From Sterne Agee analysts today on CONSOL Energy 2Q 2014 report:
CONSOL ENERGY (NYSE: CNX) Flash Note
Price Target: $56.00
Analysts: Michael S. Dudas, CFA (646) 376-5329 / Satyadeep Jain, CFA (646) 376-5357
Higher Coal Costs Contributed to EPS Shortfall; Gas Costs Impressive. Pittsburgh Seam Reserve Increase By More Than 30%
While 2Q EPS missed on higher coal costs and other line items, Consol's gas production costs dropped significantly driven by higher Marcellus contribution. Also, 30% coal reserve increase supports long-term, low-cost profile of Consol's core coal asset. Monetization of midstream assets appears on track. Liquidity remains strong at $1.9 billion. Shares remain our top pick in the mining space and one of Sterne Agee's top 2014 stock picks. Recent sector correction provides attractive entrypoint.
• 2Q'14 Results – Consol reported 2Q'14 adjusted earnings of $0.07/share vs. our $0.25 and street's $0.23 estimate. Adjusted EBITDA of $246M fell slightly short of our $254M and street's $258M estimate. Coal and gas production results were in line with pre-announced figures. Geological issues at Enlow Fork impacted 2Q coal production costs. As a result, thermal total production costs increased sequentially to $46.44/ton from $41.45/ton in 1Q'14. Average gas realization of $4.44/mcfe (thousand cubic feet equivalent) came in below our $4.69/mcfe estimate. However, total gas costs dropped to $3.44/mcfe, below our $3.67/mcfe estimate. Costs decreased primarily due to 120% increase in Marcellus gas sales volumes. As a result, gas margin of $1.00/mcfe came in line with our estimate, and above 2Q13 margins of $0.69/mcfe.
• 2014 Guidance – Consol recently raised the lower end of its 2014 gas production guidance by 10 Bcfe to 225-235 Bcfe and maintained 2015-16 annual production growth targets of 30%. Consol recently lowered Buchanan met coal production guidance from 3.6-4.2 MT to 3.4-3.8 million tons (MT). Management expects to ship 5 MT of met (low and high vol) in 2014. We are pleased to see Consol exercise production discipline at Buchanan given current depressed met coal prices. Management expects to increase its 2015 domestic sales of Buchanan coal by 50%. During the past three months, we estimate Consol did not hedge any significant additional gas volumes for 2014-15. We estimate the company priced nearly 4 MT of additional thermal coal for 2015 at $57/ton, below our expectations.
• Gas Business - In Noble County, Ohio, Consol recently turned on line its 3-well NBL 19 pad with an impressive initial production (IP) rate of 23 MMcfe (million cubic feet equivalent) per day, per lateral. In 2014 Consol expects to turn NBL16 wells on line in August, NBL18 pad in October, and NBL30 pad in September. The company also reported encouraging IP rates from its wells in Central Pennsylvania (7.8 MMcf per day at the 3-well Shaw pad in Westmoreland County) and North Wet Gas area (8-well WFN6 pad) in Marcellus. Consol remains long firm transportation and has structured its capacity contracts to allow for 30% growth targets through 2016. Consol and its joint venture partner recently announced their intention to form an MLP (master limited partnership) for their midstream gathering services. If we they do decide to go ahead, we expect closing in late 2014/early 2015.
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The Ohio Environmental Council, a statewide eco-group based in Columbus.
Earthjustice, a national eco-group.
People's Oil and Gas Collaborative-Ohio, a grass-roots group in Northeast Ohio.
Concerned Citizens of Medina County, a grass-roots group.
No Frack Ohio, a Columbus-based grass-roots group.
Fracking: Gas Drilling's Environmental Threat by ProPublica, an online journalism site.
Pipeline, blog from Pittsburgh Post-Gazette on Marcellus shale drilling.
Allegheny Front, environmental public radio for Western Pennsylvania.