Consol Energy Inc. ended the first quarter looking more like a pure-play exploration and production (E&P) company, with just one remaining coal complex on its books and the natural gas division accounting for 71% of its pre-tax earnings.
Calling the $460 million sale of its premiere Buchanan Mine and associated metallurgical coal assets in three states that occurred in February a "watershed event" in the separation of its coal and gas businesses, CEO Nicholas Deluliis said the company is now better positioned to weather the lower commodity price environment (see Shale Daily, Feb. 29). The sharp reduction in E&P, coal and corporate costs that have finally come after years of reorganizing its business were evident on a balance sheet that's now tailored to a natural gas producer.
The company's borrowing base was reaffirmed at $2 billion. Proceeds from the Buchanan sale were used to pay down debt, increasing liquidity to $1.3 billion during the period and easing investors' near-term concerns. A leaner balance sheet also helped the company generate $449 million of free cash flow during the quarter, when its capital expenditures were just $79 million.
Consol reported record production of 97.5 Bcfe, up 36% from the year-ago period when it produced 71.6 Bcfe and up from the 95.5 Bcfe it produced in the fourth quarter (see Shale Daily, Jan. 29). The Marcellus Shale continued to drive production gains, accounting for 51.2 Bcfe, but the Utica in both Ohio and Pennsylvania continues to be a strong focus for the company. Consol produced 22.9 Bcfe in the Utica, well above the 9.6 Bcfe it produced there in the year-ago period.
"We are starting to see the dry gas Utica Shale play come into the mix and help further lower costs, and we expect the exciting play to become a much bigger part of our future development program," Deluliis said.
While it has idled its drilling program this year, the company remains particularly focused on its dry gas areas, where it's working to whittle away at a backlog of drilled but uncompleted (DUC) wells (see Shale Daily, April 7). Lower processing costs, increased line pressures with more takeaway and more efficient drilling and completion techniques, management said, have it considering adding a rig in Monroe County, OH, this year.
Better-performing wells means fewer of them and lower maintenance costs, as well. The E&P divisions unit costs declined to $1.33/Mcfe during the first quarter, down from $1.70/Mcfe in the year-ago period.
"With continually improving well performance and our top 100 wells experiencing line pressures in excess of 1,000 psi, production decline rates are less than anticipated, which has resulted in fewer wells needing to be turned inline to meet our production goals," COO Tim Dugan said. "Consol pushed nine horizontal completions and two more horizontal turn inlines out of our 2016 plan. As a result, assuming our base case plan of no drilling activity in 2016, we expect our inventory of both drilled uncompleted and drilled completed wells entering 2017 to be 73 Marcellus and six Utica shale wells."
Management cautioned that production growth could level off in the second half of the year, with its turn inline activity front-end weighted. While Dugan said Utica results during the first quarter were "extremely encouraging," he said the company continues to evaluate pressure drawdown methodology, proppant type and mix and optimal inter-lateral spacing in the play, adding that the company is still in the early stages of development.
"Ideal spacing between well bores is an ongoing evaluation, while we have seen success at our initial 1,000- to 1,100-foot spacing, reservoir evaluation indicates that the Utica wells are capable of draining a larger areal extent, which may lead to longer laterals with wider spacing."
The company still struggled with low commodity prices, particularly in the Appalachian Basin, where heating degree days during the first quarter were 17% below normal causing regional spot prices to decline to their lowest point since 2003.
The company's average sales price was $2.73/Mcfe in the first quarter, compared to $3.56/Mcfe in the year-ago period. Consol added 190 Bcf of additional gas hedges through 2019 to continue protecting its downside. It has 262.6 Bcfe hedged for this year.
Lower commodity prices pushed revenue down to $558.5 million in the first quarter, down from $792.7 million at the same time last year. Consol reported a net loss of $50 million (minus 22 cents/share), compared to net income of $79 million (34 cents/share) in 1Q2015.