CONSOL Energy Misses on Q3 Earnings, Revises E&P View

Diversified fuel producer CONSOL Energy Inc. (CNX) reported operating earnings of 9 cents per share for the third quarter of 2014, lagging the Zacks Consensus Estimate of 20 cents by 55%. The company had incurred a loss of 24 cents in the year-ago quarter.

Consol Energy Inc - Earnings Surprise | FindTheBest

GAAP loss at the company was 1 cent per share compared with a loss of 28 cents per share in the prior-year quarter.

Revenue

CONSOL Energy’s quarterly revenues increased nearly 10.1% to $884.6 million from $803.3 million in the year-ago quarter. The top line marginally missed the Zacks Consensus Estimate of $886 million by 0.2%.

The year-over-year increase in revenue was primarily due to thriving natural gas and natural gas liquid sales.

Segment Performance

Gas Division

During the reported quarter, the company registered 40.8% year-over-year growth in gas production volumes to 64.9 billion cubic feet equivalent (Bcfe). Gas production in the reported quarter exceeded the guidance of 60 Bcfe.

The strong volume was primarily due to higher production from its Marcellus Shale assets. Production from this shale improved 76% year over year to 30.7 Bcfe.

However, the decline in the average sales price of one thousand cubic feet (Mcfe) of gas compared to the previous year prevented the company to realize the full benefits of higher gas production. Gas margin was 85 cents per one thousand cubic feet (Mcfe) compared with 97 cents in the year-ago quarter, reflecting a drop of nearly 12.4%.

Coal Division

The company produced 7.8 million tons of coal, of which 0.9 million tons were low-volatile coal, 0.2 million tons were high-volatility and 6.7 million tons were thermal coal. The production was marginally higher than the guidance range of 7.3–7.7 million tons.

The average sales price for low-volatile metallurgical coal tumbled 17.8% to $70.50 per ton, while the sales price for high-volatile coal was up 21.0% to $72.76 per ton. Sales price for the company's thermal coal was down 6.6% to $60.77 per ton in the quarter.

Financial Update

As of Sep 30, 2014, the company had a cash balance of $0.23 billion versus $0.32 billion as of Dec 31, 2013.

Long-term debts as of Sep 30, 2014, were $3.23 billion, higher than $3.12 billion as of Dec 31, 2013.

Cash from operating activities in the first nine months of 2014 was $0.87 billion compared with $0.45 billion in the year-ago period.

Capital expenditure was $1.17 billion in the first nine months of 2014, up 15.3% from the year-ago period.

Guidance

CONSOL Energy expects fourth quarter 2014 coal sales in the range of 8.0–8.4 million tons and 2014 coal sales in the range of 32.3−32.7 million tons. CONSOL expects 2015 coal sales of 31−35 million tons.

CONSOL Energy projects fourth quarter 2014 gas production to be 70-75 Bcfe and raised the full year production to the band of 235–245 Bcfe from 225–235 Bcfe. The company expects 2015 and 2016 gas production to grow by 30%.

For 2014, the company hedged 159.9 Bcf of total gas production at an average price of $4.58 per Mcf.

Other Coal Releases

Peabody Energy Corporation (BTU) reported a loss per share of 59 cents in the third quarter of 2014, narrower than the Zacks Consensus Estimate of a loss of 66 cents.

Arch Coal Inc. (ACI) reported third-quarter 2014 adjusted loss of 45 cents per share, wider than the Zacks Consensus Estimate of a loss of 41 cents.

Alliance Resource Partners LP (ARLP) reported third-quarter 2014 earnings of $1.13 per unit, surpassing the Zacks Consensus Estimate of $1.06 by 6.6%.

Our View

CONSOL Energy’s emphasis on natural gas assets is yielding results. During the quarter the company invested $281.6 million in E&P operations. Thanks to these steady investments, the company expects to boost its gas production over the next couple of years.

The company’s move to refinance its debt taking advantage of the lower interest rate environment is appreciable. CONSOL is expected to lower its interest expenses by $5 million annually through this refinance move.

CONSOL Energy needs to work to lower its total costs and expenses. The company registered a 10% rise in expenses in the reported quarter, which unless controlled will continue to dent its margins.

CONSOL Energy presently holds a Zacks Rank #5 (Strong Sell).

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