CONSOL Energy Inc. reported net cash provided by operating activities in the just-ended quarter of $95 million

OREANDA-NEWS. CONSOL Energy Inc. (NYSE: CNX) reported net cash provided by operating activities in the just-ended quarter of $95 million, compared to $66 million in the year-earlier quarter, which includes $12 million and $24 million of net cash provided by discontinued operating activities, respectively.

"During the quarter, CONSOL drove down E&P unit costs by 18%, compared to the prior-year quarter, generated $46 million in organic free cash flow from continuing operations¹, paid down approximately $390 million in debt, and increased estimated ultimate recoveries (EURs) in its prolific Marcellus Shale Green Hill field to 3.0-3.5 Bcfe," commented Nicholas J. DeIuliis, president and CEO. "These accomplishments not only helped us exceed our internal 18-month free cash flow plan, but also drove our NAV per share and liquidity position higher. As a result, we have made the decision to employ a two-rig program in the second half of 2016 since expected rates of return nicely exceed our cost of capital, while supporting our free cash flow plan and liquidity goals. Despite the decision to resume modest drilling activity, which will add approximately $25 million of capital expenditures in 2016, CONSOL expects the annual E&P Division capital budget to decrease to $190-$205 million due to continued capital efficiency improvements. CONSOL's main focus remains staying disciplined on deploying capital in order to grow our NAV per share."

On a GAAP basis, the second quarter earnings included the following pre-tax items attributable to continuing operations:

• Recorded a $279.7 million unrealized loss on commodity derivative instruments, related to changes in the fair market value of existing hedges on a mark-to-market basis;
• Recorded a $13.7 million loss related to pension settlement, caused by lump sum distributions from the plan which increased due to the sale of the Buchanan Mine in the first quarter of 2016;
• Recorded a $6.3 million gain related to a customer's partial buyout of a coal contract; and,
• Recorded $1.5 million in expense related to severance in connection with the company's ongoing cost reduction efforts.

Taking these items into account, the company reported a net loss from continuing operations of $233 million for the quarter, or ($1.02) per diluted share. Including the loss from discontinued operations, net of tax, of $236 million, less net income attributable to noncontrolling interest, the company reported a net loss attributable to CONSOL Energy shareholders of $470 million or ($2.05) 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 a negative $151 million for the 2016 second quarter, compared to a negative $695 million in the year-earlier quarter. 

After adjusting for certain items, which are listed in the EBITDA reconciliation table, the company had an adjusted net loss from continuing operations¹ in the 2016 second quarter of $49 million, or ($0.21) per diluted share. Adjusted EBITDA from continuing operations¹ was $136 million for the 2016 second quarter, compared to $138 million in the year-earlier quarter. 

CONSOL Energy's Miller Creek Mining Complex and Fola Mining Complex subsidiaries have entered into agreements for the sale of those Central Appalachia mining operations. The Miller Creek Complex, located in West Virginia, has an active surface mining operation, which produced 2.1 million tons in 2015, and two underground mines, which are idle. The Fola Mining Complex is a closed surface mining operation in West Virginia. The Miller Creek and Fola Mining Complexes each have 114 million tons of owned and leased coal reserves, and they have a total of $103 million of mine closing and reclamation liabilities on CONSOL's Consolidated Balance Sheets. These assets and liabilities are classified as held for sale in discontinued operations on the company's Consolidated Balance Sheets, their results of operations are included in discontinued operations on the Consolidated Statement of Income, and the reclassification of these assets resulted in an impairment charge of $356 million in the quarter.

In the transaction, the buyer will acquire the Miller Creek and Fola assets and will assume the Miller Creek and Fola mine closing and reclamation liabilities; in order to equalize the value exchange, CONSOL will pay the buyer $27 million cash at the closing, of which a portion will be held in escrow for purposes of obtaining the surety bonds required for the permits to transfer, and an additional $17 million in installments over the next four years. These payments will result in an additional loss of $44 million that CONSOL expects to record during the third quarter of 2016. CONSOL Energy estimated a negative EBITDA contribution for full year 2016 associated with these assets. The transaction is expected to close in the third quarter.

¹The terms "adjusted net loss from continuing operations," "EBITDA from continuing operations," "adjusted EBITDA from continuing operations," "free cash flow," and "organic free cash from continuing operations" are non-GAAP financial measures, which are defined and reconciled to the GAAP net income below, under the caption "Non-GAAP Financial Measures."

E&P Division:

CONSOL plans to add back two horizontal rigs to resume drilling starting in August 2016. The company expects to drill 8 dry Utica Shale wells, located in Monroe County, Ohio, where CONSOL maintains a 100% working interest, and 2 Marcellus Shale wells, located in Washington County, Pennsylvania, which fall within the joint venture where CONSOL maintains a 50% working interest. The 2 new Marcellus Shale wells are located on a 6-well pad that contains 4 existing drilled but uncompleted (DUC) wells. CONSOL expects to finish drilling the remaining 2 wells in order to complete the pad. CONSOL expects that the lateral length for the 10 wells to average approximately 8,700 feet. Despite the planned increased drilling activity, due to continued capital efficiency improvements, the company reduced its E&P Division capital budget to $190-$205 million. CONSOL expects to see a partial year production benefit from these new wells starting in April 2017. Also, the company anticipates its DUC well inventory to grow to 91 gross Marcellus and Utica shale wells exiting 2016, which includes 76 wells that are located in the wet areas.

During the second quarter of 2016, CONSOL's E&P Division achieved record production of 99.3 Bcfe, or an increase of 32% from the 75.5 Bcfe produced in the year-earlier quarter. The E&P Division's total unit cash costs declined during the quarter to $1.23 per Mcfe, compared to $1.58 per Mcfe during the year-earlier quarter, or an improvement of approximately 22%, driven by reductions to lease operating and gathering, transportation, and compression expenses.

Marcellus Shale production volumes, including liquids, in the 2016 second quarter were 53.1 Bcfe, or 33% higher than the 39.9 Bcfe produced in the 2015 second quarter. Marcellus Shale total unit cash costs were $1.27 per Mcfe in the just-ended quarter, which is a $0.31 per Mcfe improvement from the second quarter of 2015 cash costs of $1.58 per Mcfe, which benefited in part from the company requiring less processing by shifting more towards drier gas.

CONSOL Energy's Utica Shale production volumes, including liquids, in the 2016 second quarter were 23.3 Bcfe, up from 10.7 Bcfe in the year-earlier quarter. Utica Shale total unit cash costs were $0.83 per Mcfe in the just-ended quarter, which is a $0.39 per Mcfe improvement from the second quarter of 2015 total unit cash costs of $1.22 per Mcfe. The significant cost improvements across the Utica Shale were primarily driven by reductions to lease operating expenses and gathering and transportation.

E&P Division capital expenditures declined further in the second quarter to $23.4 million, when compared to the first quarter of 2016, due to further efficiency improvements and reduced activity.

E&P Division Second Quarter Operations Summary:

CONSOL's E&P activity continued to focus on completing the company's DUC inventory in the second quarter.

During the quarter, CONSOL began completion operations on a 6-well pad in Greene County, completing two of the wells. Also, CONSOL turned-in-line (TIL) 16 Marcellus Shale wells in Greene, Washington, and Allegheny counties, Pennsylvania, which included the first pad located at the company's Pittsburgh International Airport project. CONSOL's Green Hill Marcellus Shale wells located in Greene County, Pennsylvania, continue to outperform, with EURs now at 3.0-3.5 Bcfe per 1,000 feet of lateral. In the Utica Shale CONSOL's joint venture partner completed two wells and TIL five wells in Harrison County, Ohio.

CONSOL's previously completed 10-well GH53 pad, which was completed in the first quarter of 2016 and incorporated plugless completion technology, has now cumulatively produced over 4.8 Bcfe in its first 60 days of production with 9 out of 10 wells in-line, with one well shut-in due to an offset well completion. The strongest well on the GH53 pad, the GH53F, has produced 0.83 Bcfe in its first 60 days. Lastly, CONSOL's 12-well GH46 pad located in Greene County, Pennsylvania, which was previously completed and TIL in the first quarter of 2016, has cumulatively produced 10.5 Bcfe in the first 90 days of production.

CONSOL's confidence in the dry Utica program grows as time progresses and as the company continues to monitor the performance of the dry Utica Shale wells in Monroe County, Ohio, and Greene and Westmoreland counties, Pennsylvania. CONSOL's Gaut 4I well, in Westmoreland County, Pennsylvania, remains the second strongest producing well in the dry Utica across the industry. The Gaut 4I well has cumulatively produced 3.4 Bcfe in its first six months.

¹ Adjusted loss before income tax for the E&P Division of $14.3 million for the three months ended June 30, 2016 is calculated as GAAP loss before income tax of $294.5 million plus total pre-tax adjustments of $280.2 million. The $280.2 million adjustment is the pre-tax loss related to the unrealized loss on commodity derivative instruments and a pre-tax loss of $0.5 million related to severance expense.
² Includes an $828.9 million pre-tax impairment loss on shallow oil and gas properties and a $24.9 million pre-tax loss related to the unrealized loss on commodity derivative instruments. Adjusted loss before income tax for the E&P Division for the three months ended June 30, 2015 is calculated as GAAP loss before income tax of $891.4 million plus total pre-tax adjustments of $853.8 million equals the adjusted loss before income tax of $37.6 million.

Note: The increase in Marcellus sales volumes represents only the gas portion of production. When including liquids, the increase in Marcellus volumes was 33% compared to the year-earlier quarter. Production results are net of royalties.

1. Other Sales Volumes: primarily related to shallow oil and gas production and the Chattanooga shale in Tennessee.

2. Liquids: NGLs, Oil, and Condensate are converted to Mcfe at the rate of one barrel equals six Mcf based upon the approximate relative energy content of oil and natural gas.

As a result of continuing to high-grade production away from wet areas and shift more towards dry gas areas, in the quarter, liquids production decreased to 10.6 Bcfe, or 11% of the total production of 99.3 Bcfe.

*Oil, NGLs, and Condensate are converted to Mcfe at the rate of one barrel equals six Mcf based upon the approximate relative energy content of oil and natural gas, which is not indicative of the relationship of oil, NGLs, condensate, and natural gas prices.

Note: "Total Costs" excludes selling, general administration, incentive compensation, and other corporate expenses.

The average sales price per Mcfe within the E&P Division was impaired in the just-ended quarter, when compared to the year-earlier quarter due to depressed commodity prices.

The average sales price of $2.50 per Mcfe, when combined with unit costs of $2.27 per Mcfe, resulted in a margin of $0.23 per Mcfe. This was an increase when compared to the year-earlier quarter, with the improvements in unit costs more than offsetting the decline in price realizations.

During the quarter, total unit costs decreased to $2.27 per Mcfe, compared to the year-earlier quarter of $2.76 per Mcfe, driven primarily from reductions to lifting and gathering expenses.

E&P Marketing Update:

For the second quarter of 2016, CONSOL's average sales price for natural gas, natural gas liquids (NGL), oil, and condensate was $2.50 per Mcfe. CONSOL's average price for natural gas was $1.58 per Mcf for the quarter and, including cash settlements from hedging, was $2.49 per Mcf. The average realized price for all liquids for the second quarter of 2016 was $15.73 per barrel.

In April, CONSOL began recovering and selling ethane primarily via Sunoco Logistics' Mariner East project, which ships ethane to the Marcus Hook Industrial Complex for export. Such ethane sales are expected to improve NGL netbacks. On an equivalent basis, during the second quarter of 2016 these ethane sales yielded a significantly higher price than the Texas Eastern M2 market where sales would generally have occurred had the volumes been rejected into the natural gas stream. CONSOL expects further revenue enhancement in 2016 and beyond as its recovered ethane volumes grow and as the Mariner East project expands in 2017.

Coal Division:

CONSOL Energy's Pennsylvania Operations sold 6.2 million tons in the 2016 second quarter, compared to 5.7 million tons during the year-earlier quarter. The Board of Directors of CNX Coal Resources' LP (NYSE: CNXC) General Partner declared a cash distribution of $0.5125 per unit to the Partnership's common unitholders for the second quarter of 2016. The distribution will be made on August 15, 2016 to the common unitholders of record at the close of business on August 8, 2016. The General Partner has elected to not pay a distribution to holders of subordinated units, as a result of the current distribution coverage shortfall, to preserve liquidity and maintain balance sheet strength. The expected cash impact to CONSOL Energy is approximately $6 million starting in the third quarter of 2016.

Coal Division Second Quarter Summary:

During the second quarter of 2016, the Pennsylvania Operations total unit costs were $34.46 per ton, compared to $44.15 per ton in the year-earlier quarter.

As reported by CNX Coal Resources LP (CNXC) in their second quarter 2016 earnings press release, dated July 25, 2016, "From an operational standpoint, the second quarter came in ahead of our expectations primarily due to higher shipments. Our operational team delivered those tons despite four longwall moves, difficult mining conditions at the Enlow Fork Mine, and difficult longwall recovery conditions during one of the Bailey longwall moves. The Harvey Mine, which was idled in January 2016, was brought back online during the second quarter to meet customer demands, while the Bailey and Enlow Fork mines were undergoing longwall moves. Based on our current outlook for shipment volumes, we expect to run all five longwalls for the rest of 2016. Productivity for the second quarter, as measured by tons per employee-hour, improved by 17% compared to the year-ago period, despite the higher number of longwall moves negatively impacting production. For the third quarter, CNXC expects coal shipments and average realized price per ton to increase slightly, and cost of coal sold per ton to decrease compared to the second quarter."

During the quarter, CONSOL's active coal operations generated $78 million of cash from continuing operations before capital expenditures.

The Pennsylvania Operations include Bailey, Enlow Fork, and Harvey mines. Total Production Costs per Ton include: operating costs, royalty and production taxes and depreciation, depletion and amortization. Sales tons times Average Margin Per Ton, before DD&A is meant to approximate the amount of cash generated by the Pennsylvania Operations. This cash generation will be offset by maintenance of production (MOP) capital expenditures. Table may not sum due to rounding.

E&P Division Guidance:

CONSOL Energy increases its annual 2016 E&P Division production to 380-385 Bcfe, compared to previous quarter's guidance of approximately 378 Bcfe.

Total hedged natural gas production in the 2016 third quarter is 75.6 Bcf. The annual gas hedge position is shown in the table below:

* 2017 production will be a function of the second half of 2016 capital program, continued debottlenecking initiatives, and the company's drilled but uncompleted (DUC) well inventory.

** Includes actual settlements of 128.1 Bcf.

CONSOL Energy's hedged gas volumes include a combination of NYMEX financial hedges and index financial hedges (NYMEX plus basis). In addition, to protect the NYMEX hedge volumes from basis exposure, CONSOL enters into basis-only financial hedges and physical sales with fixed basis at certain sales points. CONSOL Energy's gas hedge position is shown in the table below:

* Includes physical sales with fixed basis in Q3 2016, 2016, and 2017 of 18.3 Bcf, 77.0 Bcf, and 28.3 Bcf, respectively.

During the second quarter of 2016, CONSOL Energy added additional NYMEX natural gas hedges of 17.6 Bcf for 2016 and 14.0 Bcf for 2017. In addition, to help mitigate basis exposure on NYMEX hedges, in the second quarter, CONSOL added 18.8 Bcf and 70.6 Bcf of basis hedges for 2016 and 2017, respectively. CONSOL also has hedges in place for a portion of its 2018, 2019, and 2020 production.

CONSOL's 2016 NYMEX plus basis natural gas hedge position has increased to 263.6 Bcf at an average hedge price of $3.04 per Mcf. NYMEX plus basis hedge volumes are not exposed to basis differentials but instead have protected revenue. As a result, in 2016, NYMEX plus basis gas hedges should lock in revenue of approximately $800 million.

During the second quarter of 2016, CONSOL Energy continued to add NGL (propane) hedges, along with direct sales contracts to counterparties. Excluding actual 2016 settlements of 2.3 million gallons, CONSOL currently has 10.4 million gallons of propane directly hedged through March of 2017 at an average price of $0.48 per gallon.

Coal Division Guidance:

CONSOL Energy's pro rata total Coal Division 2016 Adjusted EBITDA is shown in the table below:

Note:  CONSOL Energy is unable to provide a reconciliation of projected CNXC Adjusted EBITDA, CONSOL's Other Coal Division EBITDA, and CONSOL's Other Miscellaneous Coal EBITDA to projected operating income, the most comparable financial measure calculated in accordance with GAAP, due to the unknown effect, timing and potential significance of certain income statement items.

(1)  Includes estimated contribution from Miller Creek and Other Coal Operations for fiscal year 2016 and 1Q16 for Buchanan, and excludes Loss on Sale of Buchanan and the expected Loss on Sale for the Miller Creek and Fola mines.

(2)  Includes miscellaneous other income (net of applicable expenses) associated with the company's Terminal Operations, Rental Income, Coal Royalty Income, and other miscellaneous land income.

(3)  Includes Legacy Liability Costs of approximately $80-85 million; Other Coal-Related Corporate Expenses, and other miscellaneous items. Excludes stock-based compensation and pension settlement charges.

CONSOL Energy's Pro Rata Coal Division Adjusted EBITDA for 2016 is net of all legacy liabilities associated with the Coal Division, which are comprised of the following: long-term disability (LTD), workers compensation (WC), Coal Workers' Pneumoconiosis (CWP), Other Post-Employment Benefits (OPEB-retiree medical), salary retirement and pension, and asset retirement obligations (ARO).

CONSOL Energy expects annual 2016 Pennsylvania Operations sales to be approximately 22.5-25.5 million tons.

CONSOL Energy expects 2016 total Coal Division capital expenditures to be between $105-$125 million, which includes Pennsylvania Operations capital expenditures of $90-$100 million On a normalized basis, the Coal Division expects maintenance of production capital of $5-$6 per ton.

Liquidity:

As of June 30, 2016, CONSOL Energy had $1,313.7 million in total liquidity, which is comprised of $88.7 million of cash, excluding the CNXC cash balance, and $1,225.0 million available to be borrowed under its $2.0 billion bank facility. During the quarter, CONSOL's liquidity improved $34.0 million due to $56.6 million of cash generated from operations offset by an increase of $22.6 million in outstanding letters of credit. In addition, CONSOL holds 12.7 million CNXC limited partnership units with a current market value of approximately $138 million and 19.1 million CONE Midstream Partners LP ("CNNX") limited partnership units with a current market value of approximately $325 million, as of July 19, 2016.

CONSOL Energy used the $66.3 million of free cash flow generated during the quarter and the $426.7 million of the cash on hand from March 31, 2016 to reduce outstanding borrowings on the revolving credit facility, which increased liquidity and de-levered the balance sheet.

"While we have seen the industry issue equity to improve liquidity and manage leverage ratios, CONSOL has focused on cutting costs, improving capital efficiencies, and monetizing assets," commented David M. Khani, executive vice president and CFO. "Over the past two years, the company has reduced administrative costs and legacy liabilities by several hundred million dollars per year, reduced E&P operating cash costs on a per unit basis by approximately 34%, and sold over $1.3 billion of assets. Also, since implementing our free cash flow plan in the second quarter of 2015, we have paid down debt by approximately $650 million, which excludes approximately $200 million of CNXC revolver borrowings that are consolidated on CONSOL's balance sheet."

About CONSOL

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, 2015, CONSOL Energy had 5.6 trillion cubic feet equivalent of proved natural gas reserves.  CONSOL Energy is a member of the Standard & Poor's Midcap 400 Index. 

Reconciliation of EBIT, EBITDA and Adjusted EBITDA to financial net income attributable to CONSOL Energy Shareholders is as follows (dollars in 000):

Note: Income tax effect of Total Pre-tax Adjustments was $104,855 and $313,327 for the three months ended June 30, 2016 and June 30, 2015, respectively. Adjusted net income attributable to CONSOL Energy shareholders for the three months ended June 30, 2016 is calculated as GAAP net loss from continuing operations of $233,010 plus total pre-tax adjustments of $288,574, less the tax benefit of $104,855, equals the adjusted net loss from continuing operations of $49,291.

(1)  CONSOL Energy's Other Division includes expenses from various other corporate activities including income tax expense that are not allocated to E&P or Coal Divisions.

Free cash flow and organic free cash flow from continuing operations are non-GAAP financial measures. Management believes that these measures are meaningful to investors because management reviews cash flows generated from operations and non-core asset sales after taking into consideration capital expenditures due to the fact that these expenditures are considered necessary to maintain and expand CONSOL's asset base and are expected to generate future cash flows from operations. It is important to note that free cash flow and organic free cash flow from continuing operations do not represent the residual cash flow available for discretionary expenditures since other non-discretionary expenditures, such as mandatory debt service requirements, are not deducted from the measure.