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Consol Hits Record 70.5 Bcfe in Production YOY

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   |    Friday,January 30,2015

CONSOL's E&P Division had another outstanding quarter by achieving record production of 70.5 Bcfe, or an increase of 45% from the 48.5 Bcfe produced in the year-earlier quarter. CONSOL's annual 2014 production was 235.7 Bcfe, which exceeded its goal of 30% production growth over 2013. CONSOL Energy's annual gas production guidance remains 30% growth for 2015 and 2016.

During the quarter, a midstream company that handles and processes some of CONSOL's gas and liquids had a fatality on one of their sites, during their operations. This tragedy unearthed operational standards that led CONSOL to question the safety procedures of the company. As a result, over the course of the quarter CONSOL elected to shut-in pads serviced by this midstream provider while safety processes and procedures were evaluated and validated by CONSOL. As a result of this process, CONSOL estimated that the shut-in pads accounted for 2.7 Bcfe worth of lost production in the quarter. Operations are ramping-up in this area and should be back to normal levels by the end of January.

Nicholas J. DeIuliis, president and CEO, commented: "Even though we have set high operational and production targets for the company, make no mistake about it, we are not willing to compromise our number one core value of 'safety,' just to reach or exceed operational goals. CONSOL's core values represent the foundation of this company, and there is nothing more important than upholding them. I'm really proud of our team and how they handled this situation, ultimately demanding something better from this particular company."

Marcellus Shale production volumes in the 2014 fourth quarter were 36.5 Bcfe, or 88% higher than the 19.4 Bcfe produced in the 2013 fourth quarter. Marcellus Shale costs were $2.83 per Mcfe in the just-ended quarter, which is a $0.18 per Mcfe improvement from the fourth quarter of 2013 costs of $3.01 per Mcfe. The company achieved all-in cash costs of only $1.71 per Mcfe in the Marcellus Shale.

CONSOL Energy's Utica Shale continues to become a bigger part of the production mix, and in the 2014 fourth quarter, volumes were 7.1 Bcfe, up from 0.5 Bcfe in the year-earlier quarter. Utica Shale costs were an impressive $2.24 per Mcfe in the just-ended quarter, which is a substantial improvement from the fourth quarter 2013. Rapidly increasing volumes and lower gathering and transportation costs have contributed to lower unit costs. The Utica Shale continues to benefit from higher-value condensate and NGL production, which in the quarter was 1.0 Bcfe and 1.9 Bcfe, respectively, up from negligible amounts in the year-earlier quarter.

DeIuliis added: "Despite the current commodity price environment, CONSOL continues to realize strong rates of return due to our tier one asset base, which allows us to drive efficiency improvements and continue to benefit from being a low-cost producer. CONSOL will not only continue to manage through these types of commodity cycles, but we will also capitalize on them as well through share repurchase opportunities. Our strong balance sheet and substantial liquidity position will help fuel these types of opportunities."

E&P Division

E&P Fourth Quarter Summary

The tables below summarize the quarterly comparison of key metrics for the E&P Division. Production increased by over 45% in the just-ended quarter, when compared to the year-earlier quarter, while revenue increased by over 30% for the same period. These metrics enabled the E&P Division to post net income of $36.5 million in the current quarter, compared to net income of $1.9 million in the year-earlier quarter.

During the quarter, the E&P Division's capital expenditures of $251.6 million helped the company continue drilling and completion investments to achieve its production growth targets. CONSOL's quarterly capital expenditures were net of $82.3 million of drilling carry from its joint venture partner in the Marcellus Shale and $29.2 million of carry from its joint venture partner in the Utica Shale. For the full year 2014, CONSOL received $185.4 million and $100.4 million from its joint venture partners in the Marcellus and Utica shales, respectively.

CONSOL continued to successfully develop its core operating areas in the Marcellus and Utica shales throughout the quarter. In the Marcellus Shale, CONSOL drilled four wells in the Philippi Field in Barbour County, West Virginia, and the company was also able to confirm previous positive results at the Audra Field along the corridor of the planned Tygart Valley pipeline. CONSOL also drilled four Burkett wells in Washington County during the quarter. These new Upper Devonian wells were drilled on existing Marcellus pads, which allowed CONSOL to benefit from cost efficiencies associated with stacked pays. In addition to Upper Devonian, a second stacked pay opportunity is progressing in the dry Utica in Monroe County, Ohio. The company is drilling its first pad with four Utica wells and one wet Marcellus well, and the company expects production in the third quarter of 2015. In Marshall County, West Virginia, CONSOL's joint venture partner is drilling a dry Utica well on a seven well Marcellus pad. CONSOL also plans to drill two additional dry Utica wells: one in both Greene and Westmoreland Counties, Pennsylvania. CONSOL's geological view, along with existing industry data, will help delineate CONSOL's sizable leasehold in West Virginia and Pennsylvania for additional stacked pay opportunities. CONSOL expects production for these three dry Utica wells in the second and third quarters of 2015.

CONSOL Energy and Columbia Energy Ventures, LLC (CEVCO) recently completed a transaction involving the oil and gas rights in CEVCO's Majorsville gas storage field. The storage field spans approximately 20,000 acres and is located in Washington and Greene Counties, Pennsylvania, and Marshall and Ohio Counties, West Virginia. CONSOL has the exclusive right to explore, drill, and develop oil, gas and other hydrocarbons in the Utica Shale formation within the storage field. CEVCO has a minor, non-operating participation interest in the development of the Utica rights in the storage field. According to CONSOL's analysis, the storage field suggests that the company can drill up to 125 Utica wells from 23 pad sites.

CONSOL's E&P division production in the quarter came from the following categories:

Liquids production of 8.5 Bcfe, as a percentage of the total of 70.5 Bcfe, was approximately 12% in the just-ended quarter.

The average sales price per Mcfe within the E&P Division was impaired in the just-ended quarter, when compared to the year-earlier quarter due in part to the decline in commodity prices and regional basis differentials. Helping to offset decreases to gas prices is a greater proportion of liquids production, which receives higher unit pricing.

The average sales price of $3.90 per Mcfe, when combined with unit costs of $3.19 per Mcfe, resulted in a margin of $0.71 per Mcfe. This was flat when compared to the year-earlier quarter, as unit cost improvements helped to offset the decreases in price realizations from weaker regional basis.

Unit costs were improved in the just-ended quarter, as fixed costs, such as direct administration, were spread over higher production volumes. Unit costs were also improved, as low-cost Marcellus and Utica Shale production represented a much higher proportion of total production.

All-in unit costs in the Marcellus Shale category were $2.83 per Mcfe in the just-ended quarter, or a decrease of $0.18 per Mcfe from the $3.01 per Mcfe in the year-earlier quarter. Marcellus Shale unit costs were improved in part by volumes increasing 88%, when compared to the year-earlier quarter. Partially offsetting Marcellus unit cost improvements were slight increases in gathering and transportation costs associated with fees related to liquids gas processing.

E&P Marketing and Transportation Update

During the quarter, CONSOL's average gas sales price was $3.90 per Mcfe. This gas equivalent price includes a $0.20 per Mcfe uplift from the sale of natural gas liquids, oil, and condensate. Excluding the liquids uplift, CONSOL's gas price was $3.70 per Mcf for the fourth quarter, including hedging. During the quarter, CONSOL produced liquids volumes of 8.5 Bcfe, or 12% of the company's total volumes. These liquids volumes were over five times greater than the year-earlier quarter, which then comprised 3% of the company's total volumes. The average realized price for liquids for the fourth quarter of 2014 was $32.40 per barrel. CONSOL expects to continue to realize a liquids uplift benefit as additional wells are brought online in the liquid-rich areas of the Marcellus and Utica shales.

The company currently has a total of 1.4 Bcf per day of effective firm pipeline transportation capacity.  This capacity supports the majority of projected volumes through 2016 and is composed of 0.8 Bcf per day of existing firm capacity, contracted volumes of 0.4 Bcf per day under precedent agreements with several pipeline projects that will be completed over the next few years, and 0.2 Bcf per day of long-term firm sales with major customers that have their own firm capacity. The average demand cost for the existing firm capacity is approximately $0.25 per MMBtu. The average demand cost for existing and expected future firm capacity is approximately $0.33 per MMBtu.

CONSOL Energy continues to develop a diversified portfolio of firm transportation capacity to support its production growth. The company is confident that its current contractual capacity, combined with future pipeline expansion projects, will ensure that CONSOL's growing gas production will flow onto the major interstate pipelines, while diversifying basis exposure. Large electric and gas utilities have shown a great deal of interest in these pipeline projects. CONSOL is in active negotiations with various pipeline companies regarding cost-effective transportation options that reach attractive markets.

In addition to firm transportation capacity, CONSOL has developed a processing portfolio that supports its increasing production of wet gas. The company has agreements in place to support the processing of 289 MMcf per day of gross gas volumes growing to more than 399 MMcf per day by year-end 2015. Processing supported by these agreements is expected to cover essentially all wet gas production in 2015 and be adequate to process projected wet gas production well into 2016. CONSOL plans to continue to layer in processing capacity with existing and new midstream companies as needed to support the liquids development plan.

CONSOL Energy continues to sell the majority of its natural gas liquids through the large midstream companies that process our gas. This approach allows CONSOL to take advantage of the processors' transportation efficiencies and diversified markets. CONSOL's processing contracts provide for the ability to take its NGLs "in kind" and market them directly, if desired. The processed purity products are ultimately sold to industrial, commercial, and petrochemical markets.

CONSOL is also developing a diversified approach to managing ethane. In addition to term sales, the company executed several spot deals to move ethane to Mont Belvieu via the ATEX pipeline. CONSOL will also realize ethane value through blending capabilities. Employing this multi-faceted approach enables the company to meet pipeline quality specifications, diversify the ethane portfolio, and maximize ethane pricing. CONSOL is actively discussing future outlet opportunities with a number of ethane customers and midstream companies.

E&P Division Guidance

First quarter 2015 gas production, net to CONSOL, is expected to be approximately 70 – 74 Bcfe, while annual 2015 production is expected to be between 300 –  310 Bcfe, or 30% growth compared to 2014 total production. CONSOL Energy continues to expect 2016 annual gas production to grow by 30%.

Total hedged natural gas production in the 2015 first quarter is 29.9 Bcf, at an average price of $4.05 per Mcf. CONSOL uses a dual-track approach to its gas hedging. The company uses a program approach to add a base level of hedges and layers in additional opportunistic hedges set at a higher price threshold. During the fourth quarter, the company raised its 2015 gas hedge position from 27% to 45%.

The hedged gas volumes shown in the previous table include the following NYMEX hedges that have basis hedged as well.


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