CONSOL Energy Chooses Natural Gas


CONSOL Energy is shipping out some of its legacy coal assets. Source: CONSOL Energy

CONSOL Energy has finally found its identity. The coal and natural gas producer had gone back and forth between the two commodities for years. But after selling off some of its legacy coal operations it's clear that CONSOL Energy is a natural gas company, albeit one with a coal subsidiary.

Unloading legacy coal and liabilities
CONSOL's deal to sell five of its legacy coal mines is as much about cleaning up its balance sheet as it is about unloading the coal assets. In the deal CONSOL is only getting $850 million in upfront cash along with future cash payments that have a net present value of $184 million. The bulk of the value of the deal is coming from the $2.4 billion in balance sheet liabilities that CONSOL is offloading to the buyer. All told this equates to a total transaction value of about $3.5 billion.

While the deal marks a significant chuck of CONSOL's coal assets, or about a quarter of its reserves, it doesn't signal that the company is exiting coal altogether. CONSOL will actually be retaining many of its best coal assets including its flagship Buchanan Mine in West Virginia, its soon-to-be-completed BMX mine in Pennsylvania, and its Baltimore Coal export terminal. This will enable the company to benefit from the growth in world demand for both thermal and metallurgical coal.

Turning on the gas
That said, CONSOL Energy's future is about natural gas. The biggest shift will be its future rate of natural gas production growth. The last two years natural gas production has been rather stable, but that will change. Next year CONSOL sees its natural gas production jumping by up to 32%. Further, the company sees production growth in 2015 and 2016 averaging 30% per year. Clearly, CONSOL Energy is turning on the gas.

To meet its production growth goals CONSOL will focus on expanding its liquids exposure in the Marcellus shale while turning its Utica shale position into full development mode. The company has joint ventures with both Noble Energy and Hess but its attention will be on the acreage it operates outside of both ventures.

For the balance of 2013 most of CONSOL's activity will be centered in the Marcellus shale. The company has already completed its 2013 Utica drilling program and has already moved its drilling rig to the Marcellus to support its drilling activity there. The only activity in the Utica are the two drilling rigs operated by Hess. That will change in the future as CONSOL steps up its efforts to develop the Utica acreage it operates. We should know more about this once CONSOL announces its 2014 capital budget.

In the Marcellus, Noble Energy is currently operating the joint venture's five rigs in the wet gas portion of the play. Meanwhile, CONSOL's focus has been on developing its dry gas acreage where it drilled a dozen wells last quarter. That said, now that CONSOL is lightening up on coal, investors should expect to see the company boost its drilling budget in the future with a good portion of its capital directed to its dry gas Marcellus acreage. Further, the company is likely to boost its efforts in wet gas areas. Again, we'll know more when the company details its 2014 plans.

Investor takeaway
CONSOL Energy is taking a transformative step to become a natural gas growth company. It even slashed its dividend to bring it more in-line with its natural gas focused peers. It's pretty clear that CONSOL sees a better future for its gas business than coal. To me that suggests that unless a coal company is focused on exports, its future growth opportunities are very limited. Natural gas appears to be winning the war against coal.

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