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With Consol Production Up, Company Plans Split of Coal, Gas Businesses

Consol Energy Inc. continued to shake up its business model in the third quarter, once again setting a natural gas production record that saw major gains in liquids volumes from both the Marcellus and Utica shales as it continues its transition from coal to exploration and production (E&P).

In the second quarter, the company said its Marcellus and Utica programs would likely be back-end weighted this year, with about 70% of sales connections planned for the last six months of the year, which showed in its third quarter earnings report (see Shale Daily, July 15).

"Looking at the Marcellus, it continues to establish new record levels of production. We anticipate that the Marcellus field is going to break through the 1 Bcf/d threshold on a gross basis before year’s end and...probably a matter of days from now," said CEO Nick Deluliis during a conference call with financial analysts. "Over in the Utica Shale, the production ramp is on a very steep trajectory, similar to what we saw early on in the Marcellus. Our year-to-date production has grown in our operated portion of the joint venture (JV) by approximately 3,400%...bottom line is that the wet Utica is a major contributor to production and earnings, and the Utica has arrived and is now a big player at Consol Energy."

Given that growth, and in keeping with a strategy to cut costs and increase returns, company officials for the first time on Tuesday publicly discussed their plans to split the company's coal division from E&P operations, saying that it was exploring a master limited partnership (MLP) for its thermal coal assets, which are generally sold to the power sector.

"When we look at our strong cash flows generated by thermal coal operations, especially as we're able to contract those tons over longer terms, we see the opportunity for a thermal coal MLP," said CFO David Khani. "On the [metallurgical] coal side, we are looking at various structures to capitalize on the potential rebound in the market. At this point, we are now evaluating feasibility and the structure of these options."

Consol said it would have an announcement about splitting its coal and natural gas businesses by the end of the year, and company officials added that the split would likely occur in 2015. It was unclear, though, if all the company's coal assets would be spun off. Khani told analysts the company was looking at how best to restructure the company.

Last October, Consol announced a transformative move to advance its natural gas production when it sold five West Virginia coal mines in a deal valued at $3.5 billion (seeShale Daily, Oct. 28, 2013). Meanwhile, its accelerating program in the Marcellus Shale of West Virginia and Pennsylvania, where it has a JV with Noble Energy Inc., has been growing. Year-over-year production nearly doubled in the first quarter and from there increased 129% sequentially in the second quarter (see Shale Daily, April 8).

Until last quarter, though, its efforts in the Utica Shale, where it has a joint venture with Hess Corp., had been slow going due to the learning curve and processing constraints.

Overall, Consol produced 64.9 Bcfe in the third quarter, a 41% increase from the 46.1 Bcfe it produced in the year-ago period. The Marcellus Shale accounted for nearly half of that at 30.7 Bcfe, up 76% from the 17.4 Bcfe it produced in 3Q2013. The quarter's greatest gains, though, came in the Utica Shale, where production went from 200 MMcf in the year-ago period to 6.8 Bcfe. Of that, condensate accounted for 500 MMcf and natural gas liquids accounted for 2 Bcfe, which was far above the negligible amounts reported last year.

"Our results have been so encouraging; we're actually turning more attention to increasing our handling and processing capacity for our liquids production," Deluliis said of the company's Utica assets. "So that's a short-term challenge, but a very good problem to have. It's just that our ability to efficiently produce and develop the commodity has outstripped our downstream capacity."

Although liquids helped give Consol's realized natural gas prices a 37-cent uplift, the company was still not immune to Appalachia's negative basis last quarter. That, combined with lower coal profits, the early extinguishment of debt and a non-cash charge related to phasing out pensions and healthcare benefits for retirees in favor of a 401(k) model, led to a $2 million loss (1 cent/share) last quarter, which was an improvement from the $64 million (28 cent/share) loss it incurred during the same time last year.

Consol earned $3.97/Mcfe for its natural gas last quarter, down from the $4.20/Mcfe it earned in 3Q2013. The company has plans to drill 70 gross Utica and Marcellus wells next quarter. As a result of the ramp in third quarter production, it increased its full-year guidance on Tuesday from the previously announced 225-235 Bcfe range to 235-240 Bcfe.

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