CONSOL Energy Takes Next Step in Its Growth Plan

CONSOL Energy made its shift toward gas obvious when it sold half of its coal assets back at the end of 2013. Since then, the company continued with its plan to grow its gas production at an annual rate of 30% while continuing with the monetization of non-core assets. The announcement of plan to form an MLP that will provide midstream gathering services for production from the Marcellus Shale is another logical step in CONSOL Energy's plan.

Monetization continues
CONSOL Energy and Noble Energy own a 50/50 joint venture in the Marcellus Shale. Noble Energy operates the wet gas development area while CONSOL Energy operates the dry gas area. What's more, both companies own equal shares in CONE Gathering, which will be transformed into MLP. Companies expect to proceed with the IPO of common units of the newly formed MLP late in the third quarter or early in the fourth quarter of 2014.

CONSOL Energy also has a joint venture with Hess in the Utica Shale. This joint venture is of a smaller size than the joint venture with Noble Energy. Last year, CONSOL Energy and Hess drilled 24 wells in the Utica, while CONSOL Energy and Noble Energy drilled as much as 117 gross wells in the Marcellus Shale. Unlike in the Marcellus shale, CONSOL Energy and Hess do not own gathering services in Utica and rely on third parties for gathering services. That said, both CONSOL Energy and Hess plan to monetize approximately 62,000 acres of joint venture Utica shale acres.

The monetization of non-core Utica acres is a part of CONSOL Energy's plan to monetize as much as $1 billion of non-core assets over the next five years. This will help the company reach its target to stay within its cash flows while growing its production. The money will be going toward CONSOL's gas business, which is expected to provide 53% of estimated EBITDA in 2014. To reach targeted growth, the company is dedicating as much as 74% of this year's capital spending toward its gas segment.

What about coal?
CONSOL Energy states that its coal segment is going into maintenance of production mode, as the company bets on bigger shift from coal to gas in energy generation. Does it mean that CONSOL Energy will get rid of the remaining coal assets? This scenario seems unlikely.

Despite a tough market environment, coal remains an important contributor to the company's cash flows. Earlier this year, CONSOL Energy raised its annual coal production guidance range from 30.1 million-32.1 million tons to 31 million-33 million tons. This means that the company will be operating closer to its annual production capacity, which consists of 32 million tons of thermal coal and 5.2 million tons of met coal.

The mines in CONSOL Energy's current portfolio have solid reserves and long mine life. As long as they stay cash flow positive, they are unlikely to be divested. What's more, when the met coal market recovers from the current extreme state, CONSOL Energy will enjoy an earnings boost from its Buchanan met coal operations.

Bottom line
CONSOL Energy's shares have been performing well this year, as the market endorses the company's growth prospects. As CONSOL Energy continues to execute against its strategy, its shares are likely to remain among solid performers.

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