Overview: Soros Fund Management’s new position in CONSOL Energy

Market Realist

Must-know: Changes to Soros Fund Management’s 2Q14 positions (Part 2 of 7)

(Continued from Part 1)

Soros Fund Management and CONSOL Energy

Soros Fund Management initiated new positions in CONSOL Energy (CNX), Level 3 Communications (LVLT), Time Warner Cable (TWC), and New Oriental Education & Technology Group (EDU). It sold positions in FedEx (FDX) and Monster Beverage (MNST).

Soros Fund Management’s new position

Soros Fund Management’s new position in CONSOL Energy accounts for 1.77% of the fund’s second quarter of 2014 (or 2Q14) portfolio.

CONSOL Energy is a Pittsburgh-based producer of natural gas and coal. The company is one of the largest independent natural gas exploration, development, and production companies. Its operations center around the major shale formations of the Appalachian Basin.

CONSOL Energy’s operational divisions

The company operates through two primary divisions:

  • oil and gas exploration and production (or E&P)
  • coal mining

E&P division overview

The E&P division focuses on Appalachian natural gas and liquids activities. This includes producing, gathering, processing, and acquiring natural gas properties in the Appalachian Basin. As of December 31, 2013, CONSOL Energy had an equivalent of 5.7 trillion cubic feet of natural gas proved reserves.

Coal division overview

The coal division focuses on extracting and preparing coal in the Appalachian Basin. The company’s premium coals are sold to electricity generators and steelmakers, both domestically and internationally.

A coal mining company since 1864, CONSOL entered the natural gas business in the 1980s. It initially entered this business to increase the safety and efficiency of its coal mining process by capturing methane from coal seams prior to mining. Over the past ten years, CONSOL Energy’s natural gas business has grown by approximately 290% to produce a net of 172.4 billions of cubic feet equivalent in 2013. The company’s focus is on continuing the development of its Marcellus Shale acreage and on exploring and developing its Utica Shale acreage.

Outlines shift to natural gas production

At its analyst day in June, the company disclosed that it was quickly moving from being a coal producer to a natural gas producer. The company also announced a plan to form a master limited partnership (or MLP) with Noble Energy (NBL) to provide midstream gathering services for its production in the Marcellus Shale region. The highlights of this event can be read in detail at Must-know: Highlights from CONSOL Energy’s analyst day.

Second quarter loss widens due to one-time charge

For 2Q14, the company’s reported earnings came below street estimates. It posted a wider net loss of $24.94 million, or $0.11 per share, for the second quarter, compared to a net loss of $12.53 million, or $0.05 per share, last year. The loss was due to a one-time $74.3-million expense related to an earlier repayment of debt. However, revenue was up 13%, from $828.17 million to $937.4 million, a year ago.

Increased production in E&P division

The E&P division saw production at 51.9 billions of cubic feet equivalent, an increase of 34% from the 38.6 billions of cubic feet equivalent produced in the quarter a year earlier. 2Q14 liquids volumes of 2.6 billions of cubic feet equivalent were nearly five times greater than in the second quarter of 2013. The company said in its 10-Q filing that it’ll continue experiencing liquids uplift on future average sales prices as additional wells are brought online in the liquid-rich areas of the Marcellus and Utica Shales.

Midpoint production results for coal division

CONSOL’s coal division produced 8.3 million tons, achieving the guidance range’s midpoint—between 8.1 to 8.5 million tons. Weaker markets for metallurgical coal decreased pricing for the company’s low-volume and high-volume coals. Thermal coal pricing was also lower in the quarter when compared to the quarter a year earlier. Higher thermal coal sales volumes, however, enabled the thermal coal business to generate nearly $400 million in cash before capital expenditures and depreciation, depletion, and amortization (or DD&A).

Annual gas production forecasts raised

CONSOL said its focus is on “NAV [or net asset value] per share accretion,”with the recently announced “gas midstream MLP” and the “potential non-core asset sales of $1 billion over the next five years.” On the earnings call, the management added that a divestment of CONSOL’s non-core assets includes a “potential sale of 1 billion tons of Illinois Basin coal.” Management further said that the proposed MLP formation for the midstream assets is “on schedule.”

Third-quarter gas production, net to CONSOL, is expected to be 59 to 61 billions of cubic feet equivalent. But annual 2014 production guidance was recently raised to 225 to 235 billions of cubic feet equivalent, from 215 to 235 billions of cubic feet equivalent. CONSOL Energy expects its 2015 and 2016 annual gas production to grow by 30%.

For coal, the low volume guidance range for 2014 was lowered again from that shown three months ago to reflect a price drop. For 2015, the low-volume guidance was left unchanged from the previous guidance on the assumption that pricing will improve from current levels. The thermal guidance for 2014 has increased from the previous guidance due to the strong start in both sales and production.

Continue to Part 3

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