From New York-based Sterne Agee analysts Michael Dudas and Satyadeep Jain on Tuesday:
CONSOL ENERGY (NYSE: CNX) Flash Note
Price Target: $56.00
Strong Gas Volume and Cost Performance Amid a Very Active Quarter - Reaffirm Buy
While managing lower spot coal and gas pricing during the quarter, Consol generated above targeted volume and lower operating costs in gas, de-risked coal margins and cash flow through contracting, and added value through liquids and Utica output. Management continues to make progress on non-core asset sales throughout its portfolio and its liquidity remains strong at $2.0 billion. Shares remain underpriced.
• 3Q'14 Results – Consol reported 3Q'14 adjusted earnings of $0.09/share vs. our $0.20 and Street's $0.19 estimate. Adjusted EBITDA of $236M fell short of our $258M and Street's $252M estimate. Average gas realization of $3.97/mcfe (thousand cubic feet equivalent) came in below our $4.53/mcfe estimate on basis differentials for Appalachian market sales points. However, total gas costs dropped to $3.12/mcfe, below our $3.58/mcfe estimate. Costs decreased primarily due to increase in Marcellus gas sales volumes. Gas margin of $0.85/mcfe came below our $0.95/mcfe estimate, and 2Q14 margins of $1.00/mcfe. Thermal coal pricing came in below expectations on roll-off of some legacy business and higher spot sales. Buchanan production costs dropped sequentially to almost $60/ton. We believe Buchanan has the lowest cost structure of all met mines in US.
• 2014 Guidance – Consol raised its 2014 gas production guidance to 235-240 Bcfe (up from 225-235 Bcfe) and maintained 2015-16 annual production growth targets of 30%. Management is targeting 4Q gas production of 70-75 billion cubic feet equivalent (Bcfe). 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 4.2 MT of additional thermal coal for 2015 during 3Q at prices below our expectations. Consol has priced 75% of its 2015E thermal coals; management expects to price 90% of 2015 thermal coals by 2014-end.
• Gas Business - 3Q Marcellus gas production increased 76% year-on-year (y/y) to 30.7 Bcfe. All in, Marcellus cash costs dropped to just $1.58/mcfe. 3Q Utica production volumes were 6.8 Bcfe vs 0.2 Bcfe in 3Q13. Consol remains long firm transportation and has structured its capacity contracts to allow for 30% growth targets through 2016. We expect natrual gas should average $4.00 per mcf through 2016 with volatility. While Consol's carry would likely be suspended beginning November, we would hope to see a resumption during Q1 2015.
• Balance Sheet and Liquidity – Consol ended 3Q14 with total liquidity of $2.0B. During 3Q, Consol executed $86M of non-core asset sales, including sale of portion of Illinois Basin coal reserves in Hamilton County. We believe Consol controls many liquidity levers to fund its gas growth that others in the basin do not profile. With our 2015 price deck, we would expect Consol to generate $1B in operating cash flow, which together with non-core asset sales and Joint Venture carry, should position Consol to meet capital targets.