a dividend.
The corporate has been shopping for again inventory as a result of its administration believes the inventory market valuation of the corporate is simply too good to disregard.
On condition that the inventory trades at a 24% free money stream yield, I wholeheartedly agree.
When used strategically, share buybacks are a robust software for creating shareholder worth. However too usually, public corporations don’t repurchase shares intelligently and find yourself overpaying.
CNX’s leaders don’t do this. They’re laser targeted on repurchasing shares when they’re low-cost. This isn’t shocking on condition that they frequently quote Warren Buffett of their quarterly convention calls.
They’re emulating the grasp.
Over the previous two years, administration has opportunistically shrunk the corporate’s excellent share rely from 224 million to 180 million.
Surprisingly, whereas shopping for again shares, they’ve additionally been utilizing this extra money to enhance CNX’s steadiness sheet by lowering long-term debt.
Over this similar two-year window, CNX has decreased its complete long-term debt by $700 million!
It’s fairly uncommon that an organization can concurrently repurchase boatloads of inventory and massively enhance its steadiness sheet. However that’s precisely what highly effective free money stream era can do.
For the reason that begin of 2020, CNX has generated a complete of $1.3 billion in free money stream. That’s the way it’s been capable of each retire debt and scale back the variety of shares.
The share buybacks – which have been executed at cut price costs – have allowed free money stream on a per-share foundation to extend from $1.50 in 2020 to over $4 this 12 months.
With an all-in manufacturing price of $1.19 per million cubic toes, I imagine that CNX is the only lowest-cost pure fuel producer within the nation.
CNX is ready to obtain such low-cost manufacturing as a result of it owns all of its pipeline and processing infrastructure. Different pure fuel producers must pay costly charges to 3rd events to entry the infrastructure that they use.
Within the commodity manufacturing recreation, being the lowest-cost producer is the one positive solution to win.
Regardless of that jaw-dropping 24% free money stream yield, CNX has truly been producing much less free money stream than it ought to have been.
CNX “hedged” its pure fuel value publicity previous to the commodity value having a robust run over the previous two years. Which means CNX has been promoting its manufacturing beneath market costs.
As these hedges roll off, the corporate goes to start out getting higher costs for its manufacturing and producing much more free money stream.
In administration’s most up-to-date presentation to buyers, it mentioned the corporate expects to earn greater than $8 per share in free money stream by 2026.
That will be greater than double the place CNX is at this time and equate to a 50%-plus free money stream yield on the present share value.
This inventory presents a lovely mixture of an ideal administration workforce, a superb valuation and a long-term aggressive benefit within the trade.
The Worth Meter charges this well-run pure fuel producer as “Extraordinarily Undervalued.”