Natural Gas Company Kicks Its Coal Habit

It’s an old-line American energy company…

It’s been a key energy player in America since the days when Abraham Lincoln was in the white House, back in the 1860s. This company has survived the ups and downs of the American economy for over 150 years — recessions, depressions, wars and more.

Now this resilient, long-lasting company is changing again to adapt to the times. It’s transforming into one of the largest natural gas plays in the U.S. In fact, this firm is on track to be a leader in supplying the U.S. energy mix for many decades to come. And this “old” investment idea — with many years of profitable business ahead — is a good way to kick off the year. Let’s drill down…

Long-time readers of the Daily Resource Hunter know about the Marcellus Shale play. It’s an immense hydrocarbon deposit located beneath the Pennsylvania, Ohio and West Virginia region — New York too, if the Empire State ever gets its political act together.

Besides the Marcellus formation, the Pennsylvania, etc., region hosts other deep, hydrocarbon-bearing rock units such as the Utica Shale and what’s called Upper Devonian. These three formations — with more names to come, actually — give the Northeast and Midwest U.S. what may be among the largest gas fields in the world.

I’ll quickly mention that based on current natural gas output, if “just” Pennsylvania were a sovereign nation, it would be the eighth-largest natural gas-producing country in the world. Gas output around here is simply soaring!

This year, Consol management estimates gas production will increase as much as 32%.

Today I’d like to introduce you to a company with deep roots in American industrial history and a big stake in this massive gas play.

It’s an old coal company with a recent, strategic turn towards natural gas. Actually, in terms of nat gas, this company is catching fire. It makes a lot of sense too, because this company is one of the largest mineral resource owners in the overall Marcellus region — three or four states, depending on how you calculate things.

In the past few months, the company’s management has determined to back away from its historic roots in the coal biz. Indeed, the company just agreed to sell off much of its coal assets for a handsome price. The new business emphasis is on developing natural gas and becoming one of the country’s leading producers. Last year, I heard the company CEO mention that he wants to set things up for another 150-year run of success. He called this a “generational opportunity.”

Let’s take a new look at an old energy company that has literally “kept the lights on” in America for a century and more. It’s transforming and setting up for a great future.

The name is… Consol Energy Inc. (CNX).

Consol has deep roots in the industrial and social history of America. Its forebear was the famous old Consolidation Coal Co., formed in 1860 in western Maryland from a series of mergers between smaller mining firms.

In the aftermath of the Civil War, old Consolidation rose to prominence. During the 19th and early 20th centuries, Consolidation opened mines in the Appalachian region and built railway access into the coal fields. The company’s coal output fired locomotive boilers, heated homes and fed mills that were the foundation of a rising nation. By 1927, Consolidation was the largest bituminous coal producer in the U.S.

In 1945, as World War II ended, Consolidation merged with another old granddaddy of mines, the Pittsburgh Coal Co. This merger secured Consolidation’s place as one of the nation’s largest coal producers in the postwar era. (As an aside, one might think of postwar years as the Petroleum Age, but much of the heat that melted metal and turned turbines came from the black rock that burned.)

In the 2000s, Consol expanded via mine additions and by branching into natural gas. At first, the main Consol gas play was coal bed methane from its many seams of coal under ownership or lease. Recently, however, Consol management made the strategic decision to move into gas drilling and fracking to take advantage of its immense land positions across the Appalachian region.

In other words, Consol has moved toward becoming a natural gas company, with a strong legacy coal subsidiary. Specifically, in October, Consol announced that it’s selling five older “steam coal” assets to Murray Energy. The coal sale involves cleaning up the Consol balance sheet as well…

Consol will get paid $850 million in upfront cash for five older coal mines, plus future cash payments that have a net present value of $184 million. Looking ahead, the bulk of the deal’s value comes from shedding over $2.4 billion in balance sheet liabilities. All in all, the value to Consol is about $3.5 billion.

With this sale of assets, Consol is divesting about a quarter of its coal reserves. But the company is not exiting coal altogether. That is, Consol will retain many of its best coal assets in the metallurgical arena — meaning the higher-priced coal used for steel-making and the like.

Plus, Consol is hanging onto its large coal export terminal, located not far from Agora Financial headquarters in Baltimore. This terminal will allow Consol to remain an export player and benefit from growth in world demand for coal — both metallurgical and thermal — the latter used in power plants.

Overall, however, Consol’s future is tied to natural gas. The company anticipates moving toward a strong growth curve for drilling, fracking and gas production. This year, Consol management estimates gas production will increase as much as 32%. In 2015 and 2016, management forecasts growth rates in the 30% range for each year.

Along with natural gas, Consol anticipates increasing output of natural gas liquids (NGLs) and crude oil where the geology works out. There’s a plan to focus hard on the oil-rich Utica play in Ohio, in particular. To this end, Consol has partnerships with Noble Energy and Hess.

Consol shares presently sell in the $38 range, after a rise in the past few months along with news of selling the five coal mines. The company’s market cap is about $9 billion, which is low — in that it nowhere reflects the value of Consol’s underlying energy assets.

In 2013, Consol cut its dividend to bring its yield more in line with peer companies in the natural gas arena. Right now, the yield is 1.4%, but I suspect that management will take to increasing the payout over time as the new energy strategy unfolds.

Based on what I heard from management, Consol is inventing its future as a gas and liquids play, versus a classic old coal miner. The coal end of Consol remains focused on metallurgical, to be sure, as well as exports, but not on coal for steam-power generation.

For the next iteration of this iconic old American company, the energy future will be gas, NGL and oil. Consol is taking its asset base — dating to the Civil War, for some acreage — and moving strongly into a new energy future. It’s a nat gas play even Honest Abe could like.

That’s all for now. Thanks for reading.


Byron W. King
for The Daily Reckoning

Ed. Note: The future of the U.S. energy industry is as bright as ever. Between coal, nat gas, LNG, not to mention oil production, the U.S. is awash with viable energy sources. And lucky for you, we’re still in the early stages. This is what it must have felt like to be an oil investor back in the early 20th century. There are tons of great opportunities. And when Byron King drops by the Daily Resource Hunter, he always brings a new one with him… along with at least 3 unique chances to discover more in-depth actionable investment plays. If you’r not getting the Daily Resource Hunter, you’re simply not getting the full story. But not to worry… You can sign up for FREE, right here.

Original article posted on Daily Resource Hunter

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Byron King

A Harvard-trained geologist and former aide to the United States Chief of Naval Operations, Byron King is our resident gold and mining expert, and we are proud to have him on board as the managing editor of Whiskey & Gunpowder.

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