CONSOL Energy (NYSE: CNX), a major producer of both coal and natural gas, on Oct. 29 reported a net loss for the third quarter of $64m, compared to a loss of $11m from the year-earlier quarter.
CONSOL’s Gas Division showed unit margin expansion, quarter-over-quarter, as the average sales price was nearly unchanged, while unit costs were lower, mostly due to higher volumes. Overall natural gas production was up 17%, quarter-over-quarter, aided by the 72% growth in the Marcellus Shale component. The Gas Division is on track to meet its 2014 production guidance of 210-225 Bcfe. For 2015 and 2016, CONSOL has announced annual production guidance increases of 25%-30%.
“CONSOL’s Gas Division continues to see the Marcellus Shale become a greater portion of the production mix,” commented J. Brett Harvey, chairman and CEO. “This is important for two main reasons: the first is the lower-cost nature of the Marcellus resulting from drilling efficiencies such as pad drilling, and the second is sales price uplift associated with a higher concentration of liquids. CONSOL is not only on track to meet its 2014 overall gas production guidance but is also on track to more than double its Marcellus Shale production in 2014, compared to 2013.”
Coal and gas production results, which were announced on Oct. 15, exceeded previous guidance provided in the second quarter. In the Coal Division, margins decreased primarily as a result of lower sale prices per ton, reflecting a decrease in the global metallurgical and thermal coal markets. Partially offsetting lower sales prices was approximately a 10% improvement in costs per ton.
CONSOL’s Coal Division costs per ton sold, across all tons, were $50.46 during the quarter, compared to $55.84 per ton from the year-earlier quarter. Per unit costs improved due to higher sales volumes and completed efficiency programs at the mines.
CONSOL Energy’s liquidity remains strong at $2.3 billion, while the company continues to invest in value creating projects. Third quarter capital investments were $438m, which is flat with the year-earlier quarter. The BMX Mine, essentially a third longwall for the Bailey mine in southwest Pennsylvania, remains on track to begin operations in April 2014 with an expected total capital cost of $710m.
CONSOL recently entered into an agreement to sell its Consolidation Coal Co. (CCC) subsidiary, which contains all five of its Pittsburgh-seam longwall coal mines in northern West Virginia, to coal operator Robert Murray’s Murray Energy for $4.4bn in value.
“While this transaction furthers CONSOL’s E&P growth strategy,” said Harvey, “the sale of these five mines – assets that have long contributed to America’s economic strength and our company’s legacy – was a very difficult decision for our team. The employees at these mines are among the safest and most productive miners anywhere in the world. In the end, we concluded that the time had come to sell these mature assets to ownership whose strategic direction is more aligned with those mines.”
Coal production in the third quarter consisted of 1.1 million tons of low-vol, 0.5 million tons of high-vol, and 12.9 million tons of thermal, for a total of 14.5 million tons. Of the thermal coal production, 12.4 million tons were from Northern Appalachia and 0.5 million tons were from Central Appalachia.
During the third quarter of 2013, CONSOL’s total coal inventory increased by 158,000 tons to 1,075,000 tons. Thermal coal inventory increased by 198,000 tons to 971,000 tons, while low-vol coal inventory decreased by 40,000 tons, to 104,000 tons.
Coal Marketing Update:
- In the third quarter, CONSOL’s Buchanan longwall mine working the Pocahontas seam in southwest Virginia produced and shipped over 1.1 million tons of coal to domestic and international customers. Buchanan’s continued low-cost position presented a new sales opportunity in China. This new opportunity, combined with existing business from traditional customers, enabled CONSOL to exceed the production forecast at Buchanan in the third quarter.
- CONSOL shipped 371,000 tons of its Bailey high vol met coal to customers. In the fourth quarter, CONSOL expects high vol shipments to China to resume. The demand for Bailey coal currently remains strong as the versatility allows it to compete as high-vol, PCI and high-BTU thermal coal.
- CONSOL continues to sell met coal from its Western Allegheny Energy joint venture in Pennsylvania to explore global opportunities for new met coal customers.
- At the end of the third quarter, CONSOL’s Northern Appalachia mine inventories remained below normal levels. Also, CONSOL believes coal pricing has upside potential as PJM Interconnection utility inventories remained below their 5-year average, and Southeast utility inventories have declined nearer to their 5-year average. During the quarter, CONSOL was successful in securing large multi-year deals with key utility customers in the PJM and in the Southeast. In the fourth quarter of 2013, CONSOL expects demand for contracted tonnage to remain steady as plants build their inventories in preparation for winter burn.
- CONSOL is in negotiations to contract 2 million-3 million tons of thermal and high-vol coal for 2014. CONSOL expects negotiations to conclude within the next few weeks.
In terms of guidance, CONSOL expects sales of 13.6 million to 14 million tons of coal in the fourth quarter of this year, and 57 million to 57.4 million tons for all of 2013. Excluding the mines to be sold to Murray, the company expects sales of only 30.1 million tons in 2014 and 33.8 million tons in 2015. The vast majority of that post-2013 production would be from the Bailey, Enlow Fork and BMX longwall mines in Pennsylvania.