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Consol Ramps Up Marcellus, Utica Volumes 48%; Narrows Ops
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CONSOL Energy Inc. reported net income of $79 million for the quarter, or $0.34 per diluted share. This compares to net income of $116 million, or $0.50 per diluted share from the year-earlier quarter, which included a loss from discontinued operations of $6 million.
After adjusting for certain one-time items, which are listed in the EBITDA reconciliation table, the company had adjusted net income1 in the 2015 first quarter of $85 million, or $0.37 per share. Adjusted EBITDA1 from continuing operations was $266 million for the 2015 first quarter, compared to $310 million in the year-earlier quarter. Cash flow from operations in the just-ended quarter was $228 million, as compared to $336 million in the year-earlier quarter.
CONSOL's E&P Division had another outstanding quarter by achieving record production of 71.6 Bcfe, or an increase of 48% from the 48.4 Bcfe produced in the year-earlier quarter. CONSOL Energy's annual gas production guidance remains at 30% growth for 2015 and 20% for 2016.
Marcellus Shale production volumes in the 2015 first quarter were 36.3 Bcfe, or 75% higher than the 20.7 Bcfe produced in the 2014 first quarter. Marcellus Shale costs were $2.62 per Mcfe in the just-ended quarter, which is a $0.56 per Mcfe improvement from the first quarter of 2014 costs of $3.18 per Mcfe. The company achieved all-in cash costs of only $1.67 per Mcfe in the Marcellus Shale, which continues to be the growth engine of the company.
CONSOL Energy's Utica Shale production volumes in the 2015 first quarter were 9.5 Bcfe, up from 1.2 Bcfe in the year-earlier quarter. Utica Shale costs were $2.48 per Mcfe in the just-ended quarter, which is a substantial improvement from the first quarter 2014. Rapidly increasing volumes continued to contribute to lower unit costs. CONSOL expects its Utica Shale program to expand due to the additional activity currently underway in Greene and Westmoreland counties, Pennsylvania; Monroe County, Ohio; and Marshall County, West Virginia. These dry Utica wells are expected to come online in the second half of the year.
Nicholas J. DeIuliis, president and CEO, commented: "Throughout the quarter we have continued to refine, and reduce, our 2015 E&P budget, while high-grading our development plan to maximize our rates of return in what continues to be a challenging commodity price environment. We continue to focus on areas within our control: driving drilling and completion efficiencies to lower capital and operating costs, working with our service providers to better align terms with current market conditions, and prudently maintaining a strong balance sheet and liquidity position."
CONSOL remains on-track to execute the previously announced transactions for a thermal coal MLP and MetCo initial public offering (IPO). The company recently filed a registration statement on Form S-1 with the Securities and Exchange Commission for the thermal coal MLP, which will be known as CNX Coal Resources LP, and CONSOL continues to expect a mid-year 2015 IPO. The company continues to expect the MetCo IPO to occur around early fourth quarter 2015.
The first quarter earnings results included the following pre-tax items related to recent transactions completed by the company:
- Recorded a $67.7 million loss on debt extinguishment; and
- Recorded an unrealized gain on commodity derivative instruments of $60.0 million.
CONSOL remains vigilant on reducing costs and has embraced and implemented zero-based budgeting across the company. As a result, over the past two months, CONSOL has reduced approximately $65 million of administrative and overhead costs and nearly $85 million of service costs related to the company's E&P capital, when compared to 2014. CONSOL expects to reduce approximately $80 million of E&P and coal operating costs in 2015 based on the company's most recent forecast, when compared to the company's earlier plan. CONSOL expects these administrative and overhead and E&P and coal operating costs reductions to carry into the future by continuing to focus on zero-based budgeting, and the company expects the full year benefit in 2016 to be greater than 2015.
Pre-tax income for the first quarter was $53 million. Adjusted pre-tax income1 in the first quarter was $61 million. During the quarter, the effective tax rate of negative 47.9% differed from the statutory federal rate of 35% on ordinary income largely due to a benefit from the percentage depletion deduction related to CONSOL's coal operations.
E&P Division
E&P First Quarter Summary
Production increased by 48% in the just-ended quarter, when compared to the year-earlier quarter. Despite increases to production, total quarterly sales revenue decreased by $12.1 million for the same period due to depressed commodity prices. As a result of decreases to revenue, the E&P Division realized net income of $30.9 million in the first quarter of 2015, compared to net income of $46.9 million in the year earlier quarter.
During the quarter, the E&P Division's capital expenditures of $250.3 million helped the company continue drilling and completion investments to achieve its production growth targets. CONSOL's quarterly capital expenditures were net of $27.9 million of drilling carry from its joint venture partner in the Marcellus Shale and $18.6 million of carry from its joint venture partner in the Utica Shale.
During the quarter, CONSOL narrowed its Marcellus development plan primarily to Greene, Washington and Allegheny counties in Pennsylvania; wet Utica development to Noble County, Ohio; and dry Utica development to Monroe County, Ohio. Operations outside of these areas of focus were initiated prior to the quarter. In the Marcellus Shale, during the first quarter, CONSOL drilled fifteen wells in Greene and Washington counties in Pennsylvania. CONSOL drilled eight wells at the Pittsburgh International Airport in Allegheny County, and completion activity recently commenced. During the quarter, within the Central Pennsylvania sub-region, a two-well delineation pad was drilled and completed in Jefferson County, and the company expects sales to occur early in the second quarter. Eleven wells were completed and twenty wells were turned in line (TIL) in Greene and Washington counties. Included in the twenty TILs in Greene and Washington counties were three Burkett wells and one Rhinestreet well, illustrating one of CONSOL's many stacked pay opportunities.
Dry Utica development progressed nicely in the first quarter as CONSOL drilled its second and third dry Utica wells in Monroe County, Ohio, with the fourth well underway. The Monroe County, Ohio pad will total four dry Utica wells and one wet Marcellus well. Also, CONSOL is currently drilling a single dry Utica well in Westmoreland County, Pennsylvania, which along with the four Monroe County wells, is scheduled for completion operations in the second quarter. CONSOL expects gas sales from the dry Utica wells in Westmoreland County, Pennsylvania and Monroe County, Ohio, in the third and fourth quarters, respectively. During the second quarter, CONSOL plans to drill a single dry Utica well in Greene County, Pennsylvania. In Marshall County, West Virginia, CONSOL's joint venture partner drilled a dry Utica well on a seven-well Marcellus pad. This well is scheduled for completion activity in the third quarter and will be TIL late in the quarter, or early fourth quarter, depending on pipeline availability. In Noble County, Ohio, CONSOL drilled and TIL one and four wet Utica wells, respectively, and continues to see excellent results. At the end of the first quarter, CONSOL had zero operated shale wells waiting on pipeline, demonstrating operational efficiency, and the company has twenty-nine wells that are drilled, cased, rig released and waiting on completion activity. The company has plans in place to selectively complete pads with the highest returns to optimize net income.
CONSOL's non-operated activity included completing seven wells in the highly productive Shirley-Pennsboro field of the West Virginia wet area. Within the area, some pads are being partially completed in order to optimize capital expenditure by aligning production and processing capacities with wells being brought on-line. As commodity prices improve and processing capacities are available, CONSOL expects a steady inventory of drilled wells to draw upon to quickly increase production.
The table below summarizes the quarterly comparison of key metrics for the E&P Division:
Liquids production of 8.1 Bcfe, as a percentage of the total of 71.6 Bcfe, was approximately 11% 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 to the decline in commodity prices.
The average sales price of $3.56 per Mcfe, when combined with unit costs of $3.05 per Mcfe, resulted in a margin of $0.51 per Mcfe. This was a decrease when compared to the year-earlier quarter even though the improvements in unit cost partially offset the decline in price realizations.
Unit costs were improved in the just-ended quarter, as fixed costs, such as direct administrative, were spread over higher production volumes. Unit costs were also improved, as low-cost Marcellus and Utica Shale production represented a higher proportion of total production.
All-in unit costs in the Marcellus Shale were $2.62 per Mcfe in the just-ended quarter, or a decrease of $0.56 from the $3.18 per Mcfe in the year-earlier quarter. The decrease in unit costs was primarily related to the 75% increase in total Marcellus sales volumes, including liquids, during the just-ended quarter, compared to the year-earlier quarter.
E&P Marketing, Transportation, and Processing Update
For the first quarter of 2015, CONSOL's average sales price for natural gas, natural gas liquids, oil, and condensate was $3.56 per Mcfe. CONSOL's average price for natural gas was $3.10 per Mcf for the quarter and, including hedging, was $3.58 per Mcf. During the quarter, CONSOL produced NGL, oil, and condensate volumes of 8.1 Bcfe, or 11% of the company's total gas equivalent volumes. These liquids volumes were over four times greater than the year-earlier quarter, which then comprised 4% of the company's total gas equivalent volumes. The average realized price for all liquids for the first quarter of 2015 was $20.95 per barrel.
CONSOL recently entered into an innovative sales agreement with a major utility customer that allows for contractual volumes to be either coal or natural gas depending on which one of CONSOL's products is more cost-effective for the utility for a given month. This agreement is an example of how CONSOL is using the strength of its coal and natural gas assets to provide unique value to its customers.
The company currently has a total of 1.1 Bcf per day of available firm transportation capacity. This is composed of 0.8 Bcf per day of firm capacity on existing pipelines and an additional 0.3 Bcf per day of long-term firm sales with major customers that have their own firm capacity. Additionally, CONSOL has contracted volumes of approximately 0.6 Bcf per day on several pipeline projects that will be completed over the next several years. Even with the future expiration of certain transportation contracts, this will increase the company's effective firm transportation capacity to approximately 1.7 Bcf per day. The average demand cost for the existing firm capacity is approximately $0.28 per MMBtu. The average demand cost for the existing and committed firm capacity is approximately $0.33 per MMBtu.
In addition to firm transportation capacity, CONSOL has developed a processing portfolio to support the projected volumes from its wet production areas. The company has agreements in place to support the processing of approximately 0.3 Bcf per day of gross natural gas volumes growing to approximately 0.4 Bcf per day in the next twelve months.
E&P Division Guidance
Second quarter 2015 gas production, net to CONSOL, is expected to be approximately 71 – 75 Bcfe, while annual 2015 production guidance remains between 300 – 310 Bcfe, or 30% growth compared to 2014 total production. CONSOL expects 2015 production to be more back-end weighted throughout the year due to the turn in-line schedule. CONSOL Energy continues to expect 2016 annual gas production to grow by 20%.
Total hedged natural gas production in the 2015 second quarter is 30.2 Bcf, at an average price of $4.05 per Mcf. The annual gas hedge position for two years is shown in the table below:
The hedged gas volumes shown in the previous table include the following NYMEX hedges that have basis hedged as well.
Liquidity and Credit Ratings
As of March 31, 2015, CONSOL Energy had $1.6 billion in total liquidity, which is comprised of $5.3 million of cash, $1.0 billion available to be borrowed under its $2.0 billion bank facility, and a $600 million term loan commitment. CONSOL's credit facility had borrowings of $760.5 million and outstanding letters of credit were $214.6 million. CONSOL maintained a strong total liquidity position by obtaining a $600 million term loan commitment as a backstop for the company's credit facility, which will terminate upon the successful completion of the thermal coal MLP IPO.
CONSOL remains on-track to keep its year-end 2015 leverage ratio flat, when compared to year-end 2014. The Debt-to-Adjusted EBITDA leverage ratio, less cash on hand, was 3.2x as of March 31, 2015, compared to 2.9x at December 31, 2014.
During the quarter, CONSOL Energy issued $500 million of 8% senior unsecured notes due in 2023, less $7 million of unamortized bond discount, and tendered for $937.8 million of 8.25% senior unsecured notes due in 2020 and $229.2 million of 6.375% senior unsecured notes due in 2021. An additional $2.5 million of the 2020 notes and $0.2 million of the 2021 notes were tendered in April as part of the final tender offers and consent solicitations that commenced March 9, 2015. These debt capital market transactions, along with borrowings on our credit facility, reduce CONSOL's annual interest expense by $37 million, modernize the covenant package, extend our significant long-term debt maturities by three years, and enable the company to optimize the allocation of our indebtedness across CONSOL.
In conjunction with the notes offering, Moody's Investors Service upgraded CONSOL Energy's rating outlook to stable from negative and affirmed our corporate family rating of Ba3. Standard & Poor's Ratings Services affirmed CONSOL's stable outlook and corporate credit rating of BB.