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Consol Posts Loss, But Marcellus Becoming More Important

Despite disappointing earnings at Consol Energy Inc. during the first quarter, the company reported 10.7 Bcfe of production in the Marcellus Shale, a 60% increase that signaled that the play is becoming increasingly important for the coal and natural gas producer.

During an earnings conference call Thursday, Consol officials said they expect gas production to be between 170 Bcfe and 180 Bcfe for the full-year 2013, which amounts to an 8.8-15.2% increase over the 156.3 Bcfe of gas produced in 2012. They also predict that the Marcellus will account for 34% of the 2013 production total, with the largest share (47%) being coalbed methane (CBM).

The Marcellus accounted for just 8% of the 127.9 Bcfe of gas Consol produced in 2010, but its share grew to 17% in 2011 (153.5 Bcfe) and 23% in 2012 (156.3 Bcfe). CBM has been slowly falling during the same time frame, from 71% in 2010, to 60% in 2011 and 56% in 2012.

"We're in an economy where the energy industry can be segmented into low-cost survivors and marginal players," CEO Brett Harvey said. "Consol Energy is definitely a low-cost survivor...in 2013 alone we plan to be up 15% in gas. This is without borrowing money to grow. I think that's an important thing: the margins of low cost create cash to grow the business when you have good assets."

Consol's bottom line was dinged by four unusual items during the quarter, including a fire at one of its coal mines in Blacksville, WV, in March. The company reported a net loss of $1.8 million for 1Q2013, which translated to a loss of 1 cent/share. By comparison, the company posted net income of $97.2 million (42 cents/share) for the year-ago quarter.

The coal mine fire resulted in a pre-tax expense of $15.2 million. Consol was also dragged down by pre-tax charges of $27.1 million and $20.2 million to settle lawsuits involving pensions and its acquisition of CNX Gas Corp., respectively. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was $275.5 million in 1Q2013, compared to $323.5 million in 1Q2012.

Consol reported that, together with its joint venture (JV) partners -- Noble Energy Inc. in the Marcellus and Hess Corp. in the Utica (see Shale Daily, Sept 8, 2011; Aug. 19, 2011) -- the company had drilled 25 gross wells in the Marcellus and three in the Utica during 1Q2013. Of these, 57% were targeting natural gas liquids (NGL) and 43% were in dry gas areas. Consol said total production was 39 Bcfe.

"I think when we look at our Marcellus performance through the last 18 months or so -- and then project that out for the remainder of the year and into 2014 -- this year we're on path between ourselves and Noble to drill just over 120 wells in the Marcellus," said CFO David Khani. "That's a pretty aggressive drill plan when you look at the logistics.

"The upside for additional drilling, if gas prices continue to strengthen, will be in the dry areas where our cumulative history exists. That's the central Pennsylvania [and] northern West Virginia areas. In the Utica, we're [planning] 27 wells [for 2013]. That's probably going to be a pretty firm number there. If gas prices continue to strengthen, and we want to look at or contemplate additional drilling, it most likely will be in the dry area of the Marcellus."

The company said it expects to spend between $835 million and $935 million to drill 151 wells (net to Consol) in 2013, a figure that includes about $100 million in a drilling carry from Hess in the Utica. But Consol added that it does not intend to pursue any "transformational" mergers or acquisitions in either coal or gas.

"We see some assets that we might pick up if they were distressed, but we are not out looking for other coal companies," Harvey said. "We continue to look at the process of monetizing assets, core and non-core. We've talked about that, and we're continuing to broaden that to see if our structure and value of our shares are being moved forward for our shareholders."

Consol said it drilled 12 gas wells in the Marcellus to total depth and completed 13 wells during 1Q2013. Drilling costs averaged $213/foot and $499/foot per lateral. Meanwhile the company completed 207 stages during the quarter, with an average cost of $195,000 per stage.

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