It seemed like the post-Fed action from two weeks ago may have paved the way for another leg up in the leadership. While that’s not off the table, we’re continuing to see a lot of crosscurrents out there as money sloshes around. What does it mean? Not much yet, as the major evidence remains positive.
The Stock – CNX Resources (CNX)
With natural gas prices remaining in the basement, you’d think that most gas-heavy producers would be circling the drain—but thanks to cost controls, hedges and operational flexibility, CNX Resources is doing just fine, and it also has a unique side business that’s contributing to good results.
The company is a smaller Appalachian, gas-heavy outfit (market cap of $3.6 billion), and thanks to hedges (nearly $2 billion of gains on derivatives last year!), it’s been cranking out solid numbers: Last year, production came in a bit above guidance, with hedge gains helping free cash flow for the full year to come in above $300 million (around $2 per share), and it’s using that to shareholders’ benefit, paying off debt (no maturities until 2026) and buying back shares (Q4 share count down nearly 10% from the year before).
Interestingly, $34 million of last year’s cash flow came from the firm’s “New Tech” division, formed in 2021, which focuses on innovations to lessen carbon intensity; right now, capturing waste methane from industrial activity is big and is being rewarded via some government incentives (including one program in Pennsylvania), all of which could produce $75 million of free cash flow this year! (The company says incentives aren’t large enough to expand the methane operation at this point, but it’s still a good business.)
Back to the core natural gas operation, low prices are having an effect—CNX recently delayed completion activity on three Marcellus pads, but it also reduced its expected CapEx this year by $50 million alongside that move.
All told, the firm should still be solidly free cash flow positive for the year (more than 80% of gas output is hedged), and if/when gas prices do pick up (supply/demand for gas is improving), expect production and future cash flow to do the same.
Technical Analysis
Following a deep correction, CNX picked up steam last spring and summer, challenging its all-time high near 24 before again pulling back—but this time, it did so much more mildly, falling 19% and holding its 40-week line despite very depressed natural gas prices. Like most peers, CNX has changed character since mid-February, with a modest bounce into March and a rally back followed by a strong surge to 24 on good volume in recent days. Stop — 21
The Covered Call Trade
Buy CNX Resources (CNX) Stock at 24, Sell to Open May 24 Strike Calls (exp. 5/17) for $1, or a Net Price of 23 or less
Static Return: $100 per covered call (4.34%)
Breakeven: 23
Covered Call Return (if assigned): $100 per covered call (4.34%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 23 or less. (In this case 24 minus 1 = 23. Or another example is you could pay 24.10 for the stock and sell the call for 1.10, which also equals 23)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls.
And so on …
Open Positions
| Stock Name and Symbol | Price Bought | Current Stock Price | Stop | Option - Price of Call Sold | Current Option Price |
| JFrog (FROG) | 44.75 | 42.5 | 36 | April 45 -- $2.90 | $1.00 |
| Robinhood (HOOD) | 15.85 | 18.5 | 13.4 | April 17 -- $0.95 | $1.70 |
| Samsara (IOT) | 38.7 | 35 | 33 | April 40 -- $2.20 | $0.15 |
| Permian Resources (PR) | 16.7 | 17.5 | 14.2 | May 17 - $0.75 | $1.30 |
| Toast (TOST) | 24.05 | 23.5 | 20 | May 25 -- $1.75 | $1.50 |
The next Cabot Profit Booster issue will be published on April 9, 2024.
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