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Consol Exec Says Cone IPO Is Just the Beginning

Consol Energy Inc. and Noble Energy Inc.'s bid to take their midstream assets public paid off in a big way Thursday. The market debut found their master limited partnership (MLP) raising more than expected, and shares skyrocketed in a nod of confidence for one of the largest midstream systems yet to go public in the Appalachian Basin.

MLP Cone Midstream Partners LP has been three years in the making. It was formed shortly after Consol and Noble's joint venture (JV) in 2011 (see Shale Daily, Oct. 5, 2011). The companies announced in June their intention to take the system public, and after guiding for their units to be offered at $19-21, investors scooped up 17.5 million at $22 each, helping Cone raise $385 million and sending the price up on Thursday more than 38% from where it opened to finish at $30.40 on the New York Stock Exchange (see Shale Daily, Sept. 25; Sept. 17; June 12).

"When we created this [JV], we also created the Cone gathering system as a separate entity," MLP CFO David Khani told NGI's Shale Daily. "We anticipated that we were either going to monetize the assets with a sale or with an MLP. It was a start and we now know these systems have been very well received, especially in the low-cost Marcellus basin with 20 or 40 years of drilling and the Utica and Upper Devonian looking promising. We created Cone with something like this in mind."

To be sure, the move to take Cone public comes at a time when initial public offerings (IPO) across nearly all sectors are experiencing warm welcomes and surpassing expectations. IPOs for midstream MLPs, though, have been particularly successful. Last year, according to consulting firm PwC, 24 energy-related IPOs, raised about $10.9 billion, of which 20 were MLP's with proceeds of $5.2 billion and that momentum has continued unabated this year (see Daily GPI,Feb 14).

Yet Consol, where Khani also serves as CFO, only recently said it would go full-throttle as an exploration and production company. It announced late last year that it would focus heavily on natural gas after 150 years of leaning on coal to drive profits (see Shale Daily, April 8; Oct. 28, 2013). Likewise, Houston-based Noble Energy only recently set a company Marcellus production record in the first quarter (see Shale Daily, April 24), with officials admitting at recent regional oil and gas conferences that they were still an early entrant, lacking the sort of expertise that other larger producers have in the basin.

Cone factors into both companies’ growth strategies, Khani said. And as he put it, after 20 years on Wall Street, he knows that it will be a difficult challenge to keep investors riding Thursday's highs.

"[Cone] really does provide a public vehicle now that everyone can see. Consol has had very long-term relationships with shippers in the area, whether it be Dominion or others," he said of Consol's role as a Pittsburgh-based gas producer, which began with coalbed methane in the 1980s. "This MLP brings to light what we've been doing for a long time, and we're relying on this team to keep up with the growth that's projected in this play. I think investors took a lot of comfort in that, too...It puts value and creates a good stream of cash flow over time that will satiate the kind of investor that wants comfort as opposed to other [midstream MLPs] with significant capital needs.

"We carved out this entity to show how we're growing."

Following the IPO, Consol and Noble retained significant ownership interests in the midstream system, which covers about 500,000 net acres and currently serves the JV's 520 MMcfe/d of production. Both E&Ps will be responsible for a larger share of capital expenditures associated with the ongoing buildout of the systems.

The structure, Khani said, will allow a steady stream of cash flow at the Cone level over time and insulate it from the capital intensive nature of the midstream business, while also providing for organic growth and dropdown opportunities.

"We were trying to solve a very big problem that MLPs have," Khani said. "They need a lot of cash flow, and they need to spend a lot of capital to generate that cash flow. I think this is a model that you'll see others copy. There is some production sitting above the MLP level. We'll have dropdown capability that will be built up, but we won't need dropdown growth for a couple years."

Currently, Cone's assets consist of 127 miles of anchor system pipeline, or the "backbone," as Khani called it. The existing anchor system is expected to generate a substantial amount of cash flow, while an additional 27 miles of growth system pipeline will require significant expansion and capital expenditures. Those assets will be reinforced by a few miles of  "additional systems" that are expected to create stable cash flow and require little capital.

Throughput on the anchor system is averaging about 497 million Btu/d from the 281 gross producing wells in West Virginia and Pennsylvania that are hooked up to it. Khani said he couldn't disclose the number of additional wells that might be tied-in next year because those numbers have not been publicly released.

When asked, though, Khani said Cone is poised for growth. Contractual commitments with processors and shippers total about 2 Bcf/d, and with excess capacity already on hand, the JV is planning for more through 2019, he said.

Consol and Noble will each own more than a 30% limited partner interest in Cone. Along with Khani, John Lewis of Noble will serve as CEO and Kirk Moore, also of Noble, will serve as general counsel. Joseph Fink from Consol will round out the management balance and serve as COO of Cone.

When asked if he was pleased with Thursday's IPO, Khani was cautiously optimistic.

"This was very well received, but it's now the starting point," he said. "This is nice; it's great, but I've been on Wall Street for 20 years and I know that at the end of the day, we have to deliver for the investors."

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