Consol Energy: Looking Past the Headwinds
Consol Energy (CNX) has taken a massive hit on the stock market in 2015 as it has lost 60% of its value. On account of weak coal and natural gas prices, the company's weak performance is not surprising. However, the company's increasing focus on natural gas could help it do well in the long run. Let's see why.
Making positive moves in the E&P business
Consol Energy is making good moves in the E&P division on the back of its acreage in the Marcellus Shale. The performance of this division is witnessing notable improvement in terms of both drilling and well completions.
Particularly in the Marcellus, Consol is focused on its peak rate of return areas of Allegheny, Washington and Greene counties in Pennsylvania.
Additionally, the Utica Shale is also performing well on the back of acreage in Westmoreland, Greene and Pennsylvania counties. Consol is drilling a dry Utica well in the Marshall and West Virginia and PA County and few dry Utica in Monroe County, Ohio by collaborating with its JV partners.
However, Consol is experiencing headwinds from the global reduction in commodity prices with its 15 major growth plans becoming inefficient due to weaker commodity pricing environment. Therefore, Consol has optimized its process as per the environment by significantly reducing its capital budget for the year, 30% lower than last year to $920 million. The increased production from new wells discovered by Consol is expected to hurt the company margins in an already weak commodity pricing environment, forcing Consol to sell the fuel at minimal costs.
A look at the end market conditions
The outlook for worldwide usage of petroleum and other key liquids remained somewhat unchanged last month as compared to the preceding month's forecast according to the EIA. The production for 2014 grew by 0.9 million barrels per day (b/d) compared to last year with year-over-year growth estimated to be 1.3 million b/d for both 2015 and 2016.
The continued growth in global crude production is believed to continue to hurt the oil & gas production company's margins, leaving an only option for these majors to optimize their production processes and minimize costs, going forward.
This is why Consol is focusing on the Marcellus and the Utica. The Marcellus Shale production growth in 2014 was approximately 93% compared to 2013. Here, other category comprises of Upper Devonian Shale production in WV and PA, Chattanooga Shale in Tennessee, and Shallow Oil and Gas.
Overall, Consol added 1.1 Tcfe from drilling during 2014 and gained drill bit exploration cost of $0.76/Mcfe. Crucially, the proved reserves of Consol have increased at 30% CAGR from just 1,422 Bcfe in 2008 to 6,828 Bcfe in 2014, solidifying the company's growth prospects.
More importantly, Consol is continuing to signup long-term contracts with key partners with Pennsylvania operations Thermal Coal. Also, the consolidated sales of coal for 2017 and 2018 makes nearly 40% of the overall company sales. Consol is believed to be a preferred supplier for the major plants in the northeast owing to the superior quality of its coal and shipping benefits in the southeast markets.
There is no doubt that Consol Energy's performance has taken a hit due to weakness in the end market. But, the company seems to be following the right strategies to improve the financial performance in the long run. By focusing on low cost assets that will generate higher production, Consol is moving in the right direction. Hence, investors should keep a close eye on Consol Energy going forward.