Must-know: Some causes of concern for CONSOL Energy
Overproduction of natural gas may depress price
The success of the Marcellus Shale play and development of other shale plays has resulted in growth in gas production in the region with production per day in Pennsylvania, West Virginia, and Ohio more than doubling since 2011. Traditionally, natural gas produced in the Mid-Atlantic states sold at a premium to the benchmark Louisiana Henry Hub prices. However, as Appalachian production increased, this premium narrowed. This decline, or negative basis, to the Henry Hub price is forecasted to continue in future years and may widen due to anticipated further increased Appalachian gas production. As a result, apart from the trend of gas prices in the market, CNX’s natural gas price may be adversely affected by the change in production in the markets it operates. In the past, in light of the low natural gas prices during 2012, the number of wells drilled in the Noble joint venture was significantly lower than planned.
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CONSOL Energy (CNX) has a joint venture with Noble Energy in CNX Gas Company LLC. CNX sold 50% of its interest in the Marcellus Shale oil and gas assets to Noble Energy in the second half of 2011. CNX would receive $1.9 billion of consideration from Noble Energy as CNX’s share of drilling and development costs for new wells, which are called “carried costs.” Noble Energy’s obligation to pay carried costs is suspended if average Henry Hub natural gas prices fall and remain below $4 per million British thermal units (MMbtu) in any three consecutive months. When prices go above $4 per MMbtu for three consecutive months, the payment resumes. Natural gas price has traditionally been volatile. In 2014, natural gas prices have fallen from highs of over $6 per MMBtu to $4.71 per MMBtu for the week ending June 6, 2014—a decline of ~22%. Therefore, it is difficult to anticipate whether CNX would face such a situation. In the past, Noble Energy’s obligation to pay carried costs was suspended beginning on December 1, 2011, as a result of the provision.
CNX’s pension woes
Through the sale of five West Virginia thermal coal mines to Murray Energy in December, 2013, CNX passed through $2.1 billion in other post-retirement benefit plans (or OPEB) liability to the buyer, improving CNX’s balance sheet. However, the pension settlement resulted in a $39.5 million pre-tax expense adjustment. When lump sum payments from the pension plan exceed the service and interest expense, pension settlement accounting requires unamortized actuarial gains and loss related to the lump sum payouts be amortized immediately. Many of the lump sum payments in 2013 were paid to employees who elected to retire under the 2012 Voluntary Severance Incentive Plan. Pension settlement accounting may occur in 2014 related to staff reduction that occurred in relation to the sale of the Consolidation Coal Company (or CCC) and certain subsidiaries. In December, 2013, CONSOL Energy completed the sale of its CCC subsidiary.
CONSOL Energy Inc. (CNX) is a producer of natural gas and coal. Other companies operating in the coal industry are Arch Coal Inc. (ACI), Alpha Natural Resources Inc. (ANR), and Cloud Peak Energy (CLD). Some of the major names in the natural gas sector are ExxonMobil (XOM), Chesapeake Energy (CHK), and Devon Energy (DVN). Some of these companies are part of the SPDR S&P Metals & Mining ETF (XME) and the Vanguard Energy ETF (VDE).