Mason Hawkins’ Southeastern Asset Management has gone activist on CONSOL Energy Inc. (NYSE:CNX). The billionaire value investor’s fund has recently disclosed that it uplifted its stake in the energy company by 3.26 million shares since the fund’s most recent 13F filing, to 48.21 million shares, which represent 21.1% of the company’s outstanding common stock. Moreover, Mason Hawkins changed his filing to a 13D from a 13G in order to be more active in corporate governance and management matters.
Southeastern Asset Management is a Tennessee-based fund established by Mason Hawkins in 1975. The investment management firm serves as the investment advisor to three Longleaf Partners Funds, which represent a group of mutual funds and UCITS funds created by Southeastern in 1987 as a way for its employees to invest along with the fund’s clients. The firm has more than 60 employees some of whom own stakes in the firm as well. Mason Hawkins, the chairman and CEO of Southeastern Asset Management, is among the most successful investment fund managers in the United States, currently overseeing $28.8 billion in assets under management. He is also well-known for his activist and value-driven approach to investing, which resembles Warren Buffett’s style of investing. Hawkins has more than 40 years of experience in the investment business and has received numerous industry awards during the course of his career, including Institutional Investor’s Lifetime Achievement Award, received in 2005. As stated by its most recent 13F filing with the SEC, Hawkins’ Southeastern Asset Management manages a public equity portfolio worth $15.93 billion, while the fund’s top ten holdings represent 68.78% of its entire portfolio.
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Following activist investors like Mason Hawkins is important because it is a very specific and focused strategy in which the investor doesn’t have to wait for catalysts to realize gains in the holding. A fund like Southeastern can simply create its own catalysts by pushing for them through negotiations with the company’s management and directors. In recent years, the average returns of activists’ hedge funds has been much higher than the returns of an average hedge fund. Furthermore, we believe do-it-yourself investors have an advantage over activist hedge fund investors because they don’t have to pay 2% of their assets and 20% of their gains every year that are usually charged by most hedge fund managers. We have found through extensive research that the top small-cap picks of hedge funds are also capable of generating high returns. We have been tracking the returns of these stocks since the end of August 2012. In the 32 months since our small-cap strategy was launched it has returned over 139% and beaten the S&P 500 ETF (SPY) by more than 80 percentage points (read more details).
CONSOL Energy Inc. (NYSE:CNX) is one of the leading diversified energy producers in the Appalachian Basin, producing both natural gas and high-BTU coal. The company’s premium Appalachian coals are marketed worldwide to electricity generators and steelmakers, while its Natural Gas Division has developed from a single-business-focused coalbed methane producer to a full-fledged exploration and production operation. The shares of CONSOL Energy have plummeted by 48% year-to-date, but the stock has embarked on an uptrend since the company saw an activist push from Hawkins.
In its freshly-submitted 13D filing, Southeastern Asset Management declared that it intends to discuss with third parties, along with CONSOL’s management and its board, about a potential monetization of the company’s exploration and production assets. The fund believes that the E&P assets alone are clearly worth more than CONSOL’s total equity capitalization. The monetization of these assets could be realized through a spinoff or a sale. In addition to that, the filing said Southeastern will also attempt to assist the company in realizing value for its other valuable assets, including thermal coal, met coal, pipelines, and the Baltimore terminal. During the last year, the newly-assigned CEO of CONSOL Energy, Nicholas J. DeIuliis, has been following a strategy to monetize some of the company’s allegedly-undervalued assets. As a result, two master limited partnerships (MLP) have been formed: Cone Midstream Partners, which is an MLP for the company’s pipeline assets jointly-owned by Noble Energy Inc., and CNX Coal Resources LP, which partly owns CONSOL’s three southwestern Pennsylvania coal mines. Therefore, these master limited partnerships enabled the company to raise capital by spinning off some of its assets and retain control over them at the same time. In addition to what has been said so far, Southeastern also announced its plans to discuss with the company its bond and share repurchase programs, which seem right considering the extremely discounted prices of CONSOL’s shares.
Just recently, CONSOL Energy announced a preliminary update on its second quarter performance, in advance of its scheduled release on July 28, 2015. To start with, the company announced that it expects to report a loss from operations for its second quarter, which has been mainly caused by lower commodity prices. Nevertheless, CONSOL expects to reach the total production guidance for both the E&P and Coal divisions. In addition to the aforementioned operating loss, the company is expected to record a substantial impairment charge due to the reduction in the carrying value of its conventional shallow oil and natural gas assets. However, since these impairment charges are non-cash items, the company’s reserves, Marcellus and Utica Shale segment, or its net asset value will not be affected.
It might be the case that the company’s expected poor financial results for the second quarter have already been priced-in, which implies that there is not much downside for the stock. It also seems that CONSOL’s shares have already hit their bottom, which might signal that the stock has turned into a great buying opportunity. Even though the second quarter financials appear headed towards worse-than-expected results, the intrinsic value of the company appears strong. With Mason Hawkins having gone activist on CONSOL, the stock might achieve its much needed turnaround in the upcoming months and years. Within our database, David Einhorn’s Greenlight Capital is the second-largest investor in CONSOL Energy Inc. (NYSE:CNX) with 20.58 million shares, right behind Southeastern.
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