Consol cuts coal production forecast, stock drops

Thu Apr 26, 2012 3:37pm EDT

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(Reuters) - Consol Energy Inc (CNX.N), whose first-quarter profit fell short of Wall Street estimates, cut coal production targets for this year but said it will reopen an idled mine producing steelmaking coal now that prices appear to have bottomed out.

The lowered outlook and earnings miss -- blamed on lower prices and higher costs -- combined to send the company's stock down 3.9 percent to $33.21 in afternoon trading on the New York Stock Exchange.

Another negative factor for Wall Street was that Consol said it contracted to sell some high-quality metallurgical coal to steelmakers at prices below the current benchmark.

But later, Chairman and Chief Executive Brett Harvey was upbeat with analysts, telling them the company was reopening the Buchanan mine in Virginia next week, after almost two months, because there were signs that prices were rebounding.

"We're bringing it back because it is a low cost mine, it is a high value (operation)," he said on a conference call. "We see the liquidity in the market, we see the buyers are out there, we see the price rising."

In its earnings release, Consol said it will receive $119 per short ton for the Buchanan mine's low-volatility coking coal, which is equal to about $185 per metric ton -- below the current $210 benchmark level.

Harvey said overseas steelmakers "have been taking advantage of a lull in the strong longer-term market to pressure coal producers into accepting prices below the benchmark.

"(But) Already, we're starting to see signs that the low-vol coal market has bottomed," adding though that he could not say the same for the price of thermal coal, which is used in power generation, or natural gas, which is at historic lows.

"Production cuts and reduced drilling, mostly by our peers, will eventually bring the market back in balance," said Harvey.

On the natural gas side, Consol said it expects to produce 157 billion to 159 billion cubic feet (Bcf) in 2012, more than last year's record 153.5 Bcf, as it increased production in the Marcellus Shale region of the northeastern United States.

"While we do not like the current price, the gas will find a solid footing based on fundamentals because of our low-cost structure," Harvey said. "We expect natural gas prices to rise to more normal levels and then expect to see a rise in demand for gas on the domestic front."

He said he expected power generation over the next several years to expand dramatically. "In fact, every CEO that I talk to on the utility or generation side expects the next round of generation to be natural gas. That is a real positive for Consol, and I believe we will see that."

Consol's first-quarter net earnings were $97 million, or 42 cents per share, compared with $192 million, or 84 cents per share, in the same quarter of 2011. Analysts on average were expecting 58 cents per share, according to Thomson Reuters I/B/E/S.

Revenue fell to $1.43 billion from $1.47 billion, said Consol, noting that total costs for coal mining rose 20 percent to $54.40 per ton in the first quarter.

Average realized prices for its metallurgical coals fell, to $157.78 per ton from $165.49 for high-quality coal and to $66.28 from $77.40 for lower quality. The average realized price for thermal coal rose to $61.39 from $57.82, Consol said.

"The bottom line is that Consol's results are highly disappointing, especially regarding realized and expected prices at its Buchanan mine," said analyst Lucas Pipes of Brean Murray Carret & Co.

Consol said it produced a total of 15.7 million tons of coal in the first quarter, line with its forecast. But it lowered second-quarter forecast to a range of 14.2 million to 14.9 million tons from a previous estimate of 15.5 million to 15.9 million tons. For 2012 it lowered the forecast to 58.9 million to 60.9 million tons from 59.5 million to 61.5 million tons.

Harvey said the lower profit resulted from the "very warm winter, weakened economy and low natural gas prices (which) have quickly turned a tight coal environment into a surplus."

But he said all of Consol's thermal coal had been contracted for this year at favorable pricing and nearly half of its gas production was hedged at prices higher than current levels.

Consol said that on May 1 it will reopen the Buchanan mine and also restart thermal coal mining operations at its Blacksville mine in West Virginia, which the company idled in February to manage production in response to weak demand and prices.

(Reporting By Steve James; Editing by Gerald E. McCormick, Maureen Bavdek, Jim Marshall and Steve Orlofsky)

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