May 2, 2017 - CONSOL Energy Inc. (NYSE: CNX) reported net cash provided by operating activities in the just-ended quarter of $205 million, compared to $130 million in the year-earlier quarter, which included $6 million of net cash provided by discontinued operating activities. The company reported a net loss of $34 million for the quarter, less $5 million of net income attributable to noncontrolling interest, for a net loss attributable to CONSOL Energy shareholders of $39 million or a loss of $0.17 per diluted share.
Earnings before deducting net interest expense (interest expense less interest income), income taxes and depreciation, depletion and amortization (EBITDA) from continuing operations1 were $104 million for the 2017 first quarter, compared to $138 million in the year-earlier quarter.
On a GAAP basis, the first quarter earnings included the following pre-tax items attributable to continuing operations:
Recorded a $138 million impairment on Knox Energy LLC and Coalfield Pipeline Company, which was recorded as Held for Sale at March 31, 2017 due to the fair value less costs to sell being less than the carrying value;
Recorded a $25 million unrealized gain on commodity derivative instruments, related to changes in the fair market value of existing hedges on a mark-to-market basis; and
Recorded $5 million in various other nonrecurring items.
After adjusting for certain items, which are described in the footnote to the EBITDA reconciliation table, the company had adjusted net income attributable to CONSOL Energy Shareholders1 in the 2017 first quarter of $38 million, or $0.17 per diluted share. Adjusted EBITDA attributable to continuing operations1 was $217 million for the 2017 first quarter, compared to $181 million in the year-earlier quarter.
"During the quarter, substantial progress was achieved on three important drivers of net asset value (NAV) per share," commented Nicholas J. DeIuliis, president and CEO. "First, for E&P, cycle times are down, capital efficiencies are up, and well type curves are further optimized, resulting in production guidance increases in 2017 and 2018 without any increases to last quarter's previously announced capital budgets. Second, our asset sales program is in high gear, and we monetized over $100 million to date and expect to be over halfway to the high end of our $400-$600 million asset sales target by the end of the second quarter. Third, the company generated approximately $100 million in organic free cash flow from continuing operations1, which excludes asset sales, in the first quarter and used that organic free cash flow to purchase our debt at a discount and reduce interest expense."
During the quarter, CONSOL Energy operated two horizontal rigs and drilled nine wells: seven dry Utica Shale wells in Monroe County, Ohio, and two Marcellus Shale wells in Washington County, Pennsylvania. The Ohio wells averaged approximately 9,900 lateral feet, while averaging 21.5 drilling days per well, compared to 24.0 drilling days per well during the fourth quarter of 2016. At the current pace, a single rig could drill 16 dry Utica Shale wells averaging 10,000 foot laterals, per year, which is a 14% improvement compared to the fourth quarter of 2016. Also during the quarter, CONSOL set a Marcellus Shale record by drilling 7,380 feet of lateral in 24 hours on the MOR30B well, located in Washington County, Pennsylvania.
"Over the course of the quarter, the operational execution of the team has been tremendous and, as a result, we have continued to see further efficiency improvements in both drilling and completion activities," commented Timothy C. Dugan, chief operating officer. "These improvements have led to further reductions in cycle times resulting in the acceleration of activity in 2017."
With the recent dissolution of the Marcellus Shale joint venture (JV) now providing full operational and strategic control, along with commodity price improvement, the company began monetizing non-core E&P assets in the quarter. CONSOL Energy recently closed on three asset sale transactions for total cash consideration of $108 million, of which the company has received aggregate proceeds of $16 million through March 31. One of the transactions was the sale of approximately 6,300 net undeveloped acres of the Utica-Point Pleasant Shale in Jefferson, Belmont and Guernsey counties, Ohio, for total cash consideration of approximately $77 million, or approximately $12,200 per undeveloped acre. Separately, the company divested non-core oil and gas assets, pipelines, and surface properties in two separate transactions for total cash consideration of $31 million. "These divestitures, along with additional packages in process, give us the momentum and confidence to reach our previously announced asset sales target of $400-$600 million, and we expect to be halfway to the high end of the target by the end of the second quarter," commented David M. Khani, chief financial officer.
During the quarter, CONSOL Energy generated approximately $117 million in free cash flow1, which included approximately $100 million of organic free cash flow from continuing operations1. Utilizing free cash generated during the quarter, the company repurchased approximately $100 million of its 2022 bonds at an average price of $98.54 in the open market, while maintaining liquidity at year-end levels. The company expects the 2017 leverage ratio to decline to approximately 2.0x by year-end.
For the first quarter of 2017, CONSOL's average sales price for natural gas, natural gas liquids (NGL), oil, and condensate was $2.85 per Mcfe. CONSOL's average price for natural gas was $3.18 per Mcf for the quarter and, including cash settlements from hedging, was $2.63 per Mcf. Excluding hedging, the average realized price for all liquids for the first quarter of 2017 was $29.72 per barrel, an increase of 39% from the previous quarter.
CONSOL's weighted average differential from NYMEX in the first quarter of 2017 was ($0.30) per MMBtu. With an improved Henry Hub price coupled with an improved differential, CONSOL's average sales price for natural gas before hedging improved 43% to $3.18 per Mcf, compared to the average sales price of $2.22 per Mcf in the fourth quarter of 2016.
During the quarter, CONSOL executed on its strategy to add firm transportation capacity while avoiding expensive, long-term contracts. Specifically, CONSOL executed large-volume sales with two customers served on East Tennessee Natural Gas Pipeline ("ETNG"). These sales meet three marketing priorities. First, the deals complement the company's hedging program by providing a protection of physical basis in an illiquid, premium market for over three years, beginning in April of 2017. Next, the pricing structures for both deals provide value above the pool sales on Columbia Gas Transmission where much of the gas flowed prior to certain system enhancements. Finally, both deals utilize the customers' firm transportation capacity, at no cost to CONSOL, thereby allowing CONSOL to forego the renewal of certain firm transportation obligations on ETNG.
CONSOL continued to recover and sell discretionary ethane during the quarter. Directly-marketed ethane volumes were 367,000 barrels in the first quarter of 2017 and yielded a weighted average sales price in excess of Mont Belvieu ethane and $1.15 per MMBtu higher than CONSOL's residue natural gas alternative.
Pennsylvania (PA) Mining Operations Division
CONSOL Energy's PA Mining Operations sold 6.8 million tons in the 2017 first quarter, compared to 5.3 million tons during the year-earlier quarter. During the quarter, the average cost of coal sold increased to $34.52 per ton, compared to $33.16 per ton in the year-earlier quarter due to the mobilization of additional resources for the development of longwall panels, demanding geological conditions at Enlow Fork mine, and increased equipment maintenance.
First Quarter Operations Summary
CNX Coal Resources LP ("CNXC") reported the following in its first quarter 2017 earnings press release, dated May 1, 2017: "In spite of another mild winter, our coal sales improved substantially during the first quarter compared to the year-ago period, as higher natural gas prices and more normal coal inventory levels supported improved demand from our domestic power plant customers. Based on our updated coal sales guidance range, we are approximately 95% contracted for 2017 and 64% contracted for 2018. We believe our contracted position is well-balanced in hedging against market downside risk while allowing us to continue to build out the portfolio strategically and opportunistically as the market evolves."
During the quarter, on a total consolidated basis, PA Mining Operations Division generated $123 million of cash flow before capital expenditures.
As of March 31, 2017, CONSOL Energy had $1,721.4 million in total liquidity, which is comprised of $54.7 million of cash, excluding the CNXC cash balance, and $1,666.7 million available to be borrowed under its $2.0 billion bank facility. In addition, CONSOL holds 16.6 million CNXC limited partnership units, including 3.9 million class A preferred units, with an aggregated current market value of approximately $252 million and 21.7 million CONE Midstream Partners LP ("CNNX") limited partnership units with a current market value of approximately $461 million, in each case as of April 21, 2017.
CONSOL's net leverage ratio, using bank methodology, at the end of the quarter was 3.9x, a reduction from 4.4x at year-end. Improving financial performance from operations along with free cash flow generation and debt reduction drove the decrease in leverage.
CONSOL Energy Inc. (NYSE: CNX) is a Pittsburgh-based energy producer, and one of the largest independent natural gas exploration, development and production companies, with operations centered in the major shale formations of the Appalachian basin. The company deploys an organic growth strategy focused on developing its substantial resource base. As of December 31, 2016, CONSOL Energy had 6.3 trillion cubic feet equivalent of proved natural gas reserves. CONSOL Energy is a member of the Standard & Poor's Midcap 400 Index.