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Consol Energy Sticking With Dry Gas This Year and Next

Despite firming liquids prices, Consol Energy Inc. plans to focus on dry gas production this year and next as it looks to convert more noncore acreage to core through further delineation of the Utica Shale.

The company produced 101.3 Bcfe in the fourth quarter, up 6% from the year-ago period and up from the 96.4 Bcfe it produced in 3Q2016. Full year production increased last year to 394.4 Bcfe, in line with guidance, and above the 328.7 Bcfe the company produced in 2015.

Liquids accounted for 10% of Consol's overall production during the period, down from 14% in 3Q2016. Like other Appalachian producers, Consol retreated to its dry gas acreage as the 2014 commodities downturn worsened, favoring the more prolific wells and lower breakeven prices that have turned the company's dry Utica assets in Southeast Ohio into its highest rate of return project.

"Our liquids production as a percent of our total portfolio is expected to go down below 10% in 2017 and even lower in 2018," COO Tim Dugan said Tuesday during a conference call to discuss the company's year-end results. "Historically, our liquids mix has been around 10-15% of our total production. However, there has been more of a focus on dry Utica, especially from Monroe County, OH, which in combination with the Marcellus joint venture (JV) dissolution and our reduced activity in the Ohio wet Utica, is really driving these changes."

The company said during an analyst day in December that it would also focus on folding more Ohio and Pennsylvania Utica Shale acreage into its core position in the coming years to increase stacked pay opportunities and build on its drilling inventory. Consol ended its five-year Marcellus Shale JV with Noble Energy Inc. last year, dividing 669,000 acres in Pennsylvania and West Virginia that give it more optionality to delineate the play and other horizons like the Marcellus and Upper Devonian shales.

"Over the next two years we have 11 planned delineation points to characterize the Utica," Dugan added on Tuesday. "Ultimately, this data, including acoustic logs and cores, will allow us to further refine our earth model, to find the core Utica boundary and optimize our stacked pay development with the Utica, Marcellus and Upper Devonian."

The Marcellus continues to drive volumes for the company, accounting for 56.5 Bcfe of its fourth quarter production. The Utica accounted for 22.2 Bcfe during the period, up from the year-ago quarter but down from 3Q2016 volumes of 22.5 Bcfe. The third quarter saw Consol's rigs return to work after it idled its drilling program in 2015, which slowed growth in the Utica. But Dugan said the company projects that the Utica would account for 15% of its production volumes this year and from 24-27% in 2018.

Consol continued to work toward its 100% transition to an exploration and production company during the fourth quarter. It has highlighted a strategy to grow production over the next three years, generate more cash flow to reduce debt and clean up its balance sheet. The company said it could divest the remaining coal assets in its portfolio this year through a sale to a third party, a spin-off to shareholders or dropping interests to CNX Coal Resources LP.

"Ultimately, we believe that the separation of the businesses can happen this year in one of these three forms," said CEO Nicholas Deluliis. "The path we choose -- that's going to be the one that offers the best, highest net asset value per share proposition for our owners. Our efforts are underway. We're going to run a competitive process." The Bailey, Enlow Fork and Harvey mines, along with related coal assets, remain on the company's balance sheet.

Consol's average sales price for the fourth quarter was $2.77/Mcfe, compared to $2.78/Mcfe in 4Q2015. Its differential from the New York Mercantile Exchange was negative 88 cents, but average natural gas prices, excluding hedges, improved 8% to $2.22/Mcf, compared to the third quarter. Year/year revenue was down to $462 million in the fourth quarter from about $666 million.

Consol reported a net loss of $306 million (minus $1.33/share) for the fourth quarter, compared to net income of $30.4 million (13 cents) in the year-ago period. Fourth quarter earnings included a $237 million unrealized derivatives loss, pension settlement costs and transaction fees associated with the dissolution of the Marcellus JV.

The company is guiding for 415 Bcfe of production this year and 485 Bcfe in 2018 on capital expenditures of $555 million and $600 million, respectively. "In general, we're very encouraged by market conditions," Dugan said. "Of these, we believe rig counts to be most positive. We've been expecting the low rig counts of 2016 to have an effect on supply. Based on recent storage withdraw levels and based on the lack of supply response to recent high prices, we believe that available supply has finally been reduced to a level that supports healthy pricing.

"While regional rig counts are higher than a year ago, they remain well below the peak levels that led to the oversupply situation and lower pricing."

Consol finished the year with $1.73 billion in liquidity, or more than double the $855.9 million it had at the end of 2015.

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