Exploration & Production | Quarterly / Earnings Reports | Second Quarter (2Q) Update
Despite Marcellus Cost Cuts, Consol Hit by $25MM Loss
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CONSOL Energy Inc. reported a net loss of $25 million for the quarter ended June 30, 2014, or ($0.11) per diluted share. This is compared to a net loss of $13 million, or ($0.05) per diluted share from the year-earlier quarter. Adjusted EBITDA was $246 million for the 2014 second quarter, compared to $181 million in the year-earlier quarter. Cash flow from operations in the just-ended quarter was $221 million, as compared to $125 million in the year-earlier quarter.
The second quarter earnings results included the following pre-tax items related to recent transactions completed by the company:
- The company incurred $74.3 million in expense related to the early extinguishment of debt due to the purchase of all the 8.00% senior notes that were due 2017.
- The company incurred a $3.0 million non-cash charge associated with entering into a new senior secured credit facility. The charge was related to the acceleration of previously deferred financing fees.
- The company incurred a non-cash charge of $20.7 million in association with a pension settlement.
- The company recognized a gain of $30.0 million related to a coal contract customer buyout. CONSOL received a cash payment of $30 million for Bailey tons that were dedicated to a non-core market. Now, CONSOL will be able to re-market these tons into core markets.
After adjusting for these items not found in security analysts' models and which are listed in the EBITDA reconciliation table, adjusted net income in the 2014 second quarter, a non-GAAP financial measure, was $16 million.
CONSOL's E&P Division had an outstanding quarter. Production was a record 51.9 Bcfe, or an increase of 34% from the 38.6 Bcfe produced in the year-earlier quarter. Average realized prices of $4.44 per Mcfe, when combined with declining unit costs of $3.44 per Mcfe, resulted in a margin of $1.00 per Mcfe. This was 45% higher than the $0.69 per Mcfe margin achieved in the year-earlier quarter. Net Income attributable to CONSOL shareholders from the E&P Division was $15.5 million in the 2014 second quarter, compared to a loss of $2.7 million in the year-earlier quarter.
CONSOL Energy recently raised its 2014 E&P production guidance range to 225 - 235 Bcfe from earlier guidance of 215 - 235 Bcfe. To achieve the mid-point of the new range, the company will need to produce approximately 60 Bcfe in the third quarter and 70 Bcfe in the fourth quarter. The company has a record number of Marcellus Shale wells due to be tied into line in the third quarter.
In total, CONSOL's active coal operations generated $179 million of cash before capital expenditures and DD&A. This was an increase of $4 million from the year-earlier quarter.
Nicholas J. DeIuliis, president and CEO, commented: "CONSOL Energy did what we said we'd do. Our quarterly gas production came in toward the upper end of our guidance range, our gas pricing held steady with last year's quarter while our unit costs dropped meaningfully, especially in the Marcellus Shale, where cash costs below $2 per Mcfe were achieved. In coal, we managed through some typical operating issues to again achieve our production target. In the first half of 2014, the Coal Division generated nearly $400 million in cash (before capital expenditures and DD&A). For the second half of 2014, our tactical focus remains on safety, compliance, and operational execution.
"Our strategic focus, however, remains on NAV per share accretion. The latest example of that focus is our recently-announced gas midstream MLP that we intend to have up and running in the next few months. Also at our recent analyst day, we discussed potential non-core asset sales of $1 billion over the next five years. All in all, the pace of change at CONSOL Energy is accelerating the point in time when we become net free cash flow positive, which creates additional opportunities for NAV per share accretion."
E&P Division
E&P Mid-Year PV-10 Sensitivity Analysis
CONSOL Energy updated the PV-10 calculation of its 5.731 Tcfe of proved reserves as of December 31, 2013 using latest twelve month pricing as of June 30, 2014. The PV-10 valuation at year-end 2013 was $2.78 billion (without the assumption of drilling carry), with pricing of $3.67 per MMBtu. The 2014 mid-year PV-10 increased to $4.5 billion using latest twelve month SEC pricing as of June 30 of $4.10 per MMBtu, which resulted in realizing the carried interest of our JV partner.
E&P Second Quarter Results
Revenue and production both increased by 34% in the just-ended quarter, when compared to the year-earlier quarter. These metrics, when combined with much lower unit costs, enabled the E&P Division to post net income of $15.5 million in the quarter, compared to a net loss of $2.7 million in the year-earlier quarter.
E&P Division capital expenditures in the quarter set a record at $304.5 million, as the company increased drilling and completion investments to achieve its production growth targets. CONSOL's quarterly capital expenditures were net of $25.6 million of drilling carry from its joint venture partner in the Marcellus Shale and $14.1 million of carry from its joint venture partner in the Utica Shale.
The average sales price per Mcfe within the E&P Division was nearly flat in the just-ended quarter, when compared to the year-earlier quarter. A greater proportion of liquids production — which receives higher unit pricing — offset the negative impact of gas hedges in the just-ended quarter.
Unit costs were improved in the just-ended quarter, as higher production volumes spread fixed costs, such as direct administration, over more units. Unit costs were also improved, as low-cost Marcellus Shale production represented a much higher proportion of total production.
All-in unit costs in the Marcellus Shale category were $2.94 per Mcfe in the just-ended quarter, or a decrease of $0.42 from the $3.36 per Mcfe in the year-earlier quarter. The decrease in unit costs was primarily related to the 120% increase in Marcellus gas sales volumes during the just-ended quarter.
E&P Marketing and Transportation Update
Second quarter 2014 average dry gas prices, including the impact of our hedging program and net of basis, averaged $4.10 per Mcf. CONSOL's expansion into wet gas production areas provided a liquids value uplift of $0.34 per Mcfe, bringing the overall average sales price to $4.44 per Mcfe. Second quarter 2014 liquids volumes of 2.6 Bcfe were nearly five times greater than in the 2013 second quarter. CONSOL will continue to experience liquids uplift on future average sales prices as additional wells are brought online in the liquid-rich areas of the Marcellus and Utica.
Faster-than-expected replenishment of gas inventories and increasing Marcellus production have put downward pressure on gas prices. These factors have contributed to a decline in the NYMEX index price for natural gas along with the basis differentials for most Appalachian market sales points. CONSOL continues to mitigate the effect of the current downward basis pressure by finding opportunities to optimize and diversify sales opportunities among our 80+ customers located in five index markets. In addition, CONSOL Energy continues to manage the impact of price volatility through an active hedge program.
CONSOL Energy continues to develop a diversified portfolio of firm transportation capacity options to support the three-year production growth plan. Primary production areas in Southwestern Pennsylvania, Northern West Virginia, and Eastern Ohio are served by a large concentration of existing pipeline infrastructure that provides capacity to move production to major gas markets. The company is negotiating with pipeline and utility companies to expand our market reach into the premium markets of the upper-Midwest/Canada and the Southeast.
The company currently has a total of 1.3 Bcf per day of effective firm transportation capacity. This capacity is adequate for the remainder of 2014 and supports the majority of projected volumes for the three-year growth plan. This is comprised of 0.7 Bcf per day of firm capacity on existing pipelines, contracted volumes of 0.3 Bcf per day on several pipeline projects that will be completed over the next several years, and an additional 0.3 Bcf per day of long-term firm sales with major customers that have their own firm capacity. The average demand cost for the existing and committed firm capacity is approximately $0.24 per MMBtu.
In addition to firm transportation capacity, CONSOL has developed a processing portfolio that supports the increasing volumes from our wet production areas. The company has agreements to support the processing of 129 MMcf per day of gross gas volumes growing to more than 380 MMcf per day in the next twelve months. These commitments are sufficient to cover projected processing requirements for the next two years. CONSOL will continue to layer in processing capacity as needed to support the liquids development plan.
In addition to establishing a solid processing portfolio, CONSOL is developing a diversified approach to managing ethane. The company has entered into supply agreements with INEOS Europe and are also contracted to supply volumes to Shell's cracker plant in Monaca, PA. CONSOL is actively negotiating to supply ethane to other proposed regional cracker facilities. In addition to term sales, the company executed several spot deals to move ethane to Mt. Belvieu via the ATEX pipeline. CONSOL will also realize ethane value through blending capabilities. The company recently constructed an ethane pipeline to bring ethane supplies to the McQuay station where it will be blended with significant volumes of dry gas blend stock. Employing this multi-faceted approach enables us to diversify the ethane portfolio and capitalizes on changes in ethane pricing.
E&P Division Guidance
Third quarter gas production, net to CONSOL, is expected to be 59 – 61 Bcfe, while annual 2014 production guidance was recently raised to 225 – 235 Bcfe, from 215 – 235 Bcfe. CONSOL Energy expects its 2015 and 2016 annual gas production to grow by 30%.
Total hedged natural gas production in the 2014 third quarter is 41.7 Bcf, at an average price of $4.58 per Mcf. CONSOL uses a dual-track approach to its gas hedging. The company uses a formulaic approach to a base of hedges, but can decide to layer-in additional opportunistic hedges to capture value from price spikes. CONSOL does not expect to hedge more than 80% of its estimated natural gas production for any given year.
Liquidity
CONSOL Energy Inc. entered into a new Amended and Restated Credit Agreement dated as of June 18, 2014 for a $2.0 billion senior secured revolving credit facility. The new senior secured revolving credit facility replaced the existing $1.0 billion senior secured revolving credit facility which had been entered into as of April 12, 2011 and was amended and restated on December 5, 2013. The new senior secured revolving credit facility also replaced the existing $1.0 billion senior secured revolving credit facility of CNX Gas Corporation and its subsidiaries that had been entered into as of April 12, 2011.
As of June 30, 2014, CONSOL Energy had $1.9 billion in total liquidity, which is comprised of $147.4 million of cash, $24.0 million available to be borrowed under the accounts receivable securitization facility, and $1.7 billion available to be borrowed under its $2.0 billion bank facility. CONSOL Energy's credit facility has no borrowings. Outstanding letters of credit under the bank facility are $260.4 million.
CONSOL's liquidity in the second quarter was improved by $112 million from the receipt of a federal cash tax refund in association with last year's sale of five mines. The cash from the $30 million coal contract buyout occurred in July, so it will be reflected in the third quarter financial statements.