June 12th Investor Day Highlights Continued Emphasis on E&P Versus Coal
Gas growth - CONSOL expects Marcellus production (55 Bcfe in 2013) CAGR 60% through '16 and Utica (0.8 Bcfe in 2013) at 270% through '16.
E&P Capex Will Climb - $1.11B of E&P capex will be needed in 2014 (up 15% y/y) to fund CONSOL's production increases. E&P capex will comprise 73% of the company's planned capital spending and bodes well for ABB, AME, EMR and HON.
Coal Capex Will Drop - After investing significant capital in its three remaining coal complexes (two thermal, one met), CONSOL is now satisfied with reaping FCF from the mines. The only coal-related capital spending will be $390M of maintenance capex, down 15% from 2013.
Funding the Evolution - CONSOL describes using a combination of cash flow from coal production, non-core land/coal asset sales, cash received from mines sold in 2013 and a newly announced MLP to finance continued gas exploration and drilling. The MLP is a JV with Noble Energy that will focus on midstream gathering from the Marcellus Shale with a public offering in late 3Q or early 4Q.
Exiting Coal? - Industry sources indicate that CONSOL is interested in selling all of its remaining coal complexes, but we can't identify a domestic buyer with cash on-hand. Thus, the mines could be sold to a foreign investor. CONSOL's Buchanan mine in VA recently experienced a layoff, and its met coal sells into a bad market. Its future operation only makes sense if it continues to support, and benefit from, coal-bed methane production. The company's Miller Creek Complex in WV is a marginal asset, thus leaving the Bailey Complex in PA as the real crown jewel in coal.
Take-away: CONSOL's shift toward natural gas mirrors the U.S.'s increasing reliance on gas as opposed to coal. This trend will likely continue. Shale plays offer strong growth opportunities, and we remain interested in profiting from America's energy renaissance.
Brian K. Langenberg, CFA
Nathan E. Yates, Research Associate
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.