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Consol Energy halts steelmaking coal IPO as low coal, oil prices dent Q2 earnings

28th July 2015

By: Henry Lazenby

Creamer Media Deputy Editor: North America

  

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TORONTO (miningweekly.com) – US oil, gas and coal producer Consol Energy has put the planned initial public offering (IPO) of its metallurgical coal business on hold, citing the continued degradation of metallurgical coal prices on Tuesday.

The MetCo IPO of up to 20% of the subsidiary's equity was expected to occur early in the fourth quarter, following on from the June IPO of the company’s thermal coal unit CNX Coal Resources (CNXC).

During the quarter, the thermal coal unit IPO raised about $345-million in net proceeds, including assigning about $200-million in debt. The company used the proceeds to pay down Consol’s parent credit facility in July, since the transaction closed after the second quarter ended.

In completing the IPO, Consol had granted CNXC a right of first offer to acquire its retained 80% undivided interest in the Pennsylvania mining complex along with the Baltimore marine terminal, Cardinal States gathering system and the Buchanan mine.

Further to evaluating this asset as a potential future drop down into CNXC, Consol was also evaluating the possibility of partnering with a third party to grow the Buchanan mine through consolidation, before potentially taking it public in the future. Both options supported the company’s strategic and structural goals, and the company expected to make a decision regarding its Buchanan asset by year-end.

"Consol continues to make significant progress towards executing our strategy. This started by divesting our West Virginia coal mines in late 2013, refinancing our debt over the past two years – which has helped modernise our covenants, extend our debt maturities and lower our cost of capital – and most recently, executing an IPO of CNXC, which monetised only 9% of the total Pennsylvania operations.

“Despite taking place in a tough coal environment, this is a valuable transaction that not only brings in cash proceeds, but more importantly, sets up the structure to drive net asset value,” president and CEO Nicholas DeIuliis told analysts on a conference call.

BUMPY QUARTER
For the quarter ended June 30, NYSE-listed Consol on Tuesday reported a net loss of $603-million, or $2.64 a share, with the bottom line weighted down by a massive $829-million pretax impairment in the carrying value of the company’s shallow oil and natural gas assets, mainly owing to the continued depressed NYMEX forward prices.

This compared with a net loss of $25-million, or $0.11 a diluted share, from the year-earlier quarter.

After removing special items, Consol reported an adjusted net loss of $84-million, or $0.37 a share, a far cry form Wall Street analyst expectations of $0.01 a share on revenue of $798.59-million.

Consol’s revenue in the quarter fell 30% year-over-year to $648.94-million, on the back of lower natural gas, natural gas liquids and oil sales, and falling coal sales.

Cash flow from operations in the quarter was $62-million, compared with $221-million in the year-earlier quarter.

"Consol is focused on managing through what continues to be a very challenging commodity price environment. Given this environment, we will manage the company to be free cash positive over the next 18 months, beginning in the second half of 2015. We are moving forward by resetting the company using zero-based budgeting, lean manufacturing and continuous improvement to hold our E&P [exploration and production] growth targets, while achieving our free cash flow targets,” DeIuliis explained.

The E&P division achieved record output of 75.5-billion cubic square feet equivalent (Bcfe), or a year-over-year increase of 45% from the 51.9 Bcfe produced in the year-earlier quarter. Consol’s yearly gas output guidance remained firm at 30% growth for 2015 and 20% for 2016.

However, the company had lowered its 2015 E&P capital expenditures (capex) forecast to $800-million, which was $120-million lower than the previous guidance, owing to a combination of improved well profiles, decreased cycle times and the debottlenecking of midstream infrastructure.

Further, owing to lean manufacturing and continuous improvement, the company intended to significantly reduce E&P capital in 2016 to about $400-million to $500-million, depending on natural gas prices.

Marcellus Shale output in the second quarter was 64% higher at 39 Bcfe, compared with the 23.8 Bcfe produced in the same period of 2014. Marcellus Shale costs were $2.68 for every million cubic square feet equivalent (Mcfe), which was a $0.26/Mcfe improvement from the second quarter of 2014 costs of $2.94/Mcfe. The company achieved all-in cash costs of only $1.72/Mcfe at Marcellus Shale.

Consol’s Utica Shale output volumes were 10.6 Bcfe, up from 1.7 Bcfe in the year-earlier quarter. Utica Shale costs were $2.31/Mcfe in the quarter, which was a substantial improvement on the comparable quarter a year earlier. The company expected its Utica Shale programme to become a much bigger portion of its production mix, mainly owing to the additional dry Utica wells that were expected to come online in the second half of the year.

These dry Utica wells would help delineate a significant portion of Consol’s acreage, which could potentially either shift more future development to these areas or help record the value as a monetisation opportunity.

Consol’s coal division produced 7.5-million tons in the second quarter, slightly below the guidance range of 5.8-million tons to 6.1-million tons.

At the Virginia operations, the company's Buchanan mine saw metallurgical coal prices decline in the quarter owing to weakening markets. Despite these market headwinds, this cornerstone mine drove down costs by $12.76/t to $48.38/t sold in the second quarter.

Consol would reduce its current regular dividend to $0.01 a share, a quarter, effective from the third quarter.

Consol’s NYSE-listed stock edged 2.31% higher on Tuesday to $17.75 apiece, but had lost nearly half its value since the start of the year.

Edited by Tracy Hancock
Creamer Media Contributing Editor

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