CONSOL Energy Inc. (NYSE:CEIX) Q3 2021 Earnings Conference Call November 2, 2021 11:00 AM ET
Nathan Tucker - Director of Finance and IR
Jimmy Brock - CEO, President & Director
Mitesh Thakkar - CFO
Daniel Connell - Senior Vice President of Strategy
Robert Braithwaite - VP of Marketing & Sales
Conference Call Participants
Lucas Pipes - B. Riley FBR
Nathan Martin - The Benchmark Company
Michael Dudas - Vertical Research Partners,
Andrew Cosgrove - Bloomberg Intelligence
Arthur Calavritinos - ANC Capital
Good morning, everyone, and welcome to the CONSOL Energy Third Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note, today's event is being recorded.
At this time, I would like to turn the conference call over to Nathan Tucker, Director of Finance and IR. Sir, please go ahead.
Thank you, and good morning, everyone. Welcome to CONSOL Energy's third quarter 2021 earnings conference call. Any forward-looking statements or comments we make about future expectations are subject to some risks, which we have outlined in our press release and in our SEC filings and are considered forward-looking statements within the meaning of Section 21-E of the Securities Exchange Act of 1934. We do not undertake any obligations of updating any forward-looking statements for future events or otherwise. We will also be discussing certain non-GAAP financial measures, which are defined and reconciled to comparable GAAP financial measures in our press release and furnished to the SEC on Form 8-K, which is also posted on our website. Additionally, we filed our 10-Q for the quarter ended September 30, 2021 with the SEC this morning. You can find additional information regarding the company on our website, www.consolenergy.com.
On the call with me today are Jimmy Brock, our Chief Executive Officer; Mitesh Thakkar, our Chief Financial Officer; Dan Connell, our Senior Vice President of Strategy; and Bob Braithwaite, our Vice President of Marketing and Sales. In his prepared remarks, Jimmy will provide a recap of our key achievements during the third quarter of 2021 and specific insights on operations and sales. Mitesh will then provide an update on our liability management initiatives, our financial performance during the quarter and our 2021 guidance.
In his closing comments, Jimmy will lay out our key priorities as we head into 2022. After their prepared remarks, there will be a Q&A session in which Dan and Bob will also participate. Finally, we posted a supplemental slide deck on our website this morning, which can be refer to for additional information.
With that, let me turn it over to our CEO, Jimmy Brock.
Thank you, Nate, and good morning, everyone. I want to start by highlighting a few developments for CONSOL that we're very excited about. First, we've recently announced a very important strategic goal related to reducing our Scope 1 and 2 direct-operating greenhouse gas emissions across our entire operating footprint. Specifically, we committed to a 50% reduction in Scope 1 and 2 greenhouse gas emissions compared to 2019 baseline levels by the end of 2026 and net zero Scope 1 and 2 emissions by 2040.
We are very pleased to be among the first pure pay coal companies to set these targets. I also want to emphasize that this isn't a new focus for us. Since becoming an independent company in 2017, we've prioritized an ESG approach, centered around enhancing employee safety, reducing environmental impacts and creating sustainable value. Developing direct operating greenhouse gas emission reduction targets underscores ESG as a core component of our business strategy, while complementing our technology, growth and diversification initiatives.
We expect to achieve these targets through multiple pathways, including the expansion of our methane destruction program, which began at the PAMC in 2017. We believe our world-class assets will continue to play a vital role in securing the world's electricity and infrastructure needs. And this effort is aligned with our commitment to sustainably lead the coal industry and carrying out this role.
Second, due to the improved and sustained demand for our product, we announced this morning that we are recommencing the development of our 5th longwall located at our Enlow Fork mine. This wall will go to the newest reserve area of Enlow Fork after we recently finished selling off the northern section of the mine. As such, Enlow will be a light new mine with an efficient layout moving forward.
Given the supply demand imbalance we've witnessed this year as well as our recent multiyear contracting success, we believe the market fundamentals exist to support this decision. Finally, our Itmann mine and preparation plant are progressing as expected. The mine continues to operate productively on a single production shift with a second support shift that was recently added.
Due to the improved market dynamics, the underground operations are generating positive operating cash flows on a consistent basis. We continue to explore options to further ramp up production and promote the Itmann product in the low-vol met market. Prep Plant Earthwork began in Q3 and is approximately 50% complete. Teardown at the recently purchased plant is underway, and the primary processing equipment has been removed and is awaiting transport to the Itmann site.
The main steel structure of the plant and rail load out is now being disassembled. Earthwork and foundations are targeted for completion by the end of the fourth quarter and the erection of the plant will then commence. Commissioning of the Itmann plant remains targeted for the second half of 2022, which will coincide with the ramp-up to full production at the mine shortly thereafter.
On the safety front, our Enlow Fork mine, Bailey Preparation Plant, CONSOL Marine Terminal and Itmann project each had zero employee recordable incidents during the third quarter of 2021. Our year-to-date total recordable incident rate at the Pennsylvania mining complex remains significantly below the national average for underground bituminous coal mines.
Now, let me move on to our Q3'21 operational performance. Coal production at the Pennsylvania mining complex came in at 5.3 million tons in Q3 of '21 compared to 4.5 million tons in Q3 of '20. The improvement versus the prior year period was due to the increased demand for our product as coal markets were just beginning to recover from the COVID-19 related demand decline in Q3 of '20.
However, we encountered multiple operational, geological and logistic issues as well as planned maintenance shutdown that limited our production in the quarter. As a result, our average cash cost of coal sold per ton was elevated, finishing Q3 '21 at $30.64 compared to $28.64 in Q3 of '20. The increase in our per ton cash cost was mostly the result of limited production as well as increased maintenance supply, contractor and project expenses associated with the operational and geological issues that we encountered in the quarter.
We continue to deal with certain geological challenges in the early part of the fourth quarter. However, this has been largely mitigated, and we are back to run 4th longwall more consistent. The CONSOL Marine terminal had a throughput volume of 2.8 million tons during Q3 of '21 compared to 2 million tons in the year ago period. The increase was again due to improved demand in the seaborne markets compared to the prior year quarter, which was still being impacted by COVID-related coal demand decline.
Terminal revenues for the quarter came in at $14.1 million compared to $17 million in the year ago quarter. Despite the increase in throughput tonnage, revenue was impaired in Q3 of '21 compared to Q3 of '20 due to the take-or-pay contract that was in place in the prior year period. CMT operating cash cost came in at $5.8 million versus $4.8 million in the year ago quarter, driven by the increased throughput tonnage.
On the marketing front, we continue to witness demand for our products strengthening throughout the third quarter of 2021 due to the ongoing economic recovery and improved electric power and industrial demand here at home and across the globe.
During the quarter, we sold 5.4 million tons of coal at an average revenue per ton of $47.46 compared to 4.5 million tons at an average revenue per ton of $40.55 in the year ago period. The improvement was due to the increased demand for our products and ongoing supply tightness compared to the prior year period. When coal markets were just beginning to recover from the COVID-19 demand destruction that bottomed out in the middle of 2020.
Pricing was improved as the commodity markets continued to rise in the third quarter of 2021. Henry Hub natural gas spot prices averaged $4.35 per million BTU during Q3 of '21, a 118% increase compared to Q3 of '20. Average PJM West day-ahead power prices also continued to improve, ending Q3 '21, 81% above the year ago quarter. Pricing has further improved since the end of the third quarter, with Henry Hub natural gas prices now and the $5.50 million per BTU range for December deliveries and calendar year 2022 trading above $4 per million BTU.
On the export front, the seaborne thermal coal markets continued their upward trend in the third quarter of 2021 as well. API2 spot prices ended Q3 '21 at $151 per ton or 193% improved versus Q3 of '20. LNG prices also continued to rise in the third quarter of 2021, and the Asian market ended the quarter more than 5x higher than Q3 '20 prices. Pet coke prices remained supportive, popping up demand and pricing for Northern App coal and high CV markets.
Additionally, Turkey recently announced that it has eased its restrictions to allow up to 3% dry sulfur coal to be imported. We believe that our PAMC product is a natural fit, and we've already received inquiries. We continue to see improvement in our domestic customers' contracting appetites, and our marketing team was successful in securing additional sales contracts in 2022 and 2023.
As such, our contracted position has grown to 20.2 million tons in 2022 and 5.8 million tons in 2023. Due to our strong contracted position and free cash flow generation, we feel good about our business as we head into 2022.
With that, I will now turn the call over to Mitesh.
Thank you, Jimmy, and good morning, everyone. Before I move on to the financial update, let me add some more color on the recent coal market strength, which Jimmy had just highlighted. A lot of what is driving the improvement is the significant supply demand imbalance that we are witnessing. We expect that overall market conditions will continue to remain robust due to the accelerating global economic recovery and a muted supply response.
IHS market estimates that total U.S. coal demand in 2021 will increase by 110 million tons versus 2020 levels, while total U.S. coal production will improve by only 59 million tons. This just leading to tight supply and declining coal inventories. The EIA reports that August coal inventory levels at domestic power plants stood at 84.3 million tons, the lowest level since at least when Ronald Reagan was President.
While the low number is important, what is even more important is that the market is fundamentally under-supplied and power plants are already in preservation mode ahead of the winter. Additionally, the EIA also estimates that these inventory levels will continue to decline and finish 2021 at approximately 73 million tons, a reduction of 45% from year-end 2020 levels.
Barring any significant reduction in demand, we expect this imbalance will continue, driven by a lack of investment in the coal space in recent years and the Dwindling access to capital for coal companies, which we expect will remain the trend going forward.
Combine this with the fact that active reserves continue to deplete during each year of operation, and you have a situation where it will be challenging for supply to ramp up or even sustain at current levels in the future. This highlights the significant value of an already installed asset base and the advantage we have to be able to restart the development of our 5th longwall to restore capacity in an environment where such few opportunities exist.
Now, let me provide an update on the progress we have made on our key financial priorities. I also want to touch on some of the volatility we have recently witnessed in the API2 market. I will then review our third quarter 2021 results and our guidance. Despite the operational challenges we faced this quarter, we still made significant progress on our financial priorities. First, we continue to maximize free cash flow generation and generated nearly $35 million of free cash flow in the third quarter, which brings our year-to-date total to $162 million for the first 9 months of 2021.
Second, we continue to make strides on our overall debt reduction goal as we made total debt payments and repurchases of approximately $23 million in 3Q '21, including $2.9 million of open market repurchases of our outstanding second lien notes.
Third, our cash balance increased by approximately $12 million during 3Q '21, bringing our total unrestricted cash and cash equivalents to $162 million at 9/30/2021. When accounting for our restricted cash of $50 million, our total cash and cash equivalents balance set at more than $212 million at quarter end.
Fourth, we ended 3Q '21 with a liquidity position of $402 million, which allows us to continue to make prudent capital allocation decisions such as moving forward with the Itmann project and accelerating our debt reduction goals.
Finally, we reduced our net leverage ratio to approximately 1.6x at the end of 3Q '21. As a reminder, this ratio does not account for the restricted cash from our tax-exempt bonds due to the treatment of restricted cash under our credit agreement. However, if we include the $50 million of restricted cash, our leverage ratio as of September 30th would be below 1.5x, and our consolidated net debt would drop to $469 million.
Before moving to the financial results for the quarter, let me highlight some of the volatility we have seen in the API2 market as it relates to our financial hedges for 2022. As a reminder, we hedged 2 million metric tons in the API2 market for calendar year 2022 at a weighted average price of $79.34 per ton. On a year-to-date basis, we have recorded nearly $168 million in unrealized pretax losses on commodity derivative instruments, $147 million of which were recorded in the third quarter of 2021.
Calendar year 2022 API2 forwards have been highly volatile throughout 2021, ending September 2021 at $157 per metric ton versus $76 per metric ton at the beginning of May 2021, an increase of 107%. However, as of end of October, calendar '22 API2 prices have reduced by 28% compared to September 30th. And we estimate that approximately $112 million of these unrealized losses have been reversed.
With that, let me now recap the third quarter results before moving on to our 2021 guidance. CEIX ended the third quarter of 2021 with a net loss of $113.8 million or $3.30 per diluted share, which included the previously mentioned $147.3 million of unrealized pretax mark-to-market losses related to commodity derivatives and adjusted EBITDA of $66.6 million.
This compares to a loss of $7.2 million or $0.28 per diluted share and adjusted EBITDA of $68.3 million in the year ago quarter. In 3Q '21, we generated $80.5 million of cash flow from operations, which included $27 million of positive working capital changes, driven by a reduction in our accounts and notes receivables balance and an increase in our accounts payable balance. This compares to cash flow from operations of $15.7 million in 3Q '20, which included $31.7 million of negative working capital changes. The improvement in operating cash flow compared to the prior year period highlights the improvement in the core markets and demand for our product.
Additionally, we spent $45.9 million in capital expenditures in 3Q '21 compared to $19.5 million in 3Q '20. This resulted in free cash flow generation of $34.8 million in 3Q '21 compared to $4.3 million in the prior year period.
Now, let me provide you with our updated outlook for 2021. Due to the operational and logistical challenges we encountered during the third quarter, we are decreasing the top end of our expected sales volume range for 2021 to 23.5 million to 24.5 million tons. Additionally, due to our recently announced recommenced 5th longwall development as well as the operational challenges and modest inflationary pressures we have encountered, we are increasing our expected average cash cost of coal sold per ton range by $0.50 on the low and high-ends to an updated range of $27.50 to $28.50 per ton.
On the pricing front, we are fully contracted for 2021 at an expected average revenue of $46.26 per ton, assuming PJM West power forwards for the fourth quarter of $54.84 per megawatt hour.
Finally, we are reducing our capital guidance range by $10 million at the midpoint to a range of $150 million to $170 million. Additionally, as discussed earlier, our Itmann project is progressing as expected and on budget, and we are reaffirming our guidance of a second half 2022 start-up as well as all operating assumptions.
As we firm up our expectations for 2022, we will provide our 2022 guidance ranges on our next earnings call.
With that, let me turn it back to Jimmy to make some final comments.
Thank you, Mitesh. Before we move on to the Q&A session, let me take this opportunity to reiterate our priorities as we move forward. First, we continue to emphasize the importance of our balance sheet and prioritize improving our liquidity and financial flexibility.
We've had a lot of success in this regard since becoming an independent public company due to our consistent free cash flow generation in all parts of the commodity cycle. We are optimistic moving forward that we will continue to delever the balance sheet and reduce our absolute debt levels, especially given the significantly improved coal markets that we are now seeing.
Second, given the confidence that our customers have shown in us by providing duration to our contracted position and reversing the recent trend of shorter-term domestic contracts, we are committed to getting our 5th longwall up and running once development is completed, which we believe will be in the fourth quarter of 2022.
We think this is a positive sign for us moving forward and provides justification for beginning the work to adding more PAMC tons to the market. As we stand today, we have a solid order book for 2022, and we will remain opportunistic on additional sales we booked.
Third, while we view recent domestic term business as a positive development for us, we continue to focus on our longer-term strategic shift into the export market, which we expect will de-risk our domestic exposure and allow us to capitalize on growing international demand for our high CV product.
Year-to-date, we've shipped approximately 50% of our total sales volume into the export market. And owning our own terminal is a huge differentiator for us compared to our peers. The value of our PAMC coal has always been tied to its high quality, which allows it to play in many markets across the globe. We will continue to prioritize balancing markets at home and abroad with a longer-term focus on shifting to global demand growth.
Fourth, we are pleased to be well underway with our efforts to relocate a preparation plant to the Itmann site. This project is the next phase of our growth and diversification strategy. We are very anxious to get this project completed and start placing our high-quality, low-vol metallurgical Itmann product into the market.
Finally, let me reemphasize our excitement about our recently announced greenhouse gas emission reduction targets. Our commitment to ESG was a focus centered around enhancing employee safety, reducing environmental impacts and creating sustainable value aligns well with our top core values of safety, compliance and continuous improvement.
We expect to be a part of the energy mix for the long haul. And our dedication to reducing our emissions will allow us to do that responsibly and sustainably. I want to end the call by thanking our employees for working safely and compliantly and dealing with some of the challenges we faced during the quarter and getting us ready to head into the New Year, prime to excel in 2022 and beyond. Our employees are the key to our success, and once again, they have proven their value in challenging situations. There's always more work to do. But we continue to focus on our goal of strengthening our balance sheet and creating long-term value for our shareholders.
With that, I will hand the call back over to Nate for further instructions.
Thank you, Jimmy. We will now move to the Q&A session of our call. At this time, I'd like to ask our operator to please provide the instruction to our callers.
[Operator Instructions]. Our first question today comes from Lucas Pipes from B. Riley Securities. Please go ahead with your question.
Hey, good morning everyone. I have a few questions. The first one is on the 5th longwall. And I wondered if you could elaborate a bit on the capital costs that are required for that project and then the payback period and ultimately the returns of that project, would very much appreciate your perspective on that. Thank you.
Hi Lucas, good morning. Well, as far as the capital goes, as you know, we already own the equipment. So with this set in our isle, there may be some project rebuild cost in that, but we don't expect that to be anything out of normal because we have the equipment there. The cost that we'll have in the 5th longwall is developing those two panels to get it started. It will take 2 sections to do that. We're driving them both now. So we expect that capital cost will be the same as our others look. Because it will be - we say somewhere around $5 a ton for maintenance capital, this will be the same.
Got it. Got it. So there's no - so the upfront investment to get this longwall start producing is in the tens of millions of dollars? Is that the right way to think about it? I know, you would probably expense it, but I'm just trying to think about like what sort of returns you're looking for to bring additional production back online? And I understand this is a very low-hanging fruit.
Yes. The way to look at it, Lucas, is it won't even be tens of millions, it'd be in the single-digits. It's just rebuilding some of that equipment that we have now. So we'll send just like a normal rebuild we send it out to get it rebuilt, and then we'll bring it back in. It's usually each longwall move is somewhere - it's in the single-digits of millions to do that. And of course, the payback - as soon as we start that wall up, which we're anticipating Q4 of 2022, then, we'll start earning that money back.
And Lucas, as you're probably aware that a lot of the development costs might also be expensed through operating costs, so it might not all show up in capital.
Yes, yes. No, no, that makes sense from an accounting perspective. Obviously, we do want to see high returns to bring back additional thermal coal production. That's why I was asking these questions. So I appreciate that perspective. And kind of piggybacking on that. You commented on the appetite from utilities to book longer-term business and obviously bringing back the longwall plays into that as well. So what sort of pricing for 2022-2023 have you been able to lock in under fixed-price contracts, would very much appreciate your perspective.
Well, Lucas, in terms of pricing, let me kind of be clear that we continue to layer in volume for 2022 over the past, I'll call it 9 to 12 months. And you may recall that on our first quarter '22 earnings, we announced we had 5.5 million tons sold for '22. At the end of Q2, we were at 10.9%, and now we're at 20.2% at the end of Q3. So again, taking into consideration and based on a recent API2 and power forwards are for '22 as some of our contracts are linked to API2 and power prices.
Our average price across that 20.2 million tons are expected to be in the low 50s. And for the balance of our portfolio for '22, we will remain opportunistic in contract volumes that yield the best price for us, whether that be domestic or export. And then, looking ahead to 2023, we have increased our sold position as of - this morning, we announced we had 5.8 million tons sold for '23. I can also tell you that we are in negotiations for additional volumes in 2023. Again, so that provides us with this confidence to move forward in the development of that 5th longwall.
Okay. Can you comment a bit on pricing for 2023?
Being that we're in the middle of these negotiations, Lucas, we're not prepared to comment today. But I can just basically tell you, if you look at the published prices, we're close to that type of level for 2023 today.
Okay. Okay. A follow-up question on your prior comment for 2022 pricing. The low 50s, it sounds like that's a mix between domestic and export. Is it possible to break that down between those categories?
Yes. Right now, on the export front, we have approximately 6 million tons sold for 2022, so the balance would be domestic or roughly 14 million tons.
And for the 14 million domestic, what's the recent pricing that you've been able to obtain there?
Again, it's been pretty close to what the market has been for the most recent tons that we contracted. But as I mentioned to you, they were contracted throughout the third quarter. So when you go back and you look at what the published pricing was, and I believe you'll find that the average pricing across NAPP coal for Q3 were - was right around $60, give or take. We've been able to secure volumes at or slightly above those published prices during that quarter.
Got it. And then, my last question. The logistic issues during the quarter. Can you elaborate what cost them? Where in the chain are you seeing the biggest bottlenecks? And how quickly do you expect the logistic issues to be resolved from here? Thank you very much.
Yes. I mean, as we mentioned, rail did have some issues throughout the quarter, but I can tell you that they continue to improve. I mean, we're having conversations at all levels across the railroads. And we are expecting a strong finish to the year, followed by a strong start to 2022. I think, the challenge continues to be employees. I think they continue to try to ramp up. I don't think anybody really saw this demand increasing as quickly as it did but they are in the process of hiring hundreds and hundreds of conductors and engineers to ensure that they're ready for this uptick in demand that we're seeing now, and we expect to go through 2022.
Okay. Okay. Well, I appreciate that. And hopefully, things improve on that front as well. So thank you and best of luck.
Thank you, Lucas.
Our next question comes from Nathan Martin from Benchmark. Please go ahead with your question.
Good morning guys. Thanks for taking my questions. So Lucas kind of touched on the pricing side for '22. Maybe I'll shift over to the cost side. Obviously, we're seeing some inflationary pressures, some logistics issues, maybe labor issues as well. Maybe could you guys help quantify any headwinds you see? And then, it also appears that will be probably a sales sensitive increase as well next year. So maybe just get your overall thoughts on how costs might trend in '22? Thanks.
Well, I think when we look at costs, there are some small inflationary pressures that we're seeing now. And it's - with many of the products that we use to mine the coal with. Also, labor is getting - labor is very tight across all the markets. You've heard many people talked about that. But for us, we have been able to hire the people. We've been able to bring some people on down at Itmann, and we'll continue to do that.
Now, it's not easy to go out into the labor pool today. The market is very, very tight. And I think what our hope is, as we move forward, some of these geological issues that we have behind us here in this third quarter will go away, and we'll get back to some sort of operating normal, whereas we're - we've always said, we'd like to keep the inflationary project somewhere below that 5% number when we're looking at inflation, and we believe we'll be able to do that.
Great. Thanks for those comments, Jimmy. Maybe again, just going back to the 5th longwall ramping up here. It looks like your production wouldn't begin until fourth quarter of next year. Maybe could you guys give us your early thoughts on what production out of PM's done as a mining complex might look like in '22 at this point? And then, maybe touch on Itmann. You guys gave a little update on progress there, but what kind of shipments could we see from that mine in '22? Thanks.
Well, looking at '22 for the 5th longwall in the Pennsylvania Mining Complex, it will be late in the quarter, and it all depends on how development goes. This wall is going into our newest section of reserve. We just sell the northern portion of the mine off. And these panels are going to be 3,000 feet longer in length than the others, and that's why it's taken a little extra time to do that. So it will be - it will have minimum impacts in 2022 as far as the 5th longwall goes. Hopefully, we can get it up and running for a month or so and do well there.
But I think when you look into 2023 and beyond, we can be back to that 5th longwall whereas, we ran in the past, we used the midpoint of 26 million tons. So we could be in that neighborhood there moving forward. It all depends on the market, on how hard we run that 5th wall. And if the market is there, we'll run it to the same level as we run before. If it's not, obviously, we'll put one of those walls back.
Itmann, Itmann is going very well. We're really happy that we found a prep plant that we can demobilize, take down there and have running. They continue to run very productively on the one shift that we've been running. We did add a second crude to pick up some additional tons there. But we're happy with where the Itmann project is now. And I'll let Dan add to that a little bit about the ramp-up of production and what our expectations are.
Yes, sure. Nate, our expectation, given the development mining that we've been able to do here since starting a project is that we will be positioned to ramp up very quickly at Itmann when our prep plant project is complete. We are still targeting second half of next year. We've said our annual run rate is going to be on the order of, call it, 900,000 tons. So we would expect to get close to that level of run rate in the latter part of next year. Between now and then, Jimmy mentioned, we're currently operating one section. This is ultimately a three-section mine. So figure, somewhere around 1/3 capacity probably for the first half of next year.
Got it. That's helpful, guys. I appreciate that. And then finally, just, I guess, touching on CapEx guidance lowered by $10 million to the midpoint for this year. Any early thoughts on how that might shape up for next year?
Nate, I think it's a little too early to give you a 2022 CapEx guidance range. But generally speaking, as Jimmy has mentioned in the past, if you think about it from a maintenance CapEx perspective, $4,000 to $5,000 a ton range with some inflationary pressures. And then Itmann residual spending, which I believe could be in the order of $30 million, $35 million for next year and then, some other stuff that typically is there from a CapEx perspective. But generally, in that range, no major changes. Jimmy mentioned that the 5th longwall could be low single digits that could be potentially capitalized. So maybe you add that in.
Got it. Thanks, Mitesh. That's it for me. I appreciate all your thoughts, guys. Thanks again for the time and best of luck in the fourth quarter.
Our next question comes from Michael Dudas from Vertical Research Partners. Please go ahead with your question.
Yes, good morning everyone. First question is, you've talked a little bit about that interesting news out of Turkey. Maybe element of - in your marketing plans, is there going to be a significant shift of who's buying your coal, who's looking to buy the coal? Certainly, India is going to be - continue to be an important customer base. Is there any shift there that impact on pricing?
And then second, I guess, a follow-up to that would be, looking at today's market and as people start to figure out what you can price tons without giving away too many state secrets. But relative to what netbacks might be today and the appetite of the consumer, given where prices are extraordinarily high and as crazy as certainly going on in Europe on natural gas, are customers just - are they panicked or are they to be trying to play cute? Or how are they portraying and how is that going to be able to help you secure some of those pricing that you might be seeing as we move to '22?
Mike, I'm going to answer your questions in reverse order. Starting off by just these API 2 price rises or I should say, just indices in general. A lot of this volatility is based on speculation from what's coming out of Russia and China. Russia, obviously, saying they're going to increase gas supply, which, by the way, we have yet to see. And then China, putting a cap on their - of their coal pricing. And obviously, China does affect the world market.
However, just looking at the fundamentals, the globe certainly remains energy short. And I think as we continue through time, we'll continue to see these international prices prop back up. We might not see $300 API 2 prices, but I wouldn't be surprised if you see another - just call it, $20 or $30 improvement for where they are today.
And although these markets are continuing to bounce all over the place, and there is volatility in the export prices. What I can tell you is, first, we are now seeing our physical coal sell to a premium to the paper. And secondly, we have been successful in just the past 2 weeks to book additional thermal cargoes in Q1, of which yield very close to $100 back to the mine. So again, physical continues to sell at a premium to paper.
As far as Turkey is concerned, we are excited about the new opportunity. We are receiving inquiries on a daily basis. I will tell you that if we could ship a cargo tomorrow, they'd be interested. However, as we mentioned, we are fully contracted for 2021. There will be opportunity for us in 2022. Again, it's exciting. It actually places a little bit more pressure on the Indians.
Typically, the India - the Indians will look at the API 2 markets and petcoke markets. Now, they also got to understand that we have another outlet for our coal. So puts another sense of competitiveness into the marketplace. And again, I wouldn't say a major shift from what we're doing today, India will still be a large consumer of our coal going forward, and that's our expectation. But the good news for us is now we have another market opening up to our Northern App coal.
Thank you for that. And maybe Mitesh, thinking about locking in and hedging and such. Any thoughts on going forward if there's appetite ability? How do you think through this given, trying to take advantage of some of these spikes relative to the craziness of the market yet trying to be a little bit more measured on what the company might be able to secure and certainly drive some pretty, you would think, supportive cash flows to continue to recapitalize?
Mike, that's a good question, and we often have the discussion about forward hedges and stuff like that. I think, one of the challenges is just the overall volatility. And at times, there is a disconnect between the paper and the physical market. So for instance, when the prices ran up, you start to see physical trade at a little bit of a discount to paper. And more recently, as Bobby pointed out, you are seeing paper trading at a premium to - sorry, physical trading at a premium to paper. And unless you have a very good one-to-one correspondence there, it becomes a risky proposition. And that is okay, if you have a lot of open position that you can offset some of the future sales against it.
But in - for example, for 2022, we are not looking to add additional paper sales for the 3 million or 4 million tonnes that we have opened because you will have that issue where you don't have a lot of open position to offset against. 2023 is something that we'll look into. 2023 rallied a little bit and then pulled back. We'll look into it. But again, I would much rather prefer Bobby to sell some API tooling contracts and then offset against that and just going - make it against future sales. Not that we'll never do it, but it makes it a little bit more difficult proposition for us.
And just finally, logistics on the high seeds, availabilities, issues with regard to containers and crews and those issues, obviously, it's being priced to marketplace, but is there a sense of any delays or backups or anything that could cause some shift to Q1 from Q4? Vessels that you might be thinking of that you anticipate to book this year moving into next, just a sense of that? And maybe what pricing might be, and of course, I'm sure that's maybe not it all is post the paper markets, but certainly, I'm sure, very volatile as the shippers or the transportation companies want to make their pay as well?
Yes. I don't anticipate any issues with getting our export volumes loaded this year. In fact, almost all of our vessels that we have for the balance of this year have been nominated and have ETAs. As far as vessel rates, freights are still inflated from where they were earlier this year. However, most people I talk to believe that freight rates will come or I should say, vessel rates will come back down approximately 10% to 20%.
And a lot of this has to do with some of the Australian ships that have been underload for over a year now, pre - I'll call it, the pre-China, Australia tensions. And once they offload, that will add some additional shifts in the market. And then, with this, I'll call it, slight softening in the markets, it should help as well.
Our next question comes from Andrew Cosgrove from Bloomberg Intelligence. Please go ahead.
[Technical Difficulty] for '22. So just wanted to double check are the 20.2 million tons that are contracted, are those committed and priced? Or are any of those tons still yet to be priced?
Andrew, I'm sorry, could you start the first part of that question over? You were muted or something. We only heard the part about the tons for 2022.
Okay. Sorry. Yes, I was just curious if the tons earmarked for next year, those contracted, which is that 20.2-million-ton figure, is all of that committed and priced? Or are there some slug in that mix that are still yet to be priced?
So of the 20.2 million tons, we have about, call it, 3.5 million tons that are subject to power prices, which would be our netback contracts. And then, we have between 1 and 1.5 million tons that are linked to API2 prices, balance our fixed-price contracts.
Okay. And then, I guess, the remaining, call it, 5 that are left, assuming we do 25 million tons next year. Are those all export-oriented tons?
As we mentioned, we're going to remain opportunistic in contract volumes to yield the best price, and that could be domestic or it could be export.
Okay. And then along the lines of pet coke, can you just maybe just give us a market, a general indication, of where current pet coke prices are because not everyone has access to some of these pricing sources. So I think sometimes even just telling people where things are at, so they get a good idea. And then similarly, where domestic NAPP prices as well right now?
I mean pet coke price, we look at mainly what it is for delivered into India. We - obviously, that's what we compete against. Last, I saw, I believe we are somewhere in the high 100s on a delivered basis, close to $200. So we just do the calculation back off freight and then also look at the calorific value discount that we have worth 6,900 kcal into India. Petcoke is at 7,500. So it's basically doing a calculation to come up with what we believe our delivered cost and then our FOBT prices for our NAPP coal to compete against petcoke into those specific markets. And again, specifically, it's India.
As far as NAPP prices are concerned, I mean, where gas prices are today, call it, the $550 in range. I think what you're seeing in the published markets are accurate. And then again, we look at what the future natural gas price and power prices are to come up with what we believe is a competitive price for our Northern App coal going into the domestic power gen market. And again, I think if you look at where the published prices are today, whether you're looking at SNL, if you're looking at Vaughn, if you're looking at IHS, I think they're fairly accurate to where they're at. But again, we'll continue to watch the gas curve, continue to watch the power curve and price our coal accordingly.
Okay. Great. Thanks for taking my questions. And good luck for the rest of the year.
Our next question comes from Chris Vancarp [ph] from Checkmate Capital Management. Please go ahead with your question.
Hi, good morning. Two questions. One on the volume shortfall in the quarter due to some geology in the mine. Sequentially, your sales were only - your production is only down like 0.5 million tons, and it's a seasonally weak quarter because of the scheduled maintenance. How much of that quarter-over-quarter reduction was due to problems and how much was just the normal maintenance season?
I think if you look at just the recent quarter, we had probably the geological issues that we had on the one wall and the one fall probably equates somewhere between, I'm going to tell you 250, 400 thousand tons.
Okay. So that's - so what was not your usual to have any trouble, but it was a pretty small issue. It sounds like in the big scheme. And then, I mean, the prices are - just to shift gears, the prices you're talking about, I mean, at least if I'm looking at my spreadsheet right, these are pretty high prices compared to the last 5 years.
I mean - and there's a lot of operating leverage in the model. I mean, maybe you could update us on what your priority is for the use of all this free cash flow. I mean, what's your target leverage? And what are you going to do when you reach that?
Yes. This is Mitesh here. So just on overall capital allocation standpoint, you are right. The pricing that we are seeing are some of the higher prices that we have seen in last 4 or 5 years. So thank you for acknowledging that. And we do anticipate that we're going to have a good year next year, and we're going to use that free cash flow based on our stated priorities of reducing our outstanding debt. So right now, we sit north of 1.5x levered on our bank calculation method, 1.6x. I would like to get that sub one as a first step.
And then we always look at what other initiatives that we are going for, for instance, the Itmann project will have some residual spending next year, which will use some capital. And then, looking at what the opportunity set looks like from - everything from shareholder return perspective, internal projects, those kind of things, I think all those things will be considered.
Okay, thank you very much.
And our next question is a follow-up from Lucas Pipes from B. Riley Securities. Please go ahead with your follow-up.
Hey thanks very much for taking my follow-up question. I want to get a better understanding of this 5th longwall. So it sounds like this is going to take the majority of 2022 to get up and running. And you have some tons contracted for 2023, but it's 20% in that ballpark or so. So what gives you that confidence to restart this longwall? Has something structurally changed in the market that we're going to need to supply? I would really appreciate it.
Well, look, we still think that, as Bobby mentioned earlier, the world is energy short. And we just do not see - we think the tightness in the market is going to remain there. There's - any of the capital that's been spent in the last 2 to 3 years has certainly not been spent to have the coal mines in a position to run more tonnage or to add new tonnage. So we have the opportunity with this fifth longwall. Like I said, some of the capital is already sunk in now. Some of the equipment was rebuilt because we've planned on running that until the COVID situation happened to us.
So we think that the market is going to continue to stay strong. We're pivoting toward the - growing the markets in the international business. And we believe that we'll be able to get our costs well under control again and compete in both the domestic and international markets. And as it grows, we have an opportunity for the tons.
And Lucas, I'll also point out one thing is that if you think about what we said about the 5th longwall, it's got very de minimis capital, so to speak, but it has a long gestation period. So for example, we start work today, we don't see it until next 12 months. So this helps us get ready. So hopefully, 2023 is going to be a continuation of 2022, and we are able to capitalize on it. But if it is not, we did not spend a lot of capital, but we avoided the long gestation period and a certain - mining is always difficult.
So for instance, like in the third quarter, it would be nice to have that 5th longwall running when we were facing geological issues. So it could potentially help offset some of that risk as well. So on a risk-adjusted basis, it would be nice to have that wall geared up and ready to start, whether we run it or not depends on what our contracted position is going to be in 2023.
Yes. And Lucas, if you recall in the past, that's exactly what's happened to us. I mean, we've had issues on these other longwalls. And then we ran the other four really hard, and we hardly noticed it. But when you take - we were down to four longwalls, when two of those four are down, then you feel the pain of the volume.
And one last thing on the marketing front, Lucas. We are in negotiations for additional volumes in '23. And I can tell you that we passed on some volumes already for '23, we just didn't feel as though it was the right price for what the market was back in Q3. So - and I can tell you we're having similar conversations with those same customers, and it's likely we're going to yield higher realizations than if we would have booked those tons in Q3.
So I would anticipate by the time we have our next earnings call that we will have some additional contracted volume for '23. And again, most of that - just about all of that for '23 that we have booked is domestic. There's very, very, very little export in that. And typically, we sell close to 50% of our coal exports. So we feel pretty confident that the market will be there in '23.
Okay. That's helpful. One other follow-up question on this topic. Is there a trade-off between this gestation period and capital? In other words, given where the market is today, why not spend more money to try to get this up and running quicker?
Yes. There's really not a trade-off, Lucas. Plus, we can't get it up and running quick or we could spend more money, but it won't do it then. We have the crews hired. We're running both of those crews to develop, but it's just a matter of how many feet per machine shift can you drive to get it there. And we're going to run ever available shift we can, and we'll update on our next earnings call, where we are with that. But currently, it's down to - it's just feet per machine shift to drive-up and make the connections to us, we can have it ready to move to the longwall into.
Okay. Well, I appreciate that additional color. And then again, best of luck.
Our next question comes from Arthur Calavritinos from ANC Capital. Please go ahead with your question.
I have a question on the contracted position, so '22 is around the corner in less than 60 days, and you just addressed something of '23, which is interesting that most of it is domestic. But I'm looking at - like you guys, all the news flow and you have better news flow than I do. But the inventories like in India, England has to turn on a new coal plant, are so low. At what point do the international guys - and I understand they don't do as long-term contracts as the U.S. guys do.
But the inventory is inventory. And if you run out of electricity, it's a bigger problem than what the price is. And you mentioned physical is greater than paper. Do you see a dynamic changing? And I would have thought the '23 - again, it's early, but not early, but I would have thought you'd have more international business in '23. Or are those guys calling you up and saying, Okay, I want a few hundred thousand tons, I need it in '23 and I'll sign a contract. If you could just talk on that. Thank you.
Yes. I mean, Arthur, like you said, inventory levels are at the lowest I've seen them in 17 years across the globe. I think everybody is concerned about tomorrow. And the focus right now for many international customers is basically tomorrow, not 2023. I do anticipate, call it, in the next 3 months or so, we'll probably start those discussions for, I'll call it, the balance of '22 and for 2023. But right now, everybody's just focused for tomorrow, trying to get as much coal as they possibly can as soon as possible to ensure that, again, they keep the lights on.
I will also tell you that in terms of India, as you mentioned, you brought that up. Most of our coal goes into the industrial sector, not the power gen sector. It's mainly due to the quality of our coal. Obviously, India burns a lot of domestic product, Indonesia coal, South African coal, et cetera. But we would yield a premium to all that based on our calorific value. So I think a long-winded answer is everybody is concerned about tomorrow. 2023 is a little bit too far out for these international guys. But I think we will get in those conversations here, call it, the next 3, 4, 5 months.
And in the domestic - one last question because the domestic guys bringing up their inventories. I was talking to another coal company in an earnings call last week. And it's sort of - the way they phrased it was, our guys here, it's - they can't get there - not they can't. Maybe they're prohibited or there something to keep their inventories higher than they should, but much higher than they are now. And the comment was like, the utility would like to have higher inventories, but they can't. Is there anything going on there or anything like that, that prohibits them from having higher days' supply of inventory?
I think the comment that was made was likely due to transportation issues. Obviously, I don't - again, I think I mentioned this earlier, no one saw this great uptick. I mean, I think many predicted $4 gas, not so sure - many predicted $5 and probably not $6. And when that hit, obviously, coal, there was a lot of gas to coal switching. And the transportation network just couldn't respond quick enough to be able to get all this coal to the utility.
So my assumption here is the comment on inventory levels can't get built up in a very short time is mainly due to logistics. But again, over time, I think you'll continue to see that improve. But so long as these gas prices remain in this, call it, $5 range. I mean, every ton that gets delivered to a power plant is going to get burned. So it will need to be replaced, and that's, again, another reason why we're very bullish on 2022 and for that matter, 2023.
Alright, good. Thank you very much.
All and ladies and gentlemen, with that, we'll be ending today's question-and-answer session. I'd like to turn the floor back over to Nathan Tucker for any closing remarks.
Thank you. We appreciate everyone's time this morning, and thank you for your interest in and support of CEIX. Hopefully, we were able to answer most of your questions today, and we look forward to our next quarterly earnings call. Thank you.
And ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for attending. You may now disconnect your lines.