August 1, 2017 - CONSOL Energy Inc. (NYSE: CNX) reported net cash provided by operating activities in the just-ended quarter of $89 million, compared to $95 million in the year-earlier quarter, which included $13 million of net cash provided by discontinued operating activities. The company reported net income of $174 million for the quarter, less $4 million of net income attributable to noncontrolling interest, for net income attributable to CONSOL Energy shareholders of $170 million or earnings of $0.73 per diluted share, compared to a net loss of $469 million in the year-earlier quarter, less $1 million of net income attributable to noncontrolling interest, for a net loss attributable to CONSOL Energy shareholders of $470 million, or a loss of $2.05 per diluted share in the second quarter of 2016.
Earnings before deducting net interest expense (interest expense less interest income), income taxes and depreciation, depletion and amortization (EBITDA) from continuing operations1 were $395 million for the 2017 second quarter, compared to a negative $153 million in the year-earlier quarter.
On a GAAP basis, the second quarter earnings included the following pre-tax items attributable to continuing operations:
After adjusting for certain items, the company had adjusted net income attributable to CONSOL Energy Shareholders1 in the 2017 second quarter of $39 million, or $0.17 per diluted share. Adjusted EBITDA attributable to continuing operations1 was $177 million for the 2017 second quarter, compared to $139 million in the year-earlier quarter.
"We are at a pivotal point in our transformation as a company," commented Nicholas J. DeIuliis, president and CEO. "The steady march of continuous improvement was sustained this past quarter in our E&P operations in all phases including drilling and completions. Despite short term turn-in-line delays at two of our Monroe County Utica pads and a post-closing adjustment from an asset sale, both of which impacted quarterly production, our 2017 production guidance remains unchanged. Closed asset sales did not disappoint and beat our prior stated goals, helping to drive our leverage ratio down to 3.0x at quarter-end, with an undrawn credit facility and $300 million of cash on hand. To top things off, we are fully immersed in preparing to spin and separate the coal and E&P businesses."
"Increased efficiencies that we fought hard to achieve now allow us to hold our 2017 production guidance and raise our 2018 production guidance for a modest amount of incremental capital. We are raising 2017 capital by approximately $78 million, based on the midpoint of the guidance. About half of the capital increase reflects expected service cost inflation and the cost of the two pad delays. The other half of the capital increase reflects continuous improvement gains, which provide a 30 Bcfe production bump in 2018 guidance while holding 2017 production guidance steady. This yields compelling rates of return and NAV per share accretion."
"Assuming no additional asset sales beyond those currently under contract or closed, we should finish the year at a leverage ratio in the mid-2x range. Additional asset sales that get us to the $600 million end of our asset sale guidance range would drive leverage ratio even lower. Our liquidity, leverage, and overall balance sheet strength have come a long way since mid-2015 and now provide us the optionality we have desired to grow NAV per share across what is an exciting game board over the next 18 months."
During the second quarter, CONSOL Energy received approximately $326 million in proceeds from asset sales, which included four recently closed transactions for approximately $215 million. The total undeveloped acres sold in these transactions included approximately 22,500 Marcellus Shale acres, along with some associated Utica Shale acres in Pennsylvania. The first transaction, which resulted in assets being sold for approximately $130 million, included the sale of 12 proved developed producing (PDP) wells averaging a total of approximately 20.0 MMcfe per day, 15 drilled but uncompleted (DUC) wells, and approximately 11,000 undeveloped leasehold acres, in each case located in Doddridge and Wetzel counties, West Virginia. Also, as part of the transaction, CONSOL received approximately 2,400 Marcellus and Utica Shale acres within the company's Wadestown project area, which is located in Monongalia County, West Virginia. In aggregate, the other three transactions consisted of the sale of non-producing scattered Marcellus Shale acres, along with some associated Utica Shale acres, in Westmoreland, Washington, and Allegheny counties, Pennsylvania. These three Pennsylvania transactions, which also included an overriding royalty on future production associated with the Utica Shale, consisted of the sale of 11,500 undeveloped acres and totaled approximately $85 million, or on average approximately $7,800 per undeveloped acre. Lastly, the company expects to close another transaction during the third quarter involving the sale of non-core Marcellus Shale acres in Allegheny and Westmoreland counties, Pennsylvania, for approximately $30 million.
During the quarter, CONSOL Energy generated approximately $273 million in free cash flow1, which included proceeds from sales of assets. Utilizing free cash flow generated during the quarter, the company repurchased approximately $19 million of its 2022 bonds at an average price of $99.51 in the open market, and increased its liquidity to approximately $2.0 billion, which includes $292.5 million of cash. Also, after the end of the second quarter, the company redeemed the outstanding balance on its 2020 and 2021 bonds, which was $74.5 million and $20.6 million, respectively.
CONSOL Energy recently announced the filing of a Form 10 registration statement with the U.S. Securities and Exchange Commission for a spin-off of its coal business, including the Pennsylvania Mining Complex and other coal-related assets and liabilities. This filing represents an important milestone for the company to complete the separation of the coal and E&P businesses, with each separate company being well capitalized and free cash flow generating following the separation. The company has been running dual processes to separate the businesses, and shortly following the recent filing of the Form 10 registration statement, the company concluded that the sale process did not produce compelling results. Therefore, the company is now 100% focused on executing a spin-off transaction of the coal business and expects to be ready to spin no later than year-end 2017.
During the second quarter of 2017, CONSOL's E&P Division sold 92.2 Bcfe, or a decrease of 7% from the 99.3 Bcfe sold in the year-earlier quarter, which resulted primarily from both timing delays associated with the TIL schedule and from the company selling approximately 3.0 Bcfe of production related to the net developed acres located in Doddridge and Wetzel counties, West Virginia. As stated last quarter, the company expected to TIL three pads in the second quarter; however, due to operational delays, the company ended up turning-in-line one pad. Therefore, the company expects to TIL five pads in the third quarter, which includes the two delayed pads from the second quarter. Lastly, the decrease of 3.0 Bcfe of production associated with the West Virginia sale was retroactive starting on January 1, 2017 through May 31, 2017.
During the quarter, total production costs decreased to $2.20 per Mcfe, compared to the year-earlier quarter of $2.27 per Mcfe, driven primarily by reductions to depreciation, depletion and amortization (DD&A), lease operating expense (LOE), and taxes. These reductions were partially offset by an increase in gathering costs related to the Marcellus Shale production mix increasing. When compared to the first quarter of 2017, total production costs decreased by $0.12 per Mcfe, despite a modest decline in production of approximately 3%. These sequential quarter-over-quarter cost reductions were driven in part by improved gathering costs resulting from lower Marcellus Shale production volumes, as well as improved processing costs related to the sale of the West Virginia assets.
E&P Division capital expenditures increased in the second quarter to $142.3 million, compared to $100.8 million spent in the first quarter of 2017, due primarily to an increase in capital associated with additional completion activity.
Marcellus Shale production volumes, including liquids, in the 2017 second quarter were 56.9 Bcfe, approximately 7% higher than the 53.1 Bcfe produced in the 2016 second quarter. The increased Marcellus production is due in part to CONSOL obtaining newer wells and more flowing production as part of the dissolution of the Marcellus Shale joint venture. Marcellus total production costs were $2.05 per Mcfe in the just-ended quarter, which is a $0.20 per Mcfe improvement from the second quarter of 2016 of $2.25 per Mcfe, driven by reductions to LOE and DD&A. The decrease in LOE is primarily driven by reductions to water disposal costs resulting from increased use of produced water in active completion operations.
CONSOL Energy's Utica Shale production volumes, including liquids, in the 2017 second quarter were 13.8 Bcfe, down approximately 41% from 23.3 Bcfe in the year-earlier quarter. The decline in Utica Shale volumes was driven primarily from timing delays associated with the TIL schedule, resulting in natural production declines in both the wet and dry gas areas. Utica Shale total production costs were $2.04 per Mcfe in the just-ended quarter, which is a $0.28 per Mcfe impairment from the second quarter of 2016 total production costs of $1.76 per Mcfe. The cost impairment was driven by lower Utica Shale volumes resulting in increased LOE and firm transportation and processing costs. Also, Utica Shale DD&A rates increased, in part, due to higher capital costs associated with the initial dry Utica delineation wells in Pennsylvania. These cost increases were partially offset by a decrease in taxes due to an adjustment related to a non-operated area. CONSOL Energy continues to expect Utica Shale total production costs to improve to approximately $1.80 per Mcfe for full year 2017, driven primarily by the addition of lower operating cost dry Utica Shale wells becoming a larger part of the production mix.
E&P Division Second Quarter Operations Summary
In the quarter, CONSOL operated two horizontal rigs and drilled seven dry Utica Shale wells: five wells located in Monroe County, Ohio and two wells (Aikens 5J and 5M) located in Westmoreland County, Pennsylvania, which are offset wells to the Gaut 4IH dry Utica well. The Monroe County, Ohio, wells averaged approximately 10,000 lateral feet and 19.7 drilling days per well, compared to 21.5 drilling days per well during the first quarter of 2017. At the current pace, a single rig could drill 17.5 Ohio dry Utica Shale wells averaging 10,000 foot laterals, per year, which is an 8% improvement compared to the first quarter of 2017. Also during the quarter, drilling costs in the Ohio Utica Shale improved by 5%, compared to the first quarter of 2017. The Aikens 5J and 5M wells averaged 7,500 foot laterals and 38.6 drilling days, with the Aikens 5M well finishing in 34 days. The drilling costs associated with the Aikens 5J and 5M wells are $5.5 million and $4.6 million, respectively. Over the course of the first three Westmoreland County, Pennsylvania, dry Utica Shale wells, CONSOL has reduced drilling capital by 71% or $11.45 million, when comparing the third well (Aikens 5M) to the first (Gaut 4IH).
Utilizing two frac crews, the company completed 15 wells in the quarter: five Marcellus Shale wells and one Upper Devonian well located in Greene County, Pennsylvania; three West Virginia Marcellus Shale wells located in Ritchie County, West Virginia; and six dry Utica Shale wells located in Monroe County, Ohio.
During the quarter, CONSOL turned-in-line six wells: five Marcellus Shale wells located in Ritchie County, West Virginia, and one wet Marcellus Shale well located in Allegheny County, Pennsylvania.
In the second half of 2017, the company expects to TIL slightly more wells in the third quarter, compared to the fourth quarter. Due to the timing associated with the TIL schedule, the company expects sequential quarterly production growth in the third and fourth quarters of 2017, with production highest in the fourth quarter of 2017.
The average sales price of $2.47 per Mcfe, when combined with unit costs of $2.20 per Mcfe, resulted in a margin of $0.27 per Mcfe. This was an increase when compared to the year-earlier quarter, due to improvements in total production costs, offset by a reduction in average sales price.
For the second quarter of 2017, CONSOL's average sales price for natural gas, natural gas liquids (NGLs), oil, and condensate was $2.47 per Mcfe. CONSOL's average price for natural gas was $2.81 per Mcf for the quarter and, including cash settlements from hedging, was $2.42 per Mcf. The average realized price for all liquids for the second quarter of 2017 was $17.81 per barrel.
CONSOL's weighted average differential from NYMEX in the second quarter of 2017 was negative $0.52 per MMBtu. CONSOL's average sales price for natural gas before hedging was $0.37 per Mcf lower than the $3.18 per Mcf reported for the first quarter of 2017. The decrease results primarily from a lower Henry Hub price coupled with a wider differential.
CONSOL continued to recover and sell discretionary ethane during the quarter. Directly-marketed ethane volumes were 600,000 barrels in the second quarter of 2017 and yielded a weighted average sales price in excess of Mont Belvieu ethane and $1.14 per MMBtu higher than CONSOL's residue natural gas alternative.
E&P Division Guidance
CONSOL Energy maintains its E&P Division production guidance for 2017 of approximately 420-440 Bcfe, while increasing its total E&P capital expenditures in 2017 to approximately $620-$645 million, compared to previous guidance of approximately $555 million. The increase in 2017 capital is driven primarily by three areas: additional capital associated with operational challenges in the second quarter, service cost inflation related to pressure pumping services, and continuous improvement progress. The continuous improvement progress is driven by improved drilling cycle times resulting in the company expecting to drill nine additional wells in 2017 and by modifying production protocols, both of which are expected to increase 2018 production to 520-550 Bcfe, compared to previous guidance of 490-520 Bcfe. Also, the company has added another layer of hedges for the expected incremental production in 2018 to help lock in returns and cash flows.
CONSOL Energy continued its programmatic hedge program to further build out NYMEX and basis hedges through 2021. Total hedged natural gas production in the 2017 third quarter is 81.7 Bcf.
During the second quarter of 2017, CONSOL Energy added additional NYMEX natural gas hedges of 40.5 Bcf, 27.6 Bcf, and 20.0 Bcf for 2018, 2019, and 2020, respectively. To help mitigate basis exposure on NYMEX hedges, in the second quarter CONSOL added 52.6 Bcf, 28.7 Bcf, 9.9 Bcf, and 9.4 Bcf of basis hedges for 2018, 2019, 2020, and 2021, respectively.
Pennsylvania (PA) Mining Operations Division
CONSOL Energy's PA Mining Operations sold 6.8 million tons in the 2017 second quarter, compared to 6.2 million tons during the year-earlier quarter. During the quarter, the average cost of coal sold increased slightly to $34.79 per ton, compared to $34.46 per ton in the year-earlier quarter due in part to additional equipment maintenance.
Second Quarter Summary
CNX Coal Resources LP ("CNXC") reported the following in its second quarter 2017 earnings press release, dated July 31, 2017: "The CNXC marketing team was also successful in placing significant volumes of coal under contract for the 2019-2021 period... demonstrating our ability and willingness to enter into longer term (3+ years) commitments with the right partners. Approximately 30% of the PAMC's 2019 planned production is now sold."
During the quarter, on a total consolidated basis, PA Mining Operations Division generated $107 million of cash flow before capital expenditures.
CONSOL Energy maintains total consolidated PA Mining Operations annual sales to be approximately 25.6-27.6 million tons for 2017. Also, CONSOL Energy maintains total consolidated capital expenditures for PA Mining Operations to be $120-$136 million for 2017..
During the quarter, EBITDA guidance for 2017 decreased for the E&P Division by approximately $55 million, compared to the first quarter of 2017, due to decreased NYMEX pricing and basis differentials. Specifically, second quarter EBITDA guidance is based on NYMEX as of June 30, 2017 of $3.17 per MMBtu plus a weighted average basis of negative $0.51 per MMBtu on open volumes. This compares to the first quarter EBITDA guidance, which was based on NYMEX as of April 4, 2017 of $3.40 per MMBtu plus a weighted average basis of negative $0.29 per MMBtu on open volumes.
As of June 30, 2017, CONSOL Energy had $1,978.7 million in total liquidity, which is comprised of $292.5 million of cash, excluding the CNXC cash balance, and $1,686.2 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 $268 million and 21.7 million CONE Midstream Partners LP ("CNNX") limited partnership units with a current market value of approximately $432 million, in each case as of July 21, 2017.
CONSOL Energy's net leverage ratio at the end of the quarter was 3.0x, which is an improvement of 0.5x and 0.9x compared to 3.5x at March 31, 2017 and 3.9x at December 31, 2016, respectively. Financial performance from operations along with asset sales 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.