CONSOL Energy (NYSE: CNX), a major producer of both coal and natural gas, reported a net loss for the second quarter of $13m, compared to net income of $153m from the year-earlier quarter.
The prior year’s second quarter included gains due to several asset sales.
The company lost an adjusted $0.03 per diluted share in the just-ended quarter, which is a non-GAAP measure, after adjusting for items not generally included in security analysts’ estimates. The two major discrete items in this quarter were largely offsetting: a pre-tax loss of $23.3m for additional expenses associated with the Blacksville longwall mine fire in northern West Virginia, and a $24.7m pre-tax gain on the sale of assets.
Coal and gas production results, which were announced ten days ago, were generally in line with previous guidance. Lower prices and sales volumes for thermal coal was the primary driver for lower adjusted earnings in the quarter, as compared to the year-earlier quarter, CONSOL said. Lower prices for the company’s premium low-vol coal, due to weaker worldwide demand, also contributed to weaker adjusted earnings.
CONSOL Energy’s Coal Division continued to hold the line on costs. Across all tons, costs per ton sold were $51.87 in the 2013 second quarter. This was a modest decrease of $0.17 per ton from the year-ago quarter. The progress was achieved despite lower sales volumes in the just-ended quarter. In the continuation of a process to manage costs, the company has initiated a thorough review of staffing levels and project expenditures.
“The second quarter was challenging,” said J. Brett Harvey, chairman and CEO, “as we incurred the expense associated with the Blacksville mine fire and were not able to realize revenue from the mine’s planned sales. In addition, during the second quarter we exerted discipline in a weak Asian market environment, which resulted in overall lower sales volumes and shipments for the rest of the coal segment.”
He added: “Looking to the third quarter and remainder of 2013, we see an improving and stronger level of demand for our domestic thermal portfolio. The improving picture for thermal coal demand is a cumulative result of the Blacksville outage, outages and idlings at competitor mines, the hot summer weather, higher year-over-year gas prices, and announced retirements of less-efficient coal plants outside of our market portfolio that will result in the base-load coal plants that we supply running harder. All of these factors bode well for second half 2013 thermal demand in our core region.”
For 2013, CONSOL said it has stepped up its asset sale process to include coal and gas transportation infrastructure, in order to capitalize on the current market environment and to re-invest proceeds in higher return projects. Investment bankers have been engaged, data rooms have been established, and in two cases, the process is proceeding to a second round of bidding.
“Furthermore, we are evaluating our overall corporate structure to consider different alternatives to unlock additional value for shareholders,” the company said.
Coal inventory at a 15-year low
Coal production in the quarter consisted of 1.2 million tons of low-vol, 0.9 million tons of high-vol, and 11.7 million tons of thermal coal for a total of 13.8 million tons. Of the thermal coal production, 11.2 million tons were from Northern Appalachia and 0.5 million tons were from Central Appalachia.
During the second quarter of 2013, CONSOL’s total coal inventory decreased by 47,000 tons to 917,000 tons as of June 30, which marks a new 15-year low inventory level. Thermal coal inventory decreased by 102,000 tons to 773,000 during the quarter, as customers continued to take all contracted tonnage. Low-vol coal inventory increased during the quarter by 55,000 tons, to 144,000 tons.
Coal Marketing Update:
Low Vol: The benchmark price for prime quality, Australian low-vol coking coal declined from $172 per metric ton to $145 per metric ton FOB Terminal Australia from the second quarter to the third quarter in 2013. CONSOL’s Buchanan longwall mine in Virginia realized lower FOB prices as a result of Australian prime low-vol coking coal prices to China, on a delivered basis, declining by $22 per metric ton during the second quarter of 2013. However, Buchanan’s low cost position presented new sales opportunities during the quarter in China and India, which enabled CONSOL to operate the mine at higher-than-forecast production levels. During the second quarter, CONSOL loaded Buchanan coal for a new customer in Brazil and two new customers in China, while maintaining its existing business with traditional customers. CONSOL said it continues to ship to European customers despite continued pressure in the European economy and excess availability of competing metallurgical coals. CONSOL is in the process of developing new business with domestic steel makers.
High Vol: CONSOL continues to ship its Northern Appalachia (NAPP) high-vol coal to existing customers in Korea, China, Brazil and the U.S. Prices for this product have remained more stable than other classes of metallurgical coal. The demand for Bailey coal, and other Pittsburgh #8 seam products, continues to exceed the supply, and the versatility of these coals allows them to compete as high-vol met, PCI and high-BTU thermal coal. CONSOL said it expects to continue to create and evaluate new sales opportunities that provide the best returns for the portfolio.
Thermal: CONSOL’s NAPP mine inventory levels are at a new 15-year low, and PJM Interconnection utility inventories remain below their five-year average levels. The market environment in the Southeast remains “challenging” but shows modest signs of improvement. Southeast utility inventories are still higher than desired but are slowly declining. European coal generation is running strong, but that market remains oversupplied. This has depressed the European benchmark price, the API2. At the end of the second quarter, the API2 was $85.65 per metric ton for the prompt quarter, which is down 7.3% sequentially and 13.2% year-over-year. Existing customers continue to demand their total contracted volume, and they are now expanding their business relationship with CONSOL through contract terms that vary between one to five years in duration. This will enable CONSOL to expand its market share in 2014 and beyond.
Guidance for CONSOL’s coal operations includes sales of 55.5 million to 57.5 million tons in 2013, 60.4 million tons in 2014 and 61.7 million tons in 2015. Estimated sales in the third quarter of this year come in at 13.4 million to 13.9 million tons.
CONSOL is a Pittsburgh-based producer of coal and natural gas. It has 11 bituminous coal mining complexes in four states and reports proven and probable coal reserves of 4.2 billion tons. The company’s premium Appalachian coals are sold worldwide to electricity generators and steelmakers.