CONSOL Energy (NYSE: CNX), a major producer of both coal and natural gas, on Oct. 27 reported net income attributable to CONSOL Energy shareholders of $119 million for the third quarter of this year.
This compares to a net loss attributable to CONSOL Energy shareholders of $2 million from the year-earlier quarter. EBITDA attributable to CONSOL Energy shareholders was $374 million for the 2015 third quarter, compared to $201 million in the year-earlier quarter.
After adjusting for certain unusual items, the company had an adjusted net loss in the 2015 third quarter of $64 million. The third quarter earnings results included the following pre-tax items related to recent transactions:
- Recorded a $100.9 million benefit related to changes in the company’s retiree medical (OPEB) plan;
- Recorded a $99.1 million unrealized gain on commodity derivative instruments;
- Recorded a $48.5 million gain on the sale of its 49% interest in the Western Allegheny Energy (WAE) coal mining joint venture with Rosebud Mining;
- Recorded $7.7 million in severance expense; and
- Recorded $3.1 million in pension settlement expense.
“Despite depressed commodity prices, CONSOL remains focused on achieving our free cash flow base plan over the next 15 months,” commented Nicholas J. DeIuliis, president and CEO. “During the quarter, we beat production targets, locked in a significant percentage of our revenues for 2016 with additional gas hedges and multi-year coal contracts, significantly reduced operating costs, corporate overhead, and legacy liabilities, and accelerated our asset sale monetization program. These steps provide increased confidence in our ability to achieve our free cash flow base plan that we highlighted during our second quarter 2015 earnings call, and we are hard at work with multiple processes underway to monetize additional assets this year and into 2016. Expected proceeds will go towards reducing debt to help accelerate the separation of our Coal and E&P Divisions.”
CONSOL’s E&P Division, made up of the gas operations, achieved record production of 86.1 Bcfe, or an increase of 33% from the 64.9 Bcfe produced in the year-earlier quarter. CONSOL is increasing the lower end of its 2015 annual gas production guidance by 5 Bcfe to 325-330 Bcfe, and the company expects approximately 20% annual gas production growth for 2016.
Marcellus Shale production volumes in the 2015 third quarter were 44.9 Bcfe, or 46% higher than the 30.7 Bcfe produced in the 2014 third quarter. Marcellus Shale costs were $2.57 per Mcfe in the just-ended quarter, which is a $0.12 per Mcfe improvement from the third quarter of 2014 costs of $2.69 per Mcfe. The company achieved all-in cash costs of $1.62 per Mcfe in the Marcellus Shale.
CONSOL Energy’s Utica Shale production volumes in the 2015 third quarter were 15.3 Bcfe, up from 6.7 Bcfe in the year-earlier quarter. Utica Shale costs were $2.14 per Mcfe in the just-ended quarter, which is a $0.23 per Mcfe improvement from the third quarter of 2014 costs of $2.37 per Mcfe.
Buchanan operation in Virginia hit with another met coal price decline
CONSOL’s Coal Division produced 7.3 million tons in the 2015 third quarter, compared to 7.8 million tons in the year-earlier quarter.
- In the Virginia Operations, the company’s Buchanan longwall mine, working the Pocahontas coal seam, saw metallurgical coal prices continue to decline. The Virginia Operations average sales price per ton decreased during the quarter to $51.82 per ton, compared to $70.57 per ton from the year-earlier quarter.
- The Pennsylvania Operations, including the Bailey/Enlow Fork/Harvey longwall mines, had average sales price per ton that decreased during the quarter to $56.99 per ton, compared to $61.35 per ton from the year-earlier quarter. However, compared to the second quarter of 2015, the Pennsylvania Operations average sales price per ton slightly increased due, in part, to lower exported spot sales in the third quarter.
“A testament to our premium assets and our coal marketing team, CONSOL continues to see a tremendous amount of contracting success in, what continues to be, a brutal coal environment,” said DeIuliis. “The company now has a 2016 committed position of approximately 74% of total estimated Pennsylvania Operations sales tons. As highlighted by CNXC, the company now has in place multi-year commitments that secure CONSOL as the anchor supplier to the largest, most efficient, and most environmentally compliant coal power plants in the PJM and SERC regions. These power plants are expected to operate at high capacity factors for the coming years. In addition, CONSOL has secured multi-year commitments with key power plants in the upper Midwest and Southeast regions, which are markets that have historically been thought of as the domain of theIllinois, Central Appalachian, and Powder River Basins.”
During the third quarter, CONSOL Energy sold its 49% interest in WAE, which resulted in a recorded gain. The sale included the conveyance of 63 million tons of coal reserves, and the transaction closed on Sept. 30.
During the third quarter of 2015, Pennsylvania Operations total unit costs were $40.38 per ton, compared to $47.06 per ton in the year-earlier quarter, despite production declining by approximately 9% over the same period. Cost performance was driven by improved longwall operations, better geological conditions, an optimized workforce, and a continued focus on zero-based budgeting. To better align production to contracted sales to preserve margins, the Pennsylvania Operations moved to a four-day work week in the second quarter of 2015, compared to a normal five-day per week schedule. The company expects this schedule to continue through the remainder of 2015.
During the quarter, Virginia Operations continued to optimize its cost structure with total unit costs being lower at $53.83 per ton, compared to $61.21 per ton in the year-earlier quarter. Better utilization from previously completed efficiency projects, optimized shift schedules, and reduced travel time to the face of the longwall continued to benefit cost performance. As discussed in the previous quarter, these continued cost improvements were slightly offset, as expected, due to a planned longwall move and scheduled outage to perform a maintenance upgrade in the quarter.
In the third quarter of 2015, CONSOL’s Coal Division sold 7.2 million tons, which was slightly above the previous quarter’s guidance range of 6.6 million-7.1 million tons.
In the third quarter of 2015, the Pennsylvania Operations sold 5.7 million tons, which exceeded previous quarter’s guidance of 5.4 million-5.6 million tons. The current thermal coal market remains extremely challenged due to low natural gas prices, tepid economic growth, and regulatory uncertainty. Despite these challenges, during the third quarter, CONSOL said it made substantial strategic and tactical progress through securing additional thermal coal commitments.
Strategically, CONSOL’s Pennsylvania Operations increased its 2016 sold position to 19.3 million tons, or approximately 74% of the total estimated sales tons based on the midpoint of the guidance range. Also, CONSOL’s Pennsylvania Operations sold positions for 2017 and 2018 increased to approximately 45% and 41%, respectively. Cumulatively, these multi-year commitments allow the Pennsylvania Operations to efficiently operate at an expected five-day per week work schedule, which also provides economies of scale to lower unit costs. The structure of these multi-year commitments price coal in 2016 but also allow for higher prices in 2017, and beyond, when markets are expected to strengthen. Domestic thermal coal prices are in contango, which ties to a few contracts that have prices locked in for 2017 and 2018.
Tactically, continuing into the fourth quarter, CONSOL said it is positioned to selectively capture additional power plants across the eastern U.S., as well as spot sales, both domestic and international. CONSOL expects that these incremental sales will increase the 2016 sold position to over 90% by year-end. As CONSOL continues to secure market share, and as overall U.S. coal demand declines, the company expects the idling of coal mines across a number of basins. This supply response will allow CONSOL to selectively layer-in additional incremental sales for 2016, and beyond.
In the third quarter of 2015, CONSOL sold 0.9 million tons of its Buchanan low-vol met coal, which was in-line with previous quarter’s guidance of 0.8-1.0 million tons. Despite the continued degradation across the domestic and international metallurgical markets, Buchanan’s low cost position allows it to compete in a challenging environment. Also during the quarter, CONSOL contracted for 0.9 million additional tons for 2015 and expects to capture ongoing opportunities throughout the year. CONSOL has been successful developing new markets both domestically and in the Atlantic Basin.
In the third quarter, CONSOL sold 0.6 million tons of Miller Creek coal out of West Virginia, which is flat compared to the year-earlier quarter.
CONSOL offers 2016 guidance
For full year 2016, Pennsylvania Operations sales guidance is higher, compared to 2015, resulting from an increased committed position. CONSOL expects Pennsylvania Operations total unit costs to increase slightly in the fourth quarter of 2015, compared to the third quarter. However, for full year 2015, CONSOL continues to expect average total unit costs, including DD&A, to be $40-$43 per ton.
In the Virginia Operations, CONSOL continues to expect 2015 total unit costs to be between $50-$55 per ton.
In the Other Operations (Miller Creek), CONSOL continues to expect 2015 total unit costs to be between $50-$55 per ton.
The sales projection for coal for all of 2015 is 28.9 million to 29.9 million tons, with a projection for 2016 for sales of 30.6 million to 33.4 million tons. The sales price forecast for 2015 based on committed tons is $57-$59/ton, with the forecast being only $50-$55/ton in 2016.