The past few years have been unkind to U.S. coal producers, and Consol Energy (NYSE: CNX) is no exception. Consol is a Pennsylvania-based Fortune 500 producer of coal and natural gas. It has been mining coal, primarily in the Appalachian Basin, since 1864, and is a major producer of bituminous coal as well as one of the largest underground coal mining companies in the U.S.

Consol has fared better than many other coal producers. While operating under challenging conditions within its industry, Consol did manage to grow revenue and adjusted earnings per share in 2014. Nevertheless, because of the outlook for coal in the U.S., investors have punished the stock along with those of other coal producers. Over the past one-, two-, and five-year periods Consol’s share price is down 30%, 14%, and 33%, respectively.  

But Consol is also in the process of becoming a major natural gas driller focused on the major shale formations of the Appalachian Basin, including the Marcellus. Amid a strategic shift to natural gas, last week Consol filed an initial registration statement to raise up to $250 million by spinning off some of its coal operations into a new master limited partnership, CNX Coal Resources (CNXC).

CNXC was formed by Consol to manage and further develop its thermal coal mines in Pennsylvania. The Partnership’s initial assets include a 20% stake in, and operational control over, Consol’s Pennsylvania mining complex, consisting of three underground mines producing bituminous coal that is sold primarily to electric utilities in the eastern U.S.

Based on current production capacity, the coal reserves at these three mines should last 27 years. The committed and priced contract portfolio has locked up 85% of last year’s output for 2015, 45% for 2016 and 25% for 2017. While the U.S. coal market is likely to continue facing challenging conditions for the foreseeable future, these contracts provide a measure of stability.

CNX Coal Resources has a longstanding commercial relationship with a leading coal trader and broker via Consol’s Baltimore Marine Terminal. The terminal loads coal from rail cars to oceangoing vessels and is the only coal marine terminal on the East Coast served by two rail lines (Norfolk Southern and CSX). Last year the Pennsylvania mining complex exported approximately 3.3 million tons of coal (13% of sales); in 2013 it had exported 4.2 million tons.

Upon conclusion of the offering, Consol Energy will own 80% of the Pennsylvania mining complex, as well as 100% of CNXC’s general partner, along with the associated 2% general partner interest and incentive distribution rights (which have yet to be specified).

The partnership has calculated pro forma distributable cash flow (DCF) of $86.7 million on revenue of $323.4 million for 2014, up from revenue of $271 million in 2013. Consol has not yet offered any earnings or distribution forecasts for this spinoff. But MLP investors have reason to be wary.

While most of the half a dozen coal-focused MLPs out there yield around 8%, every one has a negative return over the past 12 months. In fact, the 76% loss suffered by Rhino Resource Partners (NYSE: RNO) over the past 12 months is the third worst among all MLPs for the period.

On the other hand, this sector has been so badly beaten down that bargain hunters may want to take note. While coal consumption in the U.S. will continue to be challenged by environmental regulations and cheap natural gas, the U.S. will still use coal for a long time. An MLP with convenient access to international markets may be able to ramp up exports even as U.S. consumption declines. In that case, CNX Coal Resources may fare better than most coal MLPs to date.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Update

A Double-Digit Yield Worth the Risk

Crude oil and energy equities have rallied a bit of late, and slowly, almost reluctantly, MLP prices have followed them higher over the last three weeks.

Still, for some perspective, the Alerian MLP Index remains well short of its trading range over the last two years save for a few days in December, January and March. In fact, it’s 5% shy of the Oct. 14 low, when things seemed pretty bleak despite much higher oil prices.

Sentiment hasn’t exactly swung 180 degrees from last summer’s peak, when we repeatedly warned the midstream sector had become overextended. But it’s finally possible to believe that, while not exactly cheap, it might be undervalued relative to its still healthy growth prospects.

Those prospects are not solely tied to the domestic oil and gas production boom, which has been interrupted but is unlikely to be stymied indefinitely. They’re perhaps even more dependent on the even vaster U.S. energy consumption, and in particular on fuel demand that’s growing again in response to the reduced prices.

This big-picture view makes it easier to appreciate the attractions of the UBS ETRACS 2x Monthly Leveraged Long Alerian MLP Infrastructure ETN (NYSE: MLPL), a real mouthful designed to double the monthly return of an index made up of the largest midstream MLPs.

The top six index constituents — Enterprise Products Partners (NYSE: EPD), MarkWest Energy Partners (NYSE: MWE), Plains All American Pipeline (NYSE: PAA), Energy Transfer Partners (NYSE: ETP), Magellan Midstream Partners (MMP) and Williams Partners (NYSE: WPZ) — account for 48% of the total weighting. These are the largest and some of the most successful midstream players, and the top five are individually recommended by us at the moment.

One thing the MLPL offers that the MLPs it leverages cannot is a leveraged yield, now at an annualized 11% based on the quarterly distribution UBS will make on April 21 to holders of record as of April 13. (The ETN goes ex-dividend on April 9.)

Even though MLPL’s distributions are taxed as ordinary income without delay, they still allow us to get paid while waiting for crude supply to balance with demand. It’s a process that won’t do much to dim the long-term prospects of MLPs. Buy MLPL below $58.

— Igor Greenwald