CNX Coal sees signs of market uptick in Q3 2016

CNX Coal Resources LP (NYSE: CNXC), which co-owns three major coal mines in Pennsylvania with CONSOL Energy (NYSE: CNX), said Oct. 31 that it had net income in the third quarter of $6.4 million.

“We reached an important milestone during the third quarter with the acquisition of an additional 5% undivided interest in the Pennsylvania mining complex (PAMC),” said Jimmy Brock, Chief Executive Officer of CNX Coal Resources GP LLC (the “General Partner”). “This acquisition is expected to increase our Adjusted EBITDA by 25% and to also provide significant flexibility from a balance sheet and liquidity perspective. As we are continuing to see improvements in the coal markets, we also feel that the timing of this transaction is very favorable.

“During the quarter, our marketing team improved the average revenue per ton by shifting focus to the domestic market as we foreshadowed on our last earnings call. We expect to continue to see improvements in all three major markets for our coal: domestic thermal, international thermal and international high-vol metallurgical coal. This bodes very well for both our current shipments and our contracting progress in the 2017-19 period.

“On the operational front, we had some challenges with geological conditions at our Enlow Fork mine, which reduced our expected shipment volumes in the third quarter. Although we expected some impact from these conditions and planned accordingly, the degree and negative impact on productivity was higher than we had expected. However, our workforce did a tremendous job of navigating through those conditions and making up some production volumes through weekend shifts. The geological conditions have now improved and we are back to normal operating conditions.”

Sales & Marketing

CNX Coal reported that the marketing team had another solid quarter, selling 1.5 million tons to 42 different end users. More importantly, it also improved the average realized price by 9% compared to the second quarter. This was achieved by selling more coal to domestic customers, who have seen their coal stockpiles drawn down as coal-fired generation improved. During the third quarter, customers demonstrated a strong demand for coal given higher natural gas prices and above-normal summer temperatures. This translated into a boost in thermal coal prices this summer after they had reached extreme lows in May.

Said the company: “We believe that coal pricing will continue to improve as many power plants located in PJM and in the southeastern U.S. saw a notable decrease in their coal stockpiles during the quarter, and coal supply remains tight. We also noticed meaningful improvement in the forward market, which allowed us to contract 575 thousand tons for 2017, including 340 thousand tons of high-vol metallurgical coal. We improved our sold positions for 2017 and 2018 to 93% and 58%, respectively. We are currently in negotiations with several customers and expect to expand our high-vol and thermal coal volumes during a time when supply rationalization, demand stabilization, and rising Chinese imports are contributing to an improved pricing environment. We expect demand for our coal to remain strong, and anticipate continued pricing improvement in the upcoming year.

“Both the domestic and export markets for our coal continued to strengthen throughout the third quarter and into October. On the domestic thermal side, hot summer weather drove strong coal burn and inventory drawdown at coal-fired power plants in our core markets in the eastern United States. According to our internal analysis, our top 15 domestic power plant customers operated at a weighted average capacity factor of 68.7% in July, which was up from the weighted average capacity factor of 49.7% during the first half of 2016. This is also higher than their weighted average capacity factor of 67.2% last July. U.S. Energy Information Administration (EIA) now anticipates U.S. coal demand to decline by 9% in 2016 while primary supply is expected to decline 18% industry-wide. We believe this should continue to help the destocking process and create better supply-demand fundamentals for the upcoming contracting periods.

“In the export market, international spot prices for metallurgical coal increased dramatically during the third quarter, driven by production cuts and increased import demand in China, coupled with tightening supply out of Australia.  The global coking coal benchmark for the fourth quarter of 2016 settled at $200/metric ton, up 116% from the third quarter settlement of $92.50/metric ton. Prices for a variety of metallurgical coal products, including our coal, have likewise trended substantially higher.  Coal from the PAMC is sold as a crossover product into the global high-vol metallurgical market. We have historically sold approximately 10% of our volume in this market and continue to pursue additional opportunities to capture pricing and volume upside. Export thermal pricing has also strengthened recently, with the API2 and API4 indexes for 2017 delivery into Europe and India both improving by about 12% during the third quarter. Pricing has continued to rally through October.”

Operational Update and Outlook

During the quarter, CNX Coal/CONSOL faced some challenging geological conditions at the Enlow Fork mine, which resulted in slower retreat rates for both longwalls in operation at the Pittsburgh-seam mine. While this was anticipated, the degree and negative impact was more than expected. To offset the production shortfall that resulted from these conditions, the companies added extra weekend shifts.

On a positive note, the nearby Bailey and Harvey longwall mines performed very well during the quarter and offset the cost increases due to the Enlow Fork geological conditions. Heading into the fourth quarter, geological conditions have improved at Enlow Fork, and the companies expect production to increase from the third quarter level. Accordingly, for the fourth quarter, they expect coal sales volumes and unit margins to increase compared to the third quarter.

Third Quarter Summary

CNX Coal sold 1.5 million tons of coal during the third quarter of 2016 compared to 1.4 million tons in the year-ago period. The average realized price declined by 22% compared to the year-ago period, as some of the higher-priced coal contracts rolled off and were replaced by lower-priced sales. Average unit costs for coal sold in the quarter improved to $35.79 per ton, compared to $40.26 per ton in the year-earlier quarter, primarily driven by various cost reduction measures. During the quarter, it exported 155 thousand tons of coal or approximately 10% of coal sales.

Guidance and Outlook

Based on the results to date, expectations for the remainder of 2016, and to reflect CNX Coal’s expanded ownership interest (on a 25% basis) in the PAMC, it is updating previously-announced guidance ranges for 2016 as follows:

  • Coal sales of 5.9 million-6.1 million tons
  • Adjusted EBITDA of $74 million-$82 million
  • Maintenance capital expenditures of $15 million-$19 million

CNX Coal Resources is a growth-oriented master limited partnership formed by CONSOL Energy to manage and further develop all of CONSOL’s active thermal coal operations in Pennsylvania. Its assets include a 25% undivided interest in, and operational control over, CONSOL’s Pennsylvania mining complex, which consists of the three underground mines and related infrastructure.

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.