We have upgraded CONSOL Energy (CNX) to Neutral from Underperform as its decision to invest more in liquid rich assets and shy away from natural gas activities bodes well in the present depressed gas price scenario.
CONSOL Energy’s deep and diversified portfolio, primarily comprising coal and natural gas, is well positioned to cater to worldwide energy demand. CONSOL's low-cost coal producing profile in northern Appalachia works to its advantage.
CONSOL posted a mixed performance in the first quarter of 2012, with its top line marginally beating our expectation, while earnings per share falling short of it. CONSOL expects coal production in the second quarter and fiscal 2012 to be in the range of 14.2–14.9 million tons and 58.9−60.9 million tons, respectively. The Zacks Consensus Estimates for the second quarter and fiscal 2012 are currently at 32 cents and $1.76 per share, respectively.
Factors that could undermine CONSOL’s performance include increasing competition from renewable energy producers, dependence on a small group of consumers for bulk sales and possibility of non-renewal of long-term contracts at favorable prices.
On a more positive note, CONSOL Energy has the largest research and development facility in the industry, focusing on energy development, improving energy efficiency and reducing pollution. The energy producer’s strong financial position had allowed it to idle two of its mines and reject offers to sell coal cheaply.
The company has subsequently resumed production from its idled Backsville mine backed by a gradual increase in thermal coal demand from China and India, which we believe will boost its financial position. So, reviewing the pros and cons, we have decided to move our recommendation upwards.
CONSOL Energy presently retains a Zacks #3 Rank, which translates into a short-term Hold rating. The company competes with other Zacks #3 Ranked peers Arch Coal, Inc. (ACI) and Walter Energy, Inc. (WLT).
Based in Canonsburg, Pennsylvania, CONSOL Energy is a multi-fuel energy producer as well as energy services provider, primarily catering to the U.S. power generators.
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