CONSOL Energy (NYSE: CNX) is working to finesse its way out of the lose-lose situation of a depressed market for its thermal coal in large part brought on by cheap natural gas, and the fact that as a major natural gas producer, low gas prices are a hit to its gas-side earnings.
Various CONSOL officials addressed these and other issues on an April 26 earnings call. That includes J. Brett Harvey, Chairman and CEO; CFO Bill Lyons; and Bob Pusateri, Executive Vice President of Sales, Marketing & Transportation.
“CONSOL Energy has a portfolio of assets that no standalone coal company or gas company can match,” Harvey noted. “Having this portfolio enables us to allocate labor and capital to develop these most valuable assets in a timely manner for our shareholders. So in both coal and gas, we continue to invest in the most profitable markets: in thermal coal, in met coal, in high-vol met coal, that means selling into a very expanding global market.”
All three of CONSOL’s coal expansion projects are geared, at least in part, to serve these global markets. The Amonate mid-vol metallurgical coal project, located along the West Virginia-Virginia line but largely in McDowell County, W.Va., is now in operation and is different than low-vol projects in a different marketplace, Harvey noted. The Baltimore Terminal rail-to-ship transloading expansion is valuable in terms of expanding coal moving into the world markets. The BMX project, which is basically a third longwall at the Bailey mine in southwestern Pennsylvania, is also a very low-cost, high-volume project that will expand into the world markets, Harvey added.
As for the depressed natural gas prices, they will change. “Everybody knows this,” Harvey said. “We’ve all begun to trim our capital budgets in response to where the markets are today. We also idled two [coal mine] longwalls in response to pricing issues. Energy markets have always been very volatile. My challenge as a CEO is to manage the downturn in such a way that we don’t miss the upside when it begins, especially with powerful assets like CONSOL has. Already, we’re starting to see signs that the low-vol coal market has bottomed. This is consistent with what we said during the January earnings call. And while I’m not ready to call a bottom in the thermal coal or gas markets, production cuts and reduced drilling, mostly by our peers, will eventually bring the market back in balance.”
Lyons noted that a key positive is that CONSOL has the financial strength to have earlier this year idled the longwall at the Buchanan low-vol mine in southwestern Virginia because it is not satisfied with the prices offered for this premium low-vol coal. It also idled the longwall at the Blacksville No. 2 mine in the Pittsburgh seam in northern West Virginia because of customer pushbacks due to depressed electrical generation, Lyons noted.
“In both of these instances, we did not shut down the coal mine, but we invested time and money in major maintenance and development projects,” Lyons said. “These projects will enable the mines to run more efficiently and effectively when we bring both the longwalls back online on May 1.”
Pusateri said the domestic thermal coal market was severely impacted by mild winter weather, low natural gas prices and an economy that “could not get lasting traction.” CONSOL’s order book was full for the first quarter when the year began, but as generators started to push back tons, a number of contracts were reopened to preserve the contracted value. That value has been preserved in the form of buybacks, adjusted shipment schedules weighted towards the second half of the year and delayed shipments into years 2013 and 2014. “As the year proceeds, we expect more normalized shipments from our domestic customers based on normal summer burn,” Pusateri said.
Blacksville No. 2 gets a big boost from the Far East
The Blacksville No. 2 mine, where the longwall will restart on May 1, is returning to work on the strength of thermal sales to China and India. CONSOL continues to leverage its export capabilities through its Baltimore Terminal, Pusateri noted. Export shipments through the rest of the quarter should be at record levels. CONSOL is expecting to expand its export thermal sales volume in the second quarter to equal 1.7 million tons. These thermal sales for the quarter will go to Asia, Europe, Central and South America.
“We are expecting an increase in export thermal coal pricing for the second half of 2012 due to monetary policy easing and the need to restock inventories,” Pusateri added. “Chinese and Indian buyers have aggressively reentered the market beginning in mid-March. Since that time, buyers in both countries have purchased significant quantities of steam coal for the balance of 2012. In order for CONSOL to meet the challenge of ensuring a competitive supply chain to customers in Asia, CONSOL, in concert with its partner, Xcoal, will continue to top off vessels off the coast of Nova Scotia. This permits our customers to realize the benefit of lower ocean freight, while reducing the delivered cost of coal.”
That is a reference to coal marketer Ernie Thrasher’s Xcoal Energy & Resources marketing company, which for some time has been taking light-loaded coal vessels out of the U.S., which couldn’t be loaded fully due to port draft restrictions, and topping them off with coal in the deep waters off Nova Scotia. This saves a lot of money as opposed to these ships steaming all the way to Asia with less than a full load.
Pusateri said the price for thermal coal into China and India is basically set on a monthly basis and is truly a negotiated price. “It’s not the API 2 index adjusted or the API 4. It’s a face-to-face negotiation. And we’ve been able to do that and keep our prices high because last year, when we started to see a downturn, we went into the vessel market and we locked up a strong volume of vessels at good prices and now we’re being able to take advantage of those. And, as you saw, we have 1.7 million tons forecasted to go into the export thermal market, and that’s essentially all new business for us. And we had to respond and respond quickly when we started to get as much pushback from our utility customers as we did in the first quarter.”
The export business has been getting a lot of attention, with Pusateri saying the depressed thermal coal business has an upside. “Domestic business, I think it’ll shake itself out,” he said. “We’re fortunate. Our domestic thermal coal is sold to scrubbed units. They’re large units. We made that consideration a couple of years ago to target those units, and right now, it’s paying for us and, yes, there are some of them that may not be running around-the-clock, but it could be because of gas or because of just pure lack of demand, but all of that changes. And we’re excited about it and we’re going to continue to grow our business.”
Pusateri said the two eastern U.S. railroads, CSX Transportation and Norfolk Southern, have been a big help with the export business. “Both eastern railroads came to the party,” he said. “They saw back as late as December when the weather was not permitting a build in inventory. They saw their loaded cars start to drop off. So I think the railroads have done a fine job in helping the U.S. suppliers get their coals off the coasts. I really do. I mean, we’re hopeful that we’ll see a similar response in the second half of the year, but right now we’re satisfied with what they’ve done.”