From Sterne Agee analysts in New York:





CONSOL ENERGY (NYSE: CNX) RATING: BUY

Price: $43.93

Price Target: $56.00



Analysts: Michael S. Dudas, CFA (646) 376-5329 / Satyadeep Jain, CFA (646) 376-5357

Effective Capital Allocation Driving Growth in Gas, Cash Flow in Coal; Raising 2014 Estimates - Reaffirm Buy



Our Call

Solid results with lots of positive energy emerging at Consol. Upside surprise on significantly higher gas realizations, impressive thermal cost performance, and nice drop in Marcellus unit costs. Consol remains long firm gas transportation, and should arrive at a decision on monetization of midstream assets within the next few months. Thermal coal markets are improving while met remains weak. Shares appear to be establishing upward momentum and remain a top pick.



Poised for Gas Growth - Consol continues to expect 2014 gas production guidance at 215-235 Bcfe with 30% production growth targets through 2016. Consol remains long firm transportation and has structured its capacity contracts to allow for 30% growth targets through 2016. In Marcellus, WFN3 pad in Majorsville came on line during 1Q14 at an impressive peak rate. Management remains hopeful of a decision on monetizing its midstream business in next few months. We believe a potential $400-$525 million value could be capitalized.



Management sees solid demand for its thermal coals, while met remains weak. Consol seems to be on path towards exercising some production discipline at Buchanan. In the PJM market, coal inventories at the end of February dropped to just over 12 MT, the lowest since 2001. Given low coal and gas inventories, post MATS, Consol believes capacity factors at the remaining more efficient coal plants would have to increase for the country to meet its energy needs.



Balance Sheet and Liquidity We believe Consol has a strong balance sheet, with year-end total liquidity of $2.1B. We expect free cash from the new BMX mine, midstream gas asset monetization, $335M carry contribution from JV partners, $115M income tax refund, opportunistic gas hedging, and cash generated from the Murray transaction to help Consol fund its $1.5B capital budget for 2014.



Our 2014-15 Estimates We have lowered our met but raised our thermal and natural gas price expectations. We have raised our 2014 EBITDA estimate from $900M to $1.1B and EPS from $0.65 to $1.40. We have also raised our 2015 EBITDA estimate from $1.3B to $1.4B but maintained 2015 EPS at $1.85.



Investment Summary - We believe that as additional, smaller sized, non-core asset sales emerge, thermal prices continue to improve, and metallurgical coal market prices normalize, and Consol's shale profile achieves targeted growth, the valuation gap should continue to narrow during the next 12-18 months. We support our $56 target using asset valuations for coal and gas businesses.