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Consol Reports Wider 2Q Loss, Slashes Capex, Postpones IPO

After reporting a wider than expected loss for the second quarter, Consol Energy Inc. said it plans to lay down its two operated rigs and won't drill any additional oil and gas wells for the next 18 months, while slashing its capital expenditures (capex) budget for exploration and production (E&P) for the remainder of the year.

Meanwhile, executives with the Cecil, PA-based company said they believe they have more than $2 billion of assets that could be monetized to help meet its goal of generating free cash flow during the second half of 2015, but have decided to table an initial public offering (IPO) of the metallurgical coal business.

On Tuesday, Consol reported a net loss of $603 million (minus $2.64/share) for 2Q2015, which included an $829 million pre-tax impairment in the carrying value of its oil and gas assets, primarily because of depressed New York Mercantile Exchange forward prices. By comparison, the company reported a net loss of $25 million (minus 11 cents/share) in 2Q2014.

During an earnings call Tuesday, CFO David Khani said the company expects basis differentials for natural gas to remain under pressure for 3Q2015 (down 95 cents/Mcf) and for the full year (down 55 cents/Mcf), but both prices and basis are expected to improve in 2016. In the meantime, Consol plans to reduce the capex budget to $800 million from $1 billion announced last January (see Shale DailyJan. 30). He added that the 2016 capex budget would range from $400 million to $500 million, depending on Nymex prices.

"We now have over $2 billion of assets to be monetized,” Khani said. “Now, I cannot comment on specifics, but know that we have several processes going on that should increase our free cash flow beyond our novel assumptions.” He later added that "some of these opportunities are large and do in fact move the needle, so there is upside to our current cash forecast."

CEO Nicholas DeIuliis said that in order for the company to become cash flow positive during the last half of this year, it is  "assuming only a modest level of asset sales, because asset sales are not entirely within our control.

"We've redoubled our effort to monetize assets. If we exceed...our asset sales expectations, or if the market begins to improve earlier than predicted, we'll be in a position to repurchase either our highly undervalued shares or our highly undervalued debt or take other aggressive actions with respect to operational plans and footprint."

Last week, majority stockholder Southeastern Asset Management Inc., which owns a 21% stake, said selling or spinning off the natural gas division, CNX Gas Co., was in order (see Shale DailyJuly 22).

DeIuliis did not mention Southeastern Asset by name during the conference call, but he said the company was "honoring our new culture of not accepting the status quo, and we're taking aggressive actions to position the company for the road ahead and we will continue to be aggressive.

"As we said at the outset, we'll continue to make decisions to drive NAV [net asset value] per share. In fact, we are more committed than ever, more confident in our plans to do just that."

Consol said it would drop its two operated rigs this quarter through 2016. But the company still would be able to grow natural gas production by 30% this year, to 300-310 Bcfe, followed by an additional 20% in 2016. COO Tim Dugan said the company would accomplish the growth in the core of southwest Pennsylvania’s Marcellus Shale, as more infrastructure debottlenecks the region.

"Starting in 3Q2015, Consol will make a series of incremental midstream improvements such as looping lines, adding compression and increasing tap capacity, which will drive additional production,” Dugan said. “These improvements will occur in incremental steps over the next 18 months.” He added that Consol would exit 2015 with a moderate inventory of wells in progress, putting it in "a strong position for rapid growth in 2H2016 or 2017, when market conditions warrant."

Consol reported that flowback is underway at its Gaut 41H well, which targets the dry Utica Shale in Westmoreland County, PA. The well had a 24-hour flow rate of more than 61 MMcf/d, making it the second-best dry Utica well drilled to date. Dugan said the well, which has a 5,840-foot lateral, was drilled and completed for about $27 million.

"There will be tremendous improvement in costs as we move forward with additional wells, but most importantly the Gaut [well] proves up a significant amount of dry Utica acreage and adds 15-plus years to our already impressive inventory of drillable stacked play wells," Dugan said. As Consol moves further into the Utica, it plans more stacked play development. "The Gaut was drilled on a distinct Marcellus pad, so we are able to utilize existing infrastructure, and that's really, in general, the plan forward with a majority of our Utica development."

Consol is a joint venture (JV) partner with Noble Energy Inc. in the Marcellus Shale and with Hess Corp. in the Utica.

Earlier this month, Consol said it would lay off 470 employees in its coal and gas divisions due to low commodity prices, and also warned investors to be wary of its upcoming 2Q2015 earnings. The company has laid off more than 600 employees so far this year (see Shale DailyJuly 20July 14).

Although opportunities abound, DeIuliis said an IPO of the metallurgical coal business MetCo, which had been planned for 4Q2015, was on hold.

"Due to the continued pressure on MetCo pricing, we decided to put this transaction on hold and instead we're evaluating additional opportunities," DeIuliis said, adding that one possibility would be to drop its Buchanan coal mine in southern Virginia into CNX Coal Resources LP (CNXC), which went public on June 15. Another possibility would be to partner with a third party, growing assets through consolidation.

"We expect to make a decision on the strategic direction of this entity by year-end and regardless of that decision, it doesn't change the structure that we already have in place nor into our ability to execute our strategy," DeIuliis said.

In a note Tuesday, analysts with Jefferies LLC said it expected "a positive reaction” from investors “despite the wide earnings per share loss, given its re-doubled balance sheet focus, Consol's 'oversold' condition and its high short interest." The firm added that it thought production growth in 2017 "will be much lower" following a capex budget of $400-500 million in 2016, "but look for Consol to increase the budget if gas prices increase materially by mid-2016."

Jefferies said it had previously estimated Consol would post a gain of 2 cents/share for 2Q2015, while the consensus on Wall Street was breakeven.

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