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CONSOL Energy Inc. (NYSE:CNX)

Q4 2009 Earnings Call Transcript

January 28, 2010 10:00 am ET

Executives

Dan Zajdel – VP, IR

Bill Lyons – EVP and CFO

Brett Harvey – President and CEO

Analysts

Kuni Chen – Bank of America-Merrill Lynch

Jim Rollyson – Raymond James

Brian Yu – Citi

Brian Singer – Goldman Sachs

John Bridges – JP Morgan

David Gagliano – Credit Suisse

Brian Gamble – Simmons & Company

Shneur Gershuni – UBS

Michael Dudas – Jefferies

David Khani – FBR Capital Markets

Jeremy Sussman – Brean Murray

Warren Chamberlain [ph] – McCleary [ph]

Paul Forward – Stifel Nicolaus

Michael Goldberg – Loomis Management

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the CONSOL Energy and CNX Gas fourth quarter 2009 results conference call. As a reminder, today’s conference is being recorded.

I would now like to turn the conference call over to Vice President of Investor Relations, Mr. Dan Zajdel. Please go ahead.

Dan Zajdel

Thank you Stacy, and good morning everyone and welcome to our joint earnings call with CONSOL Energy and CNX Gas. With me this morning is Brett Harvey, Chief Executive Officer of CONSOL Energy and Chairman and CEO of CNX Gas. Also with us today is Bill Lyons, Executive Vice President and Chief Financial Officer for both companies.

This morning, we will be discussing fourth quarter and annual results for both companies. In addition, we will be discussing our outlook for 2010. Any forward-looking statements we may express or our expectations for results as you know are subject to business risks, and we have enumerated those risks in both earnings releases issued this morning and in our SEC 10-K filings.

In addition, the US Securities and Exchange Commission permits oil and gas companies in their filings with the SEC to disclose any proved or unproved reserves that the company has demonstrated by actual production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions.

We may use certain terms in this conference call such as net unrisked resource which SEC guidelines strictly prohibit us from filing with our filings with the SEC. We also caution you that the SEC views such net unrisked resource estimates as inherently unreliable, and that these estimates may be misleading to investors unless the investor is an expert in the gas industry.

With that, let me begin the remarks and then take questions. We will start today with Bill Lyons. Bill?

Bill Lyons

Thank you, Dan, and thank you everyone for joining us this morning for the joint CONSOL Energy and CNX Gas earnings conference call. CONSOL Energy is reporting net income of $143 million or $0.78 per diluted share for the fourth quarter of 2009. This is about equal to the fourth quarter earnings of 2008 after adjusting for the special income item related to the recovery of black lung excise tax.

For the full-year 2009, CONSOL Energy is reporting net income of $540 million or $2.95 per share. This is almost a $100 million higher than the net income for the year 2008, which was $442 million or $2.40 per share. This is the second year in a row that CONSOL Energy has set an earnings record.

Net cash provided from operating activities is $216 million compared with $346 million in the fourth quarter of last year. For the year, net cash provided from operating activities was $945 million compared with $1.029 billion in 2008.

EBITDA for 2009 was $1.224 billion, that’s up $149 million from the $1.075 billion in 2008. The numbers speak for themselves. CONSOL Energy has established themselves as a company that generates strong earnings and cash flows by utilizing a stainable model that provides financial and operational flexibility. This flexibility enables us to react and adapt to changing economy environments and markets while continuing to prudently invest in our businesses. The quarter and the year again demonstrated the financial power of being a low cost diversified energy company.

Let me go into the quarter, the year and the coming year in more detail. Our met coal business, we sold 1 million tons in the fourth quarter at an average price of $108 per ton. With costs at $40.48 per ton, we had all-in margin of almost $68. I hope everyone had a chance to read our press release this morning announcing that we have sold five more vessels of high-vol coking coal sourced from Bailey and Blacksville mines and destined for integrated steel mills in China. The sales were made by Xcoal as a continual result of our Asian marketing initiative that we announced last month. The sales from these five vessels total approximately 410,000 short tons, combined with our earlier vessel to China of 82,000 short tons we have already sold 0.5 million tons of Northern Appalachia coal into the Asian met market in 2010.

Our coal terminal in Baltimore provides us with dedicated capacity of 12 million tons per year for export to these high-value markets. We also have the ability to expand capacity at Baltimore by 6 million tons to 8 million tons if markets warrant this expansion. Brett will talk more about the met markets and our met capabilities in a few minutes.

On the thermal or steam coal side, we sold 14.5 million tons in the fourth quarter at an average price of $54 per ton. That was up 17% from last year’s quarter’s average realized price per ton. Cost per ton of thermal coal in the quarter was just over $44, up about $5 last year. The majority of this increase can be attributed to our decision to reduce production to help the market stay in equilibrium. Thermal coal financial margins for the fourth quarter were $9.94 per ton or 32% higher than the $7.52 financial margin for the prior year’s quarter.

While many of our thermal coal contracts were priced in 2008 when the thermal coal market was tight, we believe that a substantial portion of this pricing reflects the continued scrubber build-out. Increasingly, our thermal coal is being priced for its high heat content, its location and its stability of supply.

You may have seen that last week we restarted our Shoemaker mine after a $205 million multi-year refurbishment. This mine now joins our premier fleet of efficient low-cost Northern Appalachia long haul mines. The Shoemaker mine will have a production capability of approximately 5 million tons per year. Operationally, our mines continue to do well. Our longwall development is in great shape and we can ramp up some additional production should the market warrant this effort. 2009 is the most profitable year we have ever had in our coal segment. As I have mentioned on previous earnings calls, margin expansion is the key driver and our step change in profitability. Our gas segment CNX Gas of which we own 83.3% had another outstanding quarter. Production increased 13% quarter-over-quarter to a record 25.1 Bcf. This record production was driven by better-than-anticipated results in our Virginia coal bed methane and our Marcellus Shale operations.

In the fourth quarter of 2009, overall costs of CNX Gas operations were $3.47 per Mcf or $0.13 better than they were in the fourth quarter of 2008. However, the record production volumes and lower costs were not enough to overcome the depressed spot prices for natural gas.

Even though we had 15.3 Bcf of our gas production hedged at $7.90 per Mcf in the quarter, our average realization per Mcf was $6.47, a reduction of 23% from last year’s fourth quarter. Net income at CNX Gas was $41.1 million or 27% per diluted share for the fourth quarter, and this is about 30% compared with the net income in the fourth quarter of 2008. The decrease in net income is solely the result of lower spot prices.

For the year 2009, CNX Gas net income was $164.5 million or $1.09 per share and that’s down $74.6 million from 2008. The annual production was 94.4 Bcf, a record and was up 23% from 2008.

We continue to be excited about our Marcellus Shale opportunity. We increased our footprint by 20,000 acres in the quarter to 250,000 acres. Two thirds of these acres are considered to be tier 1 acres. We are actively seeking additional acreage primarily in Southwestern Pennsylvania and Northern West Virginia where we have synergies with our other operations.

Earlier this week, we issued our year-end gas reserve numbers. During 2009, CNX Gas increased its reserves by 34% to 1.9 trillion cubic feet. We achieved a drill bit finding cost of $0.39 per Mcf, and replaced over 400% of our 2009 production in a falling price environment. Our financial position allows us to continue to prudently invest in our businesses even in difficult economic times. In 2009, we invested almost $1 billion in CapEx, about the same amount we invested in 2008. We expect to invest a similar amount in 2010. In the 2010 numbers we've broken out about $500 million in coal, $400 million in gas, and $100 million on other activities. The investments in coal [ph] operations are primarily in the efficiency area to maintain our position as a low cost producer. The investments in the gas company are focused on growth with emphasis on expanding our Marcellus Shale acreage position, increasing drilling and increasing production.

CNX Gas acquired approximately 19,000 acres of CBM leases and 63,700 acres of Marcellus Shale leases in 2009. In the Marcellus Shale area, our goal is to increase our position from 250,000 acres to 400,000 acres. We are ramping up drilling in the Marcellus Shale and plan to add a second rig in March. The new rig will be a flex rig that will enable us to drill multiple wells on a single pad more efficiently. We have an option to add a third rig if the market dictates. We planned to drill 24 horizontal Marcellus Shale wells in 2010. We also will be drilling 175 Virginia CBM wells and 25 horizontal wells in the Chattanooga shale.

As I said, we are very excited about the potential of our Marcellus Shale assets. Next week, the first Marcellus Shale well that we drilled which was in October 2008 will have produced 1 billion cubic feet of gas.

Now, let me return to CONSOL Energy’s overall financial position. Our balance sheet remains strong and we continue to have excellent liquidity. At December 31, 2009, CONSOL Energy, and that’s including CNX Gas, had over $600 million in total liquidity available for immediate use at interest rates that are well below market. We remain steadfast in our confidence in our business model. Our balance sheet and our status as a safe, low-cost producer enable us to effectively compete and produce excellent earnings and cash flows even during times of economic turmoil. Among our met coal reserves and our thermal coal reserves and our gas reserves in Appalachia, CONSOL Energy controls a greatest concentration of BTUs in the Eastern United States.

For almost 15 decades and through many business cycles, CONSOL Energy has remained committed to optimizing long-term shareholders value by putting safety first, by being respectful to the environment and the communities in which we operate, and providing meaningful employment opportunities. We remain committed to these values.

Brett, your comments on the quarter and the year?

Brett Harvey

Thank you, Bill, and welcome to everybody on this call. I would like to talk about where I see the future and especially in the short term. We will talk somewhat about the long term on both coal and gas. First thing I want to talk about is our initiative on safety. We have a safety program that we're trying to drive the company to zero accidents across the company. Zero is achievable. Our gas company stays at zero in terms their reporting and doing a very good job, especially with all our expansion. And the coal company, I can say, on the coal side this is the best year we ever had in terms of safety. So we believe it’s achievable. I think we will see in our future a year where we are zero on all of our operations and we are looking forward to that.

On CONSOL Energy in total, I want to talk about the cycles of energy between coal and gas. If you go back to 2008, a big – because gas prices were up, a big contributor was gas as it grew on volume as well as price. It was a higher percentage of earnings in 2008 than coal was. We saw that reverse in 2009 and a higher percentage of coal added value to CONSOL Energy as gas prices dropped even though we added volume. In both cases if you look at our ability to weather any environment in energy, on two different cycles, creates real value for our shareholders, not only in the gas company but in total in CONSOL Energy with its ownership of gas. These two cycles create record earnings as we run through the cycles. Our shareholders should be aware of that and understand that the growth of the gas company is directly related to the footprint of the coal company and the combination of those two creates real value for our shareholders over time.

I'm going to talk specifically about gas now. As Bill said, record year in production, 23% growth. Proven reserves were up 34%. Since we became public in the gas company in 2005, we have doubled our annual production. We have almost doubled our proven reserves. The interesting thing is we plan to do that again in the next five years, and our intention are to keep growing this company because it is a low-cost producer in any marketplace and we will always have the advantage on margins. We are the fastest growing company I think in the United States in terms of gas, but in Appalachia for sure of major companies.

We believe we can continue to do this and what's another very interesting part of it, it's being done with its own cash flow. We are not borrowing money to growth it, so it is a very powerful position. I would say when you look at the gas company its future has never been brighter. It has a real strong position in Marcellus Shale. It has an annuity-type project in Virginia. It continues to grow on both places and we see real value in both those spots and real potential to grow on the Marcellus Shale based on our fee footprint. We didn’t borrow money to get this footprint. We have it in our company.

Let’s talk about those markets. We see storage on the gas side at about – it's approaching a 5-year average storage and we think that that’s a good place for gas at this point in time. We see switching from coal to gas at about $450 million and when it touches that between $450 million and $500 million we will see switching between coal and gas on generation. We are very excited about the future of the gas company and where it’s headed.

Now let’s talk about coal. Coal is very interesting at this point in time as well. Keep in mind we have the highest concentration of low cost high-BTU coal anywhere in the United States. Now, what we are finding is that that concentration of capital spent on that coal, especially in the especially in the Pittsburgh 8 seam, is showing two different marketplace strengths. One is the traditional steam market of which we have already been very powerful and high margin and low-cost driven. But if you go back in time, the same seam of coal has what made the steel business powerful and Pittsburg itself. Steel came to Pittsburg because of coal and water. This same coal is the coal we mine typically for steam, but has metallurgical characteristics that the world is now demanding. That's why you see us moving this coal into a marketplace when the value of the dollar is right, the transportations is right and the demand for this type of product lines up together.

So it is important that you understand we are already capitalized to move into these marketplaces between steam and coal, especially with the investment that we have in our own facilities in Baltimore; to move the coal offshore when the time is right. We are a low-cost producer in this product and it creates real value for shareholders and margin expansion as we move between these two different products.

Now, let’s not forget about Buchanan. Buchanan is the lowest cost, highest quality low-vol coal in Appalachia. And so margin expansion there is rather easy as we see prices rising there. That is a solid mine, it is well capitalized, we have done a lot of work to make it more consistent over time and we see rising markets on that very high quality product itself. The high-vol coking coal that we call coming out of the Pittsburg seam, we think that will range right now, the price is ranging between $70 and $85 a ton depended on quality from mine to mine. What we see at Buchanan right now, we have 2.7 million tons to re-price. For 2010, we see between a $135 to $145 a ton if we sold that today, that’s where we see the marketplace right now.

Margin expansion is what drives us. If you saw what we did in 2009, even though we dropped volume we were focused on optimum places, margin expansion; and let me say something about the operations of the mines themselves. We pulled back and developed longwall panels even when we didn’t run longwalls; it put us in a great position to 2010. As the market has been unfolding, remember last time I talked about 2010 being a bridge for CONSOL to I think a brighter marketplace in 2011. We see that bridge shortening right now. These changes in the met markets as well as demand for electricity as it begins to rise as well as cold weather that have drawn stockpiles down in our natural marketplace puts us in a position where we think that prices on coal for steam will rebound quicker than what we originally anticipated, more like the second half of 2010 versus first half of 2011.

We are spending money in the mines. We are spending money on longwall expansion to keep our costs down in terms of we're making the faces wider and when we finish those projects, we will re-evaluate what projects we will do going forward. I see the expansion of gas business is our number one priority. We see the capitalization of what is already in place on the coal side as a priority in terms of maintaining what we have and expanded margins in that area. So I am very enthused about both pieces. I am pleased about the seam side, the metallurgical side, the gas side, the Marcellus play, and if you go right down into – on the gas side, down into Virginia where every hole we poke in the ground we make a lot of money, that’s also a base of our gas company and we are excited about that as well.

So with all those pieces I am enthused about our ability to work our way through tough marketplaces, and I am very impressed with this company’s assets and the people’s ability to adjust to the marketplaces as we see them shift. This is very valuable company with great assets and I would be glad to open this up for questions at this point in time.

Dan Zajdel

Stacy, could you instruct the callers on how to queue up for questions, and I would ask if you're a member of the media please ask your questions until after the call and I will take you individually offline. Stacy?

Question-and-Answer Session

Operator

(Operator instructions) And our first question with Kuni Chen from Bank of America. Please go ahead.

Kuni Chen – Bank of America-Merrill Lynch

Hi, good morning everybody.

Brett Harvey

Good morning.

Kuni Chen – Bank of America-Merrill Lynch

Nice job there. I guess just first question on Buchanan, it looks like the overall met production was a little bit blow million tons in the quarter. Can you just talk about your ramp up process there as we go through 2010, when do you expect to be at a 5 million-ton run rate?

Bill Lyons

We are at that run rate right now. Buchanan will run at that rate all year along in the 5 million-ton rate.

Kuni Chen – Bank of America-Merrill Lynch

Okay, all right, that’s pretty straight forward. And then just as a follow up, as far as your market views with thermal being back into balance by the middle of the year, can you talk about your approach to 2011? Do you wait more until the second half of the year to commit more of those tons or do you do see opportunities to layer that in as we go through the first half of the year, if you can just talk about your thought process there.

Brett Harvey

I think we'll layer it in softly, I think would be in the first half of the year and second half would be more intense. The closer you get to the next year the negotiations get there. One of the big swings is to how much high-vol coal are we going to move away from the steam market and that helps us in the negotiation process in terms of where we want to move this coal. It gives us the optionality. We could move as much as maybe at least 2 million more tons into the Asian market if we could get those sales done. So that creates a shift and we would be rather be negotiating towards the second half of the year based on where we see high-vol coking coal go.

Kuni Chen – Bank of America-Merrill Lynch

Great. I will turn it over. Thanks.

Operator

Thank you. We have a question from Jim Rollyson from Raymond James. Please go ahead.

Jim Rollyson – Raymond James

Hi, good morning everyone.

Brett Harvey

Good morning.

Jim Rollyson – Raymond James

Brett, going back to your commentary on the CapEx front, you guys have had going back to I think ’08, ’07, ‘08, a lot of efficiency projects targeted for the coal side which you continue to work on. When those start to wrap up and maybe give us some sense of timeframe of that, do you think you are going to come up with additional projects like that to continue to deploy capital towards or does your CapEx come down some or do you redeploy some of the capital towards the E&P business?

Brett Harvey

I would say, if you look at what we just came back, Shoemaker was really a three-year project. It just came on this month. And we have the widening of the longwall phases which will finish up this year. We have some refuse piles that we are working on at Bailey and other places. The most likely big project that you will see is the Bailey overland belt that will be put in but that's already in the budget cycle and being built. It will be done in 2010. We really see and our plans, the way see the market right now is to continue to try to develop on the development side, the BMX would be the fifth longwall of Bailey/Enlow, but that won’t be a year-by-year depending on where we see the marketplace. While our emphasis from a CONSOL Energy perspective is going to be very, very rapid growth in the gas business, because of our low cost position there. So I would look at the company as the coal side will be well capitalized, creating cash to grow the gas business until we see real demand for coal while the nation tries to figure out what they are going to do between coal and gas. It is nice to have that optionality and that looks like what we are going to do in the next five years.

Jim Rollyson – Raymond James

Okay, that’s helpful. And then on the Bailey/Enlow side, obviously you are selling some of that now into China as a net product, curious how your domestic steel customers are viewing the fact that you are shipping some of this overseas. Is it something that they are taking notice of? Can they overcome the sulfur content issue? Just kind of curious what opportunities you have in addition to the export tried domestically for that coal.

Brett Harvey

Keep in mind, as I said earlier that this coal was the met coal for domestic supply. That’s how all started and over time the equipment, what their needs are, what their abilities are, that’s all changed over time. It seems to me that new equipment overseas has a better ability to pull sulfur out the Pittsburgh 8 seam than older equipment in the United States. That doesn’t mean that the domestic steel companies won’t looked to this again because the pricing is pretty good and supply is good and so we are having conversations but I think this movement to China gives the steel business a whole different look at the Pittsburg 8 seam again.

Jim Rollyson – Raymond James

Great, thank you guys.

Operator

Thank you, we have question from the line of Brian Yu from Citi. Please go ahead.

Brian Yu – Citi

Great, thank you. My questions regarding the met coal tons, what’s left un-priced, is it safe to assume that those are all Buchanan product?

Brett Harvey

Buchanan, that’s right. Yes.

Brian Yu – Citi

Okay. And just in terms of your production costs for 2010 both met and thermal, met has been pretty volatile, can you give us a sense of where you see that headed?

Brett Harvey

Well, the Buchanan mine itself it’s probably going to be right around $45 to $48 a ton fully loaded. And I think that’s a good number for Buchanan. We don’t give individual numbers about Bailey and those kind projects. But if you look at our average thermal price on Pittsburg 8 seam type mines, it is going to be around $44 a ton, obviously that’s an average for all Pittsburg 8 seam.

Brian Yu – Citi

All right, and when you choose to sell the high-vol coal into the met market, are there incremental processing cost?

Brett Harvey

No, there is not. We are actually selling exactly the same product, product either to the utilities or the steel companies.

Brian Yu – Citi

All right, great. Thank you.

Operator

We have a question from the line of Brian Singer with Goldman Sachs. Please go ahead.

Brian Singer – Goldman Sachs

Thank you, good morning.

Brett Harvey

Hi, Brian.

Brian Singer – Goldman Sachs

Following up on the question on the cross-over tons, it looks like you contracted overall more than the 0.5 million tons in the quarter to Asia. Did you do contract tons to the cross-over tons, cross-over volumes to places other than Asia? And can you comment on what the additional capacity to sell Bailey into the met market beyond Asia?

Brett Harvey

We did that. In fact first sales we did before we did the deal with Xcoal. Last year we did a sale to Brazil to be delivered this year, it was a 0.5 million tons go into Brazil. I think it was a little lower priced than what we ended up with on the sales of Xcoal to China, but that tells you the strength. I mean, we see the market at Brazil, China, Korea, Japan, all of these met places are going to be looking to this coal, our typical markets in the Atlantic will get them. And when you look at the crossover, if the market is right, you could look at the whole Bailey Mine complex overtime as a high-vol met market if it holds now.

That’s not likely to happen. So, we have some studies that say what would it look like if half of the coal out of Bailey went to the met market. And for 2010, we see another 2 million tons that we could move out of that market, out of that mine if the market is there or that combination of mines.

Brian Singer – Goldman Sachs

Thanks. And secondly, shifting to gas, you are adding the second rig in the Marcellus, can you talk to your expectations for what that could add from a production perspective and why not then raise guidance or is there any reason why there wouldn’t be upside to guidance, give that you are adding that second rig there?

Brett Harvey

Well, we are going to add the second rig. We have the permits to do that, the rigs are on its way, it’s been ordered. We think that if it is very successful, we will give higher guidance as we see the success of it. It’s probably going to cost us, every rig cost us about $100 million a year, put in place. So, I think we will announce the success that we see success. I think we are looking at it as being cautious to make sure we do it right, we develop the right technology, and that we grow on a proper way to where we get maximum value for our capital.

Brian Singer – Goldman Sachs

Great, thanks. And just, if I could ask one follow-up on that, that you had mentioned restrained well acreage or wells, some acreage issues that forced you to drill, you mean, not as long a lateral in the Marcellus, is that something that could be recurring?

Brett Harvey

No. In fact, we are moving to places where the laterals are going to be optimized rather than restricted by ownership. We also have an option on a third rig if we have a lot of success. We are going to 3,000-foot laterals, and I think the others were restricted to 2,000-foot laterals. So, I think you will see much higher production out of the ones that we have going forward.

Brian Singer – Goldman Sachs

Thank you.

Brett Harvey

Yes.

Operator

Thank you. We have a question from John Bridges from JP Morgan. Please go ahead.

John Bridges – JP Morgan

Good morning Brett and Bill.

Brett Harvey

Hi John.

Bill Lyons

Hi John.

John Bridges – JP Morgan

Thanks for the clarity on your sales. You are saying $75 to $85 a ton for the Bailey met product?

Brett Harvey

Yes, that’s a mine, yes.

John Bridges – JP Morgan

Right. So, that sounds like, you know, equivalent to PCI product, is that a good benchmark that we should use for pricing going forward?

Brett Harvey

Well, I think in the market right now, I would say, a lot of it has to do with the volumes and the vessel rate and all of this incurred [ph] to China. So, I wouldn’t say that, that’s the exact number, but it’s a moving target, I would say on the metrics up, you might see a little higher pricing, because the freights different. It’s all function to the matter how you get it there. So, that’s a long way as you know, but it’s a very valuable asset to us, and moving that steam coal into that marketplace gives us a lot of strength, because we are not doing anything else to the coal.

John Bridges – JP Morgan

Yes, that’s incredible.

Brett Harvey

Yes, it is, really is.

John Bridges – JP Morgan

On Shoemaker, this is not going to bring down your average cost for lower cost mine, are you going to bring in a smaller tonnage this year, how should we look at that, and is that sold?

Brett Harvey

Yes, it is sold. And it should bring our cost, if nothing else, stabilize our cost for the year, because it is a lower-cost mine. It was one that we took it out, and it will stabilize the cost for the year and the next five years I would say.

John Bridges – JP Morgan

Okay, well done guys. Thanks a lot.

Operator

Thank you. We have a question from the line of David Gagliano from Credit Suisse. Please go ahead.

David Gagliano – Credit Suisse

Great. Hi everybody, thanks for taking the question.

Brett Harvey

Hi Dave.

David Gagliano – Credit Suisse

Hi. My first question on the thermal, just for 2011, you know, just the back of the envelope estimate, when we compare Q3 price in relation with Q4, seems in place over that 3 million tons of thermal for 2011 delivery at a price of around 54. Is that right or is there something else going on in terms of the comparison between those two tables?

Brett Harvey

It might depend, I will have to look into that in more detail, but it might have been something that we were selling on a quality aspect, it was a little bit different, or there might have been a carry-forward tons. If you would call in after the call, we will give you the specifics on that, David.

David Gagliano – Credit Suisse

Okay, great. My follow-up, in relation just to that 135 to 145 net back to the mine price that you highlighted, you know, what’s the reasonable assumption for transportation costs, just so we can compare that to the global numbers, obviously we have to adjust for short to met ton, but just in terms of transportation component?

Bill Lyons

I would say $35 on the rail side and on the freight side vessel, we are talking of China, it is $55.

David Gagliano – Credit Suisse

Okay.

Bill Lyons

So, $35 rail, $55 vessels.

David Gagliano – Credit Suisse

Okay. All right. That’s very helpful. All right, that was it. Thank you.

Operator

Thank you. We have a question from Brian Gamble with Simmons & Company. Please go ahead.

Brian Gamble – Simmons & Company

Yes, good morning everybody.

Brett Harvey

Hi Brian.

Bill Lyons

Hello Brian.

Brian Gamble – Simmons & Company

A quick question on the Buchanan tonnage R&D [ph] headed over to China, is that all Q1 shipments? I know you mentioned 2 million additional tons are possible, are you hoping to ship, you know, 0.5 million tons in the first quarter and then you go from there, or is this first half type number?

Brett Harvey

Okay. I want to make sure you understand. The Buchanan tons aren’t going to China, it’s Bailey tons, which are typical steam tons. And it’s 0.5 tons that will go into China and it’s being used as a met coal directly in the steel mills in China, and that’s kind of a new product that we are selling into China. The 2 million tons beyond that would be Bailey-type tons or it could come from the Blacksville mine or the Loveridge mine.

Brian Gamble – Simmons & Company

My apologies, Bailey is what I have got written down in my note. So, we can put the 0.5 million in the first part of the year is what I was asking?

Brett Harvey

I would say the first quarter, yes.

Brian Gamble – Simmons & Company

Okay. And then my follow-on, great cost control for the quarter, clearly helping everything across the board. Do you think that with the overall movement in thermal prices recently, that has enabled I guess some of the smaller producers to see some of the same sort of cost reductions and therefore might have incentivized some people to kind of keep some tons on that might have been rolling off at the end of the year on higher-priced contracts should not wait, or do you think that those tons are still at a disadvantage and thermal tons continue to kind of roll out of the market, both kind of Northern App and Central App, just kind of wanted to get your general feel for that?

Brett Harvey

I would say that keep in mind, Central App’s cost structure is probably 15% to 20% higher than Northern App’s cost structure. And that’s constant. I think that the prices don’t reflect bringing back anything in Central App yet. In Northern App, there is not that much tonnage that isn’t longwall oriented that would bring these people back. If it does, I think they will come back in the met type markets first, what we would see in Central App and things like that. So, we still got mountain top mining issues, permitting issues, and those costs are going up. I don’t see where there is going to be incremental tons coming back into the market right away.

Brian Gamble – Simmons & Company

Thank you Brett, appreciate it.

Brett Harvey

You bet.

Operator

Thank you. We have a question from Shneur Gershuni with UBS. Please go ahead.

Shneur Gershuni – UBS

Hi, good morning gentlemen.

Brett Harvey

How are you doing?

Shneur Gershuni – UBS

Good. Most of my questions have actually been asked and answered, but I was wondering we spend a lot of time talking about the Bailey coal going into the Asian market and so forth. If I recall correctly that also has the potential to go into the European thermal market as well, too. I was wondering if you can sort of talk about what’s going on in the European thermal market, and if Bailey is going into the Asian market, you know, where the tons, where you would have tons available to hit European demand if it started to spike up in the App market?

Brett Harvey

Well, on the thermal side, since it’s the same product, we would move it to the highest price obviously and there is limited tons that we would have. I think Bailey is going into the European market under some contracts that we already had in place for steam. But I don’t see that those steam contracts, even if you look at the forward pricing, even close to what we are selling coal for in the high-vol side. So, there is a big spread, so we are not looking to that market with Bailey-type coal unless it approaches the high-vol numbers.

Shneur Gershuni – UBS

Should demand spike there, and you would commit Bailey into the Asian market, do you have any other mines that you would look to try and send into the European market or that’s pretty much the bulk of it?

Brett Harvey

We do have some. In fact, we would move every ton if the price is right. I mean, that’s not contracted for, because we have the port facilities to do it, and our Btu structure travels a long way. Europe likes our coal, but it tends to be a, depending on the strength of Dollar, it’s tends to be a swing supplier, rather than a constant supplier to Europe as we have seen.

Shneur Gershuni – UBS

All right. Just moving on to cost for a second, for both 2010 and 2011, I guess on a more normalized basis, I was wondering if you can sort of, you know, talk to – you have done a lot of these efficiency projects, you are supposed to have improved costs and so forth, you know, kind of where do you think normalized cost structure should be, you know, absolute moves in royalties just due to pricing?

Brett Harvey

I would say if you look at the cost structure, on the met side, we are going to hold around $45 in the next couple of years, and I would say on the steam side, we will see some effect on the expansion of the longwalls, but that would trickle in, I would say anywhere from 42 to 45 depending on how, you know, we got labor, contracts coming up, things like that, but I would say 42 to 45 on this.

Shneur Gershuni – UBS

Great. And if I can just switch to gas for a second here, just to confirm what you said to, I think Brian before, your production guidance does not include the second rig or it does include the second rig?

Brett Harvey

It does include the second rig, and I think one way to understand that better is a lot of the movement that we got in 2009 was a lot of spending and permitting and things that were done in 2008, so that as you go through the cycle, remember, we cut off, we slowed down spending based on the poor economy last year, and some of that momentum rolled through 2009, and to build that up again, you got to build momentum again in your process. So, the 23% jump that we saw in 2009 relates to 2009 and 2008, and the jump that we see in 2010 is more related to ’09 and ’10 spending. And as we – the effect of that second rig will have a big effect on 2011.

Shneur Gershuni – UBS

Okay. And then just a final question on gas, can you remind us what your costs are to drill a well at this point right now and kind of what new cycle times are, you know, returned to sales?

Brett Harvey

In the Marcellus Shale area, it’s about 3.5 million a well. And it takes about 14 days, with a flex drill, about 14 days to drill it. Down in the Virginia area, on these coal-bed methane, it takes about three days to drill them, and there are about 150,000 to 160,000 a well.

Shneur Gershuni – UBS

Perfect, thank you very much.

Brett Harvey

Thank you.

Operator

Thank you. We have a question from Michael Dudas from Jefferies. Please go ahead.

Michael Dudas – Jefferies

Good morning gentlemen. Brett, how do you look at your outlook on gas hedging and how you want to play the market given the growth, low cost, and maybe your belief on how well gas is going to normalize over the next few years?

Brett Harvey

Okay, that’s a good question. Everybody wants to know what the gas prices are going forward. I would say this. We look at the entire company, CONSOL Energy, and we take it as Btu and hedge Btu. So, if you look at it from that perspective, gas is a place where we lost in at levels, we raised about $0.50. Every time the market moves $0.50, we put more gas hedges in. We are 46% hedged for 2010, and we think that’s a good place. So, if you look at it across the entire company, that 50%, it’s not hedged, really given this opportunity to work the market when at site. And if you see our history, we have been very good about doing that. So, I would say we are where we want to be. Now, if you talk about gas prices, I can give you four different guesstimate.

Michael Dudas – Jefferies

I am sure you can.

Brett Harvey

We think gas prices are going to be because of the cost structure of Marcellus Shale, between $6 and $7 going forward. On an average, if you gave a five-year average, it would be between $6 and $7.

Michael Dudas – Jefferies

I appreciate those thoughts, but thank you. Second question, when you think about new sales to China for the Bailey-type coal, it’s early yet, but how sustainable do you think that is and how do you characterize the sustainability of year-in and year-out volumes at reasonable prices all the way to China versus your term contracts to good customers that are well capitalized in the US, possibly in Europe for met coal.

Brett Harvey

Well, I think it’s all a function of price and volume, and the customers that we typically always supply, we have good relationships, we always supply based on agreed practice, and if we see real demand for this coal in China and in Asia, you know, that becomes a swing supplier for other sources for them. They might want us – you know, we think China burns about 200 million tons a year of met coal, and so for us to move 5 million to 10 million tons of met coal from we are getting paying, it’s a drop in the bucket to them, but it’s also a swing supply for them, because we are very dependable, we have the port facilities and we have the ability to get there. So, and they have a lot strength in terms of shipping. So, I would say the market is changing and that the demand for energy coming out of Asia, especially China, and I remember two quarters ago, Mike, I never wanted to say that, we would be shipping coal to China. I am pleasantly surprised to how this – so they could end up being a long-term relationship.

Michael Dudas – Jefferies

I understand. My final question is, Brett, when you think about three things, the coal and gas markets, your company or legislative regulatory issues, which ones are you most concerned about?

Brett Harvey

Well, I guess if you look at it across the board, I am concerned about two things. One is CO2 legislation, what does that really mean to the coal industry. I think a well-capitalized minds like what we have, will supply the big power plants for the next 25 to 30 years, no matter what.

The question is how much restrains can be put on utilities. What I think will happen, if you do a lot of CO2 legislation, you are going to end up stopping capital from coming into the development of coal supply, and that will drive the price of coal up to the utilities, and in the short-term, I think well-capitalized companies make a lot of money. In the long-term, I think that the cost of energy is going to rise very fast in the United States. The other thing that’s going to be hit very hard, and this is on the gas side and the coal side, the EPA very focused on water, in this charter of water whether it’s a drill hole or a mine, and that water excites the new air. Remember the ‘90s, all the changes in the air regulation would see in the same kind of thing on water, and it’s going to drive the price of energy up domestically. So, those are the two places that I show concerns, but I think these are costs that the society will bear.

Michael Dudas – Jefferies

Brett, I appreciate your comments, and well done safety issues, thank you.

Brett Harvey

Thank you.

Operator

Thank you. We have a question from David Khani from FBR Capital Markets. Please go ahead.

David Khani – FBR Capital Markets

Hello gentlemen.

Brett Harvey

Hi Dave.

David Khani – FBR Capital Markets

You know though a bunch of questions have been asked, I want to sort of step back a little bit, Nick, as I guess been put in place as the COO for about a year now, what do you think is some of the key accomplishments you think he’s gotten done. I think safety, because I guess highlight is one of the things that has been pushed, but what all things have been happening, and particularly on the coal side, because I think we can see what he has done on the gas side.

Brett Harvey

Hi. I would say that he would rather hold to the operation of the two. First of all, he really tied gas and coal together in terms of optimization between the two, in terms of what we do in our energy footprint in the region. He did a good job because he knew both sides of that. The other thing that I probably did very well as the market dropped last year, in terms of volumes, he focused on longwall development, and where we didn’t run our longwall to full capacity, he worked with marketing above (inaudible) those guys and make sure the longwall development got out ahead to where when the market changed, we have capacity that you would consider incremental based on that we are not running short on development. So, he made that a goal and objective for the margin and did a very good job of doing that. He drove safety and he also drove focus on the cost of coal as in the volume of coal, which any mining company, I think that’s where we need to be.

David Khani – FBR Capital Markets

So, would you say that production reliability is improved as a result of what you have done?

Brett Harvey

Yes, definitely. The problems we were having was reliability and the ability to keep longwall ahead of development I think that, that has done very well. And he also spent a lot of money sealing the mines, especially in Buchanan, put the seals in that, again makes that mine a lot more reliable than it was in the past, because it’s totally sealed from the problem area that we had informed.

David Khani – FBR Capital Markets

Great. Well, we are looking forward to that reliability, that would be great. Could you give us a sense now, I guess everybody is sort of asking now that the cold weather is going to draw down, the utility stockpiles and then the added benefit, I guess of pulling Bailey out of the sea market, what are the utility buyers’ thinking today, because they were obviously very confident I guess two months ago? Are you starting to see a pickup in enquiries?

Brett Harvey

I would say, we are seeing a pickup, but it’s too early to tell what the results are going to be. We are going to another coal snap. That last cold snap we had was so dramatic that one day was like 2 days of burn. And so, we actually pulled down about 20 days of supply in our area through that last coal snap. We have got another one coming. So, the combination of moving coal from high-vol into the high-vol coking coal area out of the steam market and the effect on the weather gives me a lot more optimism about second half of 2010.

David Khani – FBR Capital Markets

That’s great.

Brett Harvey

And then improved question [ph] in 2011 I believe.

David Khani – FBR Capital Markets

If you look at then, just sort of the total expert expectations that you think you will do for 2010 versus 2009, if you can give us sort of a sense of how much steam and how much met you will do?

Brett Harvey

I would say on the met side, it would be 5 million coming out of Buchanan, probably 3 million coming out of Pittsburgh on the met side, and probably another 100,000 tons coming out of a new mine that we just opened up. So, that’s the met side. And that’s a small mine that we – in the Central PA that we are doing with Rosebud [ph] coal. On the same side, the difference will be we will match the market, where are the market and we are not going to build inventory, so whatever the market will bear, we will match that side. My guess is we are going to end up combination of the two right around 62 million tons.

David Khani – FBR Capital Markets

I am sorry, I misunderstood. How much steam you think you will do this year?

Brett Harvey

Okay. I would say you take 8 from 62, it would be about 54.

David Khani – FBR Capital Markets

54?

Brett Harvey

Yes, 54 million tons of steam. That would be a good number to go off of.

David Khani – FBR Capital Markets

And then, do you think you are going to export any steam this year, do you have any steam under contract from prior years?

Brett Harvey

Yes, I think about 2 million tons.

David Khani – FBR Capital Markets

2 million tons, okay. That’s great. Okay, good. And then, I guess last question, because you are really talking about gas, I guess the question people want to ask also behind the scene is, is you have been buying back gas, you know, the gas stock overtime and you kind of had a hiatus, how do we think about what you are going to do with the remaining stuff?

Bill Lyons

Well, I can tell you this, we like that company. We buy shares from time to time when they are available at the right price, and the Board’s last decision was it’s going to stay a public company unless we get an opportunity to buy it all in. So, right now, we have partners and we are running it.

David Khani – FBR Capital Markets

But there is no gun to your head or anything, you don’t need to do this now, it’s just whether you can just get it or do it at the right away?

Bill Lyons

That’s right, there’s no pressure on that.

David Khani – FBR Capital Markets

Okay, great. Okay, thanks guys.

Bill Lyons

Thank you.

Operator

Thank you. We have a question from Jeremy Sussman from Brean Murray. Please go ahead.

Jeremy Sussman – Brean Murray

Hi good morning.

Brett Harvey

Hi Jeremy.

Bill Lyons

Hi Jeremy.

Jeremy Sussman – Brean Murray

Hi, the 8 million tons of met coal that you just mentioned, can you tell us about how much of that’s going to be exported?

Brett Harvey

I think all but 2.5 of it.

Jeremy Sussman – Brean Murray

Okay.

Brett Harvey

Yes, 2.5 would go to domestic.

Jeremy Sussman – Brean Murray

Okay. And that 8 obviously includes the incremental 2 million of Bailey quality coal that you mentioned previously?

Brett Harvey

That’s right, that’s right.

Jeremy Sussman – Brean Murray

Okay.

Brett Harvey

Now, all of that – I need to clear some up. The 2 million tons that we are saying available at Bailey, they are not sold yet. We think that could be available if the price is right and the ability to move it right. We have the port capacity to do it, but that’s not sold it. We could move it into that, we are not saying we will, but we could.

Jeremy Sussman – Brean Murray

Right. And on the potential for just thermal coal left out of the Pittsburgh, I mean, what are you seeing there? Obviously we have seen a big pickup in Australian pricing, at one point, API-2 [ph] prices moved up a fair amount, will come back a little bit. So, can you maybe talk about the timing or potential that you see there for incremental tons on the thermal side?

Brett Harvey

So, two thing we will take. One is the price now between where we would move it as met coal versus steam coal, there is about $15 or $20 spread right now on the API-2. So, that’s a pretty big spread. The other thing is capacity you move it out. Clearly, the high vol coking coal moved before the steam coal does through our own port facilities, and so it all depends on what the capacity the ports are to move steam, because I think that’s going to overtake that.

Jeremy Sussman – Brean Murray

Okay, great. Thank you.

Operator

Thank you. We have a question from Kurt Woodward [ph] from McCleary [ph]. Please go ahead.

Brett Harvey

Hi Kurt.

Warren Chamberlain – McCleary

Hi good morning. This is actually Warren Chamberlain for Kurt. Most of my questions have actually been asked and answered. Just want to follow up to Jeremy’s question, according to the port statistics, it looks like you accounted for about 60% of the throughput through Baltimore in December versus 20% in November. Can you just elaborate and comment on a little bit more on the recent trends in the seaboard side of the business, what you are hearing from your overseas customers, and what you are seeing relative to strength and weakness right now?

Brett Harvey

Well, month to month, I guess you could call back and we would give you specifics on what’s going on in the ports. For the first quarter, we see about 3.3 million tons going through our facilities, for the first quarter, in terms of seaboard freight and all of those issues, we tend to sell all of our products to the mine or the port, that tend to be on the customer side. So, our transportation people might be able to give you some stuff if you call back in later.

Warren Chamberlain – McCleary

Okay, thank you. That’s it.

Operator

Thank you. We have a question from Paul Forward with Stifel Nicolaus. Please go ahead.

Paul Forward – Stifel Nicolaus

Good morning.

Brett Harvey

Hi Paul.

Paul Forward – Stifel Nicolaus

Just wondering what you would call your upper limit on coal production capacity in 2010 and 2011?

Brett Harvey

Let’s see, if we ran flat out, I think it would be about 62 to 64 for 2010, and 2011 it would probably approach 66 to 68.

Paul Forward – Stifel Nicolaus

All right. And that would assume a full production from the mine, for example?

Brett Harvey

Yes, that would be fuller online, everything online with some overtime.

Paul Forward – Stifel Nicolaus

All right, thanks for that. And you had mentioned earlier $35 rail rate for Buchanan to the export markets, just wondering, can you give us a comparable figure for the Northern App coal just lower price and shorter distance mean a lower rate?

Brett Harvey

We don’t disclose that.

Paul Forward – Stifel Nicolaus

Okay, I tried. Maybe lastly, you have now got your finger on the pulse of the Chinese market with the help of Xcoal, just wondering if you had seen anything over the past couple of weeks of importers not being able to get financing or get a little bit of credit, anything very recently that, that has concerned at all?

Brett Harvey

We, in fact, are seeing our orders come our way and little credits in place as well as insurance, so we should be all right.

Paul Forward – Stifel Nicolaus

Great.

Brett Harvey

We don’t see any real indicators as any problems.

Paul Forward – Stifel Nicolaus

Excellent, thank you.

Operator

Thank you. We have a question from Michael Goldberg from Loomis Management. Please go ahead.

Brett Harvey

Hi Michael, how are you doing?

Michael Goldberg – Loomis Management

Hi, how are you? Gentlemen, I just wanted to ask you how you view when you think about excess cash and how you view it versus for additional investments of the coal and gas business versus M&A or living in a share buyback, what are your thoughts?

Bill Lyons

You know, we have been consistent, and one of the advantages of CONSOL Energy is we have a great optionality. You know, we talked about some of our organic projects such as the BMX, and anytime you look at an acquisition opportunity, you have to put in along with our organic opportunities, I mean, quite frankly, most of our organic opportunities are far better than what we have seen on the M&A side. We are going to continue on to do what we have always done. That means will we see opportunities to invest in our business, we do that. However, in periods of time, will we see the stock has tremendous value is we will go out and repurchase some of the shares that are again, buying more shares of the gas company when they look very advantageous, as Brett said, you know, that’s not out of the realm of possibility either. So, I think you have to look at what we have done. And so, we will continue along that.

Brett Harvey

Okay. With that, I think we will wrap it up. Stacey, could you please instruct us on the replay information.

Operator

This conference will be available for replay after 1 o’clock PM today running through February 4th until midnight. You may access the AT&T Replay System at any time by dialing 1-800-475-6701 or 1-320-365-3844, access code 140539. Those numbers again, 1-800-475-6701 or 1-320-365-3844, access code 140539.

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Source: CONSOL Energy Inc. Q4 2009 Earnings Call Transcript
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