Consol slashes budget, will focus on gas transportation

Company hopes to produce more without new wells

Consol Energy Inc. won’t drill any new oil and gas wells for the next year and a half, the company told investors on Tuesday. But it still expects to produce 30 percent more gas this year and 20 percent more in 2016.

The Cecil-based company announced it will lay down the two rigs it operates, and instead focus on building out gas gathering pipelines and compressor stations to bring online more existing wells.

It’s part of the company's costcutting plan, which includes further slashing 2015 capital spending to $800 million from $1 billion, and setting an oil and gas capital budget for next year between $400 million and $500 million. The goal is to generate free cash flow within the next year and a half.

Consol reported a second quarter net loss of $603 million, or $2.64 per share, compared to a loss of $25 million, or 11 cents per share, during the same period last year. The past three months included an impairment in the value of the company’s shallow oil and gas assets of $829 million as a result of continued low commodity prices.

Low prices overshadowed the company’s efficiency improvements across its divisions. It cost Consol $2.90 to develop a thousand cubic feet of gas or the equivalent in natural gas liquids, which is a decrease from $3.44 per mcfe in the second quarter of last year.

But the company was only able to sell that volume for $2.68, losing 22 cents per mcfe. The cost to transport its oil and gas increased during the quarter by 38 percent, mainly due to the added cost of dealing with more natural gas liquids.

Consol said it entered into an agreement to ship its ethane, propane and butane to the Marcus Hook Industrial Complex in Delaware County, from where it will be exported to Europe late next year. That should add a premium to the natural gas liquids that Consol is pulling out of the ground, the company said.

The company also said that because of depressed commodity prices, it won’t go forward with a

planned metallurgical coal master limited partnership that would have spun out the assets at Consol’s Buchanan Mine in Virginia by the end of 2015. Instead, it will evaluate partnering with another company to grow those assets before taking them public, or dropping them into the recently formed CNX Coal MLP, which operates Consol’s thermal coal mine complex in southwestern Pennsylvania.

In a conference call with investors on Tuesday, Consol executives walked through their plan to make the company cash flow positive within 18 months.

Consol has more than $2 billion in assets that could be spun out as standalone companies, become part of joint ventures, or sold outright, according to CFO David Khani.

“As our drilling results have dramatically improved, our asset sale opportunity set has significantly risen,” Mr. Khani said.

Consol's largest single shareholder — Southeastern Asset Management, a Tennessee-based investment management firm — told regulators that it would urge Consol to explore spinning out or selling its gas business, which swung to a $540 million loss during the past quarter.

“Now, I cannot comment on specifics, but know that we have several processes going on that should increase our free cash flow beyond our normal assumptions,” Mr. Khani said Tuesday.

Consol’s big exploration news was in the Utica Shale, where the company's first dry Utica well in Westmoreland County achieved the second best initial production rate of any company testing the dry portions of the Utica Shale. The best initial production rate came from EQT last week in Greene County.

The highlighted Utica well is in a part of the shale play that hasn't been explored yet and Consol said it has more than 100,000 acres in the vicinity, in Westmoreland and Indiana counties.

The well cost $27 million to drill and complete, but Consol would like to get the cost of such wells below $15 million in the future. At that rate, dry Utica wells like that one could generate a 35 percent return even with gas prices below $3 per million cubic feet.

With more Utica and Upper Devonian wells coming online, Consol's CEO Nick Deluliis said the company will now look to consolidate its core operations into three or four key areas with opportunities in more than one shale layer that can be developed in tandem, capitalizing on the shared infrastructure.

And once those areas are concentrated, everything outside of that becomes ripe for sale or joint venture potential.

But, “First things first,” Mr. Deluliis said. “The biggest opportunities we see right now without a doubt [are] what our shares are trading at and what our debt's trading at.”

Earlier this month, Consol laid off 470 employees, the majority in gas and corporate divisions, shedding more than 10 percent from its payroll in the second round of layoffs this year.

The company also announced that starting in the third quarter, it will reduce its dividend.

Consol shares closed at $17.75 on Tuesday, up from the previous close at $17.35.