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Coal Sale Lifts Consol Profit as Company Stays Focused on Growth

Consol Energy Inc. on Friday said its fourth quarter earnings were a preview of how the company will grow in the next three years, billing them as the first strong indicator of how the company will perform financially in the post-coal era.

"Last year was a transformative year, with the sale of half our coal business and multiple sale processes going on," CFO David Khani told financial analysts during a conference call to discuss earnings. "However, the most important event was the shift and focus towards becoming a strong E&P company."

This year, Khani said, that focus will narrow even more as the company looks to ramp up its gas and liquids volumes to a higher level and "rebrand itself" as a "top-tier" exploration and production company.

Consol saw a big year/year gain in its 4Q2013 earnings, mainly by de-leveraging its balance sheet with the sale of five legacy coal mines in West Virginia in a deal valued at $3.5 billion (see Shale Daily, Oct. 28, 2013). The sale closed in December and the company received $850 million in cash last quarter as a result.

"We regained our gas production momentum after low gas prices. We improved capital efficiencies in gas, improved drilling efficiencies and embraced new completion techniques," CEO J. Brett Harvey told analysts. "We balanced our asset portfolio with the sale of mature coal assets and are redeploying that capital into our gas business. We're beginning 2014 with a much stronger and robust balance sheet."

Consol reported a profit of $738.2 million, or $3.20/share, up from just $149.9 million, or 65 cents/share in 4Q2012. Income was $591.1 million from discontinued operations, up from $42.1 million a year earlier.

Consol said its gas division achieved record quarterly production of 48.5 Bcfe, driven mainly by a 56% increase in Marcellus Shale production. While earnings were primarily boosted by the coal mine sale and a $131 million tax benefit from a reversal of tax provisions in earlier quarters, its gas sales also increased from $143.5 million to $170.6 million last quarter.

The company's focus on natural gas development, though, has cost it in recent years. Revenue last quarter decreased 12% to $825.2 million, as total costs increased 2.4% to $809.4 million.

Company officials said they would target an 87% percent increase in Marcellus Shale production this year, which had Jim Rollyson, a financial analyst at Raymond James, concerned. He asked officials Friday if they expect capital expenditures to continue rising in the years ahead.

The company's liquidity at year-end was $2.1 billion, including $327 million in cash. Though it expects to outspend cash flow this year to foster coal and natural gas growth, Khani said the company expects to maintain its current liquidity through the end of 2014 on continued cost-cutting measures, aggressive hedging, improving drilling and completion techniques and land swaps over time.

"From 2012-2014 our gas capital has doubled to about $1.1 billion [see Shale Daily, Jan. 21], half of which is tied to our liquids activity," Khani said. "I want to remind you that 2014 capex sets up our growth for 2015, as it takes about six-plus months to drill and complete our multi-well pads. It is our goal to increase productivity at the wells and drive this capital number down.

"We have also been quietly increasing our land capital over the last two years to core up and find continuous acreage packages. That will continue over time and we expect to swap and sell Utica acreage to reduce land capital."

The company said it has been utilizing short stage lengths and reduced cluster spacing, which is expected to increase estimated ultimate recovery by 15-20% in the Marcellus (see Shale Daily, Jan. 24). On Friday, company officials said those techniques could be applied to all its acreage in Pennsylvania, Ohio and West Virginia moving forward. Lateral lengths have been increased from about 5,000 feet to nearly 8,000 feet and the company will also test shorter downspacing in the second half of 2014, President Nicholas Deluliis said, with the aim of reducing to 500 feet from about 1,000 feet in the Marcellus and 750 feet in the Utica.

As volumes continue to rise for the company, it also discussed the possibility of monetizing its midstream assets with the sale or formation of a master limited partnership. When pressed, though, company officials had little to say about when that might occur, or which route the company would take.

Consol reiterated 2014 production guidance of 215-235 Bcfe. It expects annual production guidance in 2015 and 2016 to increase by 30%.

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