Consol Breakup Could Mean Short-Term Pop for Coal ETF

ETF Trends

The $175.2 million Market Vectors Coal ETF (KOL) spent the first six months of 2013 in a steady downward spiral. Low natural gas prices, slack emerging markets demand and investors’ preference for resurgent alternative energy stocks conspired to plague KOL and its 34 holdings.

The past three months have been a more positive story for KOL as the ETF has jumped 10.6%, helped by a rebound in emerging markets equities. While the bulk of KOL’s country weight is allocated to developed markets, the ETF does feature a combined 34.3% weight to China, Indonesia, South Africa and Thailand. [Coal ETF Could be Turning Higher]

More upside could be on the way for KOL if one its marquee holdings proceeds with a plan to breakup itself into two companies. Consol Energy (CNX) is reportedly mulling that idea in a bid to unlock shareholder value. The company is considering separating its coal and natural gas assets, which include significant acreage in the Marcellus Shale. One idea being floated is a spin-off of the natural gas business into a separate, publicly-traded entity.

“Sum-of-the-parts models from Deutsche Bank, Raymond James, Nomura and Goldman Sachs Group Inc. reveal a gap between Consol’s current price and the value of its businesses. The estimates range from $39 a share to $50, reports Tara Lachapelle for Bloomberg.

Consol is KOL’s largest holding with a weight of 8.7%, 140 basis points more than the weight allocated to the ETF’s second-largest holding, China Shenhua Energy.

The idea of a Consol breakup is not new, particularly because the Pennsylvania-based company has acquired gas assets in recent years. In 2010, Consol paid $3.5 billion to Dominion Resources (NYSE: D) for Marcellus and Utica shale acreage. That same year, the company bought the part of CNX Gas it did not already own.

The deal with Dominion brought Consol over 1 trillion cubic feet in reserves and 41 billion cubic feet in annual gas production while beefing up the company’s Marcellus acreage to 750,000, according to Consol’s web site.

Although natural gas prices are volatile and remain depressed, exposure to the production of that commodity has helped Consol sharply outperform KOL over the past two years. In that time, the ETF is off almost 43%, but shares of Consol are down just 6%. [Coal ETF Tries to Emerge From Abyss]

A spin-off of Consol’s gas assets could mean a short-term pop for KOL. As for where a publicly-traded Consol gas spin-off could make an ETF home, the Guggenheim Spin-Off ETF (CSD) and the First Trust ISE-Revere Natural Gas Index Fund (FCG) are legitimate possibilities.

Market Vectors Coal ETF

View photo




ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

View Comments (1)