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This article first appeared on Simply Wall St News.
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CNX is well-positioned to benefit from the natural gas reclassification
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The company has an attractive value relative to its peers
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A strong buyback campaign should offer support if needed
With growing geopolitical tension, and the recent reclassification of natural gas as a green energy source, midstream companies have been taking the spotlight on the energy market. For that reason, we'll look into CNX Resources Corporation (NYSE: CNX), a company that has a strong growth perspective in that sector.
CNX Company Profile
CNX Resources Corporation is an independent natural gas and midstream company, operating primarily in the Appalachian Basin. The company designs, builds, and operates natural gas gathering systems, operating about 2,600 miles of pipelines as well as natural gas processing facilities – but it is not a pure midstream play. It owns rights to extract natural gas in several states, including lucrative locations like Utica Shale and Marcellus Shale. These fields, dubbed Saudia Arabia of natural gas, are considered among the richest in the world.
CNX Value vs. Peers
Compared to its peers, CNX has a favorable P/S ratio (0.9x vs 2.3x average) and P/B ratio (1.3x vs 5.5x average), and a forward P/E ratio of 5.9.
With shares trading around $17 and roughly $4 per share in free cash flow in 2022, at a shares float of 185.5m, this gives roughly $740m in free cash flow. Since the management prefers share buybacks to dividends (repurchased 18.7 million shares in 2021), we can expect substantial repurchases in the future (likely over 15% of the float per year).
CNX has a High Short Interest
Short interest remains rather high at over 15%.
With 9 days to cover given the average volume, this increases the probability of a short squeeze in case of a positive news catalyst.
CNX has Quality Earnings
In equity analysis, it is important to measure how well a company converts reported profits into free cash flow (FCF). A key ratio that measures it is called the accrual ratio using the following formula:
Accrual Ratio = (Net Income – Free Cash Flow) / Total Assets
During the 1990s, professor Richard Sloan documented the „accrual anomaly“, suggesting that companies with small or negative accruals vastly outperform those of companies with large ones.
Thus, we're pleased to see that CNX Resources had a negative accrual ratio (-0.30) for the first half of 2022. Despite the negative profits in the last year, it reported an FCF of US$523m. If you're interested in further analyst forecasts, you can check that by clicking here. You could get a better understanding of CNX Resources' growth by checking out this more detailed historical graph of earnings, revenue and cash flow.