Consol Energy Inc. on Monday marked a transformative step to advance its natural gas-weighted exploration and production (E&P) business in the Appalachian Basin, not to split the coal operations as some had anticipated, but rather to sell a big coal subsidiary and shift from exploration to exploitation in the Marcellus, Utica and Upper Devonian shales.
Consolidation Coal Co., which contains all five of Consol's longwall coal mines in West Virginia, is being sold to a unit of Murray Energy Corp., one of the biggest coal operators in the United States in a transaction valued at $3.5 billion. Murray is paying $850 million cash for the mines, $184 million in future royalty payments for coal reserves and assuming $2.4 billion in liabilities, mostly for worker pensions and benefits.
Rumors have circulated for months that Consol would split into two separate companies, one focused strictly on E&P and one on coal. However, as CEO J. Brett Harvey explained during a conference call, the latest decision allows Consol to raise its E&P profile with coal operations as a secondary focus, rather than be viewed as a coal-focused operator with E&P operations.
Keeping some coal assets also provides options overseas for the corporation, he said. However, the CEO didn't dismiss the idea of separating the businesses at some point down the road.
"While this transaction furthers Consol's E&P growth strategy, the sale of these five mines -- assets that have long contributed to America's economic strength and our company's legacy -- was a very difficult decision for our team. The employees at these mines are among the safest and most productive miners anywhere in the world.
"In the end, we concluded that the time had come to sell these mature assets to ownership whose strategic direction is more aligned with those mines."
Consol would be rapidly growing its natural gas stores with the coal sale. Total 2013 gas production guidance is 170-172 Bcfe. By the end of 2014, gas production guidance has been hiked by 23-32% to 210-225 Bcfe. In 2015 and 2016, gas output should be 30% higher a year, Harvey told analysts.
In the Marcellus, Consol operates about 430,000 gross acres -- mostly dry gas -- with partner Noble Energy Corp. operating 170,000 gross acres, mostly wet gas. Eighty-seven percent of the acreage is held by production, allowing for development flexibility, said Harvey.
Now, Consol will be looking for "bolt-on acreage opportunities."
Consol hasn’t enhanced its drilling plans in the Marcellus for this year. It still plans to drill 48 Marcellus wells: 27 in southwestern Pennsylvania; 10 in Central Pennsylvania; and 11 in Northern West Virginia. Noble is drilling 75 wells this year in West Virginia.
With the added capital, Consol over the coming year wants to expand its up-to-now limited liquids exposure in the Marcellus, said Harvey. There's also work to be done to expand exploitation efforts in the Utica and in the Upper Devonian.
"In advancing our E&P growth strategy, we expect that West Virginia will continue to play an important role," said Harvey. "We have a sizeable Marcellus Shale footprint in West Virginia, which will take a significant amount of labor and capital to develop."
What's next? Consol plans to sell off more noncore assets, said the CEO. Management is evaluating some remaining infrastructure assets, with the 2014 capital budget to be announced within a few months. The year-end gas reserve report also comes out early next year.
Consol also plans to continue to invest in its shale projects across the region "to meet production growth targets," said Harvey.
Consol gained entry into the Marcellus with a big transaction in 2010 to buy Dominion's E&P business (see Shale Daily, Nov. 1, 2010). In July Consol said it had drilled its first Upper Devonian well in Greene County, PA, in the Burkett formation, one of the deepest of several of the shale's targets (see Shale Daily, July 23). Consol and drilling partner Noble Energy Corp. also are building a natural gas pipeline in the region (see Shale Daily, May 29).
Consol partners with Hess Corp. on a portion of its Utica acreage (see Shale Daily, Aug. 19, 2011).
In addition to its noticeable exploration gains, Consol also has signaled that it plans to boost its visibility as a partner with the states. In August, Consol and Pennsylvania's Allegheny County Airport Authority unveiled a drilling proposal for Pittsburgh International Airport property to allow 47 wells to be drilled into airport property overlying the Marcellus (see Shale Daily, Aug. 29). The public works project is expected to provide new revenues and attract additional flights.
Consol plans to retain "coal assets that clearly align with the company's long-term strategic objectives," including the Pennsylvania operations, with estimated production of nearly 24 million tons in 2014. The mines produce a high-Btu Pittsburgh-seam coal that is lower in sulfur than many Northern Appalachian coals, according to Consol. The coal may be sold domestically or abroad, as either thermal coal or high-volume coking coal.
Mines being sold are McElroy, Shoemaker, Robinson Run, Loveridge and Blacksville No. 2. Collectively, they produced 28.5 million tons of thermal coal in 2012. Murray also is acquiring about 1.1 billion tons of Pittsburgh No. 8 seam reserves. Consol's River and Dock operations also are included; last year the fleet of 21 towboats and 600 barges transported 19.3 million tons of coal and other commodities along the Upper Ohio River system.
The transaction with Murray is set to close by the end of the year, with Consol recording $1.3 billion of a pre-tax gain on its 4Q2013 financial statements. It is reporting its 3Q2013 results on Tuesday.
In conjunction with the sale, Consol is realigning its dividend policy to reflect the company's increased emphasis on growth. Beginning with the first declared quarterly dividend after the transaction closes, Consol intends to pay a regular quarterly rate of 0.0625 cents/share, for an annual rate of 25 cents/share.
As a separate action following the sale, administrative expenses are expected to be reduced by about $65 million a year. The transaction, and the subsequent reduction in administrative expenses, should reduce Consol's 2014 gross earnings by an estimated $213 million. After adjusting for capitalization liabilities, the company estimates 2014 adjusted gross earnings would be reduced by about $377 million.