CONSOL Energy cuts costs further in 2015 as it rides out tough coal market

Coal and gas producer CONSOL Energy (NYSE: CNX) on Jan. 29 reported net income attributable to CONSOL Energy shareholders of $30 million for the fourth quarter of last year, compared to net income attributable to CONSOL shareholders of $74 million from the year-earlier quarter.

“CONSOL continues to control the controllables in a commodity price and energy environment that is unprecedented,” commented Nicholas J. DeIuliis, president and CEO. “Specifically, CONSOL continues to adapt to the challenging commodity environment by further driving down costs, illustrated by the E&P Division reducing total unit cash costs by over 25% year-over-year. For the Coal Division, Pennsylvania Operations (PA) set new levels of cost performance, and the Buchanan Mine, again, posted impressive total unit costs.

“In addition to the substantial cost performance, recently, we announced that we are exerting production discipline on both the E&P and Coal sides of our business. For E&P, specifically, we reduced our 2016 capital budget by an additional $185 million, while scaling back production growth to approximately 15%, over 2015 volumes. For the Coal Division, we have also optimized production schedules to better align with customers’ delivery schedules to help manage high inventory levels, due to the lack of demand from a mild start to the winter. The company also continues to position itself to capitalize on what we believe to be an industry leading dry Utica acreage position and initial well results, as demonstrated by showcasing three of the top ten dry Uticawells across the industry, to-date.”

During the fourth quarter of 2015, CONSOL Energy’s Coal Division saw safety and compliance exceptions reduced by approximately 60%, compared to the year-earlier quarter. In the Pennsylvania Operations, the company’s Bailey Mine was awarded the 2015 Keystone Mine Safety Award for the second consecutive year in the longwall mine category during the fourth quarter. The Miller Creek Complex was awarded the Mountaineer Guardian Safety Award of West Virginia.

During the fourth quarter of 2015, the Coal Division’s total unit costs were $41.97 per ton, or an improvement of $3.02 per ton, compared to $44.99 per ton in the year-earlier quarter. Full year 2015 Coal Division total unit costs were $43.64 per ton, or an improvement of $3.27 per ton, compared to $46.91 per ton in the prior year. Full year 2015 Coal Division total unit costs were within the previously stated cost guidance of $41.61-$45.36 per ton.

The Pennsylvania Operations total unit costs were $39.84 per ton, compared to $42.61 per ton in the year-earlier quarter, despite production declining by approximately 28% over the same period. The improved cost performance during the quarter was primarily driven by reduced expenses related to Pennsylvania streams subsidence. Also, the Pennsylvania Operations continues to optimize the operational schedule at the mines to offset potential unit cost increases related to expected lower production volumes.

CONSOL previously announced a reduction to Pennsylvania Operations 2016 sales guidance to 22 million-26 million tons due to shipment schedules and high-levels of customer inventories. As a result CONSOL has temporarily idled the Harvey Mine, one of the five longwalls in the Pennsylvania Operations (which are at the adjacent Bailey, Enlow Fork and Harvey mines in the Pittsburgh coal seam). This action will not affect the previously stated guidance, but it will optimize the operating schedule to offset any cost increases associated with the delay in shipments. CONSOL expects that its decision to idle a longwall is short-term since the Pennsylvania Operations has a strong sold position of about 100%, based on the midpoint of the 22 million-26 million tons sales guidance. The Pennsylvania Operations were built to provide optionality and flexibility as to which longwalls are run, which could change in the future, based on coal quality, mining conditions and timing.

The Virginia Operations continue to optimize cost structure, as reflected in the much lower all-in unit costs during the fourth quarter 2015 of $44.08 per ton, compared to $53.96 per ton in the year-earlier quarter. Better utilization from previously completed efficiency projects, and reduced travel time to the face of the longwall continued to benefit cost performance.    

During the quarter, CONSOL’s active coal operations generated $121 million of cash before capital expenditures.

Coal Marketing Update

In the fourth quarter of 2015, CONSOL Energy’s Coal Division sold 6.6 million tons, compared to 8.1 million during the year-earlier quarter. For full year 2015, CONSOL sold 29.2 million tons, which was in-line with 2015 total Coal Division guidance of 28.9 million-29.9 million tons. The timing of receipts of contracted tons, netback contracts, and spot business, both domestic and export, are affecting coal price realizations.

  • Pennsylvania Operations: During the fourth quarter of 2015, the Pennsylvania Operations sold 5.0 million tons to 40 different end users through term contracts varying in length. Despite the currently depressed coal and gas markets, CONSOL has been able to gain market share in both traditional and non-traditional markets, which has resulted in a strong 2016 sold position of 24.1 million tons. However, unprecedented warm December weather has contributed more volatility to an already volatile market. This volatility could result in shipping delays, which may affect average realizations based upon changes in the customer mix and timing of coal shipments. Despite some shipping delays, CONSOL expects to ultimately ship these tons, but in the interim continues to seek additional incremental sales to help offset delays. In addition to a strong 2016 sold position, CONSOL also has sold positions for 2017 and 2018 of about 61% and 49%, respectively. CONSOL Energy’s contracting strategy remains the same: to continue to build a portfolio that targets the power plants that will endure in future energy markets with the potential to grow their consumption of coal. 
  • Virginia Operations: In the fourth quarter of 2015, the Virginia Operations sold 1.1 million tons of coal to domestic and international customers. The continued cost performance of the Virginia Operation’s Buchanan Mine allowed the segment to remain competitive and profitable, while attracting new sales opportunities domestically and in Europe. During the quarter, CONSOL executed upon its strategy to increase domestic sales, which are now expected to represent 35%-40% of 2016 sales. In the fourth quarter, CONSOL contracted 0.7 million tons of the Buchanan Mine’s low-vol metallurgical coal into the domestic market for 2016. As additional supply cuts are announced and the met coal market recovers, the Virginia Operations will continue to prosper. CONSOL continues to expect steady demand for its low-vol coal in the first quarter of 2016 and subsequent quarters.
  • Other: In the fourth quarter of 2015, the Miller Creek Complex sold 0.5 million tons, which is flat with the year-earlier quarter. Also in the fourth quarter, CONSOL contracted a term deal consisting of an additional 2.0 million tons with a Southeastern utility customer, resulting in a sold position of 1.8 million and 1.0 million tons for 2016 and 2017, respectively. CONSOL temporarily idled the Miller Creek Complex and anticipates restarting operations once inventory levels normalize.

Coal Division Guidance

CONSOL Energy expects annual 2016 Coal Division sales to be approximately 27 million-32 million tons, which includes 2016 estimated sales for Pennsylvania Operations of 22 million-26 millions tons.















COAL DIVISION GUIDANCE (tons in millions)

       
   

2016

 

2017

     Est. Total Coal Sales

 

27.0 – 32.0

 

30.5 – 33.4

       Committed

 

27.8

 

12.7

       Estimated Price Per Ton (committed tons)

 

$50-$55

 

$50-$55

     Est. PA Operations Sales

 

22.0 – 26.0

 

25.0 – 27.0

       Committed

 

24.1

 

11.1

     Est. VA Operations Sales

 

3.5 – 4.2

 

3.7 – 4.2

       Committed

 

1.9

 

1.6

     Est. Other Sales

 

1.5 – 1.8

 

1.8 – 2.2

       Committed

 

1.8

 

CONSOL Energy is a Pittsburgh-based producer of natural gas and coal. The company is one of the largest independent natural gas exploration, development and production companies, with operations centered in the major shale formations of the Appalachian basin. As of Dec. 31, 2014, CONSOL Energy reported 6.8 trillion cubic feet equivalent of proved natural gas reserves. The company’s premium coals are sold to electricity generators and steel makers, both domestically and internationally.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.