On Jun 11, we issued an updated research report on coal and natural gas operator CONSOL Energy Inc. (CNX). CONSOL is set to benefit from its focus on exploration & production (E&P) and has increased its 2014 natural gas production guidance by 30%. However, CONSOL’s coal assets, primarily underground mines, expose it to a number of operational hazards.
CONSOL Energy, a Zacks Rank #2 (Buy) stock, reported earnings of 53 cents in first-quarter 2014, surpassing the Zacks Consensus Estimate of 20 cents by a whopping 150.0%. The strong performance was attributable to thriving natural gas and natural gas liquid sales.
Per a U.S. Energy Information Administration report, natural gas is expected to increase by 0.8% each year from 2012 through 2014, primarily due to higher natural gas usage in the industrial sector and for electricity generation. The increasing demand for natural gas and the shale gas boom in the U.S. are helping CONSOL to further its E&P strategy.
However, CONSOL functions in a highly competitive natural gas industry teeming with oil and natural gas operators like EOG Resources, Inc. (EOG), Chesapeake Energy Corporation (CHK) and Southwestern Energy Co. (SWN) among others.
Natural gas is in demand globally for its clean burning nature. CONSOL plans to invest $1.1 billion in natural gas operations in 2014 to further strengthen its gas operations and achieve 30% annual gas production growth in 2015 and 2016.
2014 is likely to be a transition year for CONSOL Energy. Last year, it sold nearly half of its coal business, which contributed nearly 66% of its total revenues. Following the divesture, the contribution from coal assets was 55.2% of total first-quarter revenues. This could go down further as the company is planning to sell more of its coal assets.
CONSOL still retains some high quality, low cost coal mines in the U.S. CONSOL has 24 coal supply agreements with these customers, which will expire between 2014 and 2028. If the company fails to renew or win fresh long-term contracts its revenue stream will be hurt.
Recently, the Environmental Protection Agency proposed a regulation that would cut carbon dioxide emission from coal-fired power plants by 30% in 2030 from 2005 levels. The increasingly stringent government regulations on granting permission to coal-based power units will negatively impact the prospects of coal miners like CONSOL Energy.