Joint ventures (JV) in its domestic natural gas division helped Consol Energy Inc. to achieve record fourth quarter profits, but it said Thursday sustained low gas prices will require scaling back spending and drilling plans in 2012.
The Cecil, PA-based coal and gas producer reported a profit of $196 million (85 cents/share) in 4Q2011, up from $104 million (46 cents) in the year-ago period. Revenue totaled $1.4 billion. In 2011 Consol earned $632 million ($2.76/share), versus $347 million ($1.60) in 2010. 2011 revenue reached $6.1 billion.
Gas production in the last three months of 2011 jumped to 431 MMcf/d from 394 MMcf/d in 4Q2010. Total coalbed methane output was 23.8 Bcf, up 1% year/year. In the Marcellus Shale output was 7.2 Bcf net, which was 118% higher from the 3.3 Bcf produced in the year-earlier quarter. Conventional production fell 6% to 8.2 Bcf from a year ago, with more rigs and capital shifted to the higher returns in Marcellus and Utica unconventional targets.
Despite the record results, continuing low gas prices have forced Consol’s hand, said CEO J. Brett Harvey. Less than two weeks ago the company set its capital expenditures for 2012 at $1.7 billion. On Thursday the spending plan was reset at $1.5 billion, with $130 million of the cuts to be made within the Marcellus Shale division.
“We ended  on a good note,” said Harvey. “But markets change.”
Speaking to financial analysts during a conference call, Harvey said the company was “positioned well for a weak environment on energy. We’re hedged well and we’re in a solid position for opportunities with our partners in the gas business.”
The spending and drilling revisions from Consol’s Jan. 10 announcement “are occurring mostly because a combination of mild weather and high production, which has caused natural gas prices to drop to a 10-year low.” Gas investments in the Marcellus will be reduced to $130 million, with 23 gross wells (Noble/Consol) deferred. In total Consol and Noble now plan to drill 99 wells in the Marcellus this year.
However, even though there will be fewer wells, the cuts won’t impact 2012’s estimated production of 160 Bcf because the wells being deferred were not scheduled to be drilled until later this year. The cutbacks now actually will impact production beginning in 2013, he said.
“Less drilling in 2012…coupled with the postponement of some pad development spending for the 2013 drilling program is causing the company to reduce its 2013 production guidance to 190-210 Bcfe, which would be 10 Bcfe lower than the earlier projection. Consol’s 2015 goal of 350 Bcfe, however, remains unchanged because the drilling schedule in the out years has enough flexibility in it to accommodate a slightly reduced production goal in 2013.”
Nearly half of the forecasted gas production in 2012 also is hedged at $5.25/Mcf, CFO Bill Lyons said. The company this year will turn its attention to “reducing capital expenditures in gas and focusing on high returns in Marcellus liquids.”
It’s all about costs, said the CEO.
“We don’t control gas prices but we control costs,” Harvey told analysts. Consol’s two “powerful” JV partners are helping to allay some cost concerns, but deferring some spending and drilling into 2013-2015 would do the rest.
Hess Corp. paid Consol $593 million to acquire a half stake in nearly 200,000 net acres in eastern Ohio’s Utica Shale. Last August Noble Energy Inc. secured a $3.4 billion deal with Consol that gave it half of a 663,350 net-acre leasehold in Pennsylvania and West Virginia, including existing wells and midstream infrastructure (see Daily GPI, Aug. 19, 2011). The two partnerships, along with the sale of an overriding royalty interest to Antero Resources in October, generated gross proceeds to Consol of $841 million in 2011.
Last year Consol’s gas output was a record 153.5 Bcf net, which was 20% higher than in 2010. Gas production actually would have been about 25% higher had Consol not sold properties to Noble and Antero Resources last year (see Daily GPI, Oct. 3, 2011).
“Our record results were even more impressive when one realizes that, on the gas side, weakening gas prices throughout 2011 largely offset our record gas production,” said Harvey. “For Consol, 2011 was a year characterized by our ability to seize opportunities and, in some cases, to create opportunities.”
Because of the strategic JVs it put into place, “we are flexible on our assets,” said Harvey. “We are able to maintain where we’re at and these projects, whether in gas or coal, are discretionary to us based on the rate of return and forward looking markets.”
Consol’s news to reduce its gas drilling and spending follows a pattern that began on Monday when Chesapeake Energy Corp. said it would cut dry gas spending by 70% this year and slice in half operated gas drilling activity (see Daily GPI, Jan. 24). In just the past couple of days other producers also have announced plans to reduce their onshore gas drilling plans, including ConocoPhillips, which Wednesday said it was shutting in 100 MMcf/d (see related story and Daily GPI, Jan. 26a; Jan. 26b).
Harvey said the influx of cash from the gas transactions, along with the record cash flow from operations in 2011 of $1.5 billion, “considerably strengthened the company’s financial position during a time of economic uncertainty.” With 2011 capital expenditures of $1.4 billion and dividends paid of $96 million, the company was slightly cash flow positive, even before considering the proceeds received from the gas transactions.
Tudor, Pickering, Holt & Co. said in a note Thursday the decision to reduce gas spending “looks good.” Based on analyst calculations, Consol will reduce its 2012 Marcellus well count by 19% and shave spending by 23% from its initial spending plans.
Analyst Lucas Pipes of Brean Murray Carret & CO. called Consol’s decision “sensible” and said it “should be rewarded by investors.”
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