Soros Fund Management exits position in CONSOL Energy

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CONSOL Energy

Soros Fund Management exited its position in CONSOL Energy, Inc. (CNX) in the quarter ended on September 30, 2014. The position accounted for 1.77% of the fund’s 2Q14 portfolio and was one of the top ten positions. The position was initiated in the second quarter that ended in June.

CNX

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Overview of CONSOL Energy

Based in Canonsburg, Pennsylvania, just outside of Pittsburgh, CONSOL Energy produces natural gas and coal. The company is one of the country’s largest independent natural gas exploration, development, and production companies.CNX operates through two primary divisions:

  • E&P division: 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: The coal division focuses on extracting and preparing coal in the Appalachian Basin. The company sells its premium coal products to electricity generators and steelmakers, both domestically and internationally.

CONSOL Energy has operated as a coal company since 1864 and entered the natural gas business in the 1980s. Over the past ten years, its natural gas business has grown by ~290%. The company produced a net of 172.4 billions of cubic feet equivalent (or Bcfe) in 2013, and it’s focused on continuing the development of its Marcellus Shale acreage. CNX also wants to explore and develop its Utica Shale acreage.

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Shift to natural gas production

At its analyst day in June, the CONSOL Energy disclosed that it was quickly moving from being a coal producer to a natural gas producer. During 3Q14, it also saw the initial public offering (or IPO) of CONE Midstream Partners—a master limited partnership (or MLP) formed between CONSOL and Noble Energy.

Greenlight noted in an investor letter that since CONSOL is “covered mostly by coal analysts, its stock has languished along with other coal stocks.” The fund said it believes that “as analysts recognize CNX’s change in asset mix from coal to gas, the shares should re-rate.” The fund said its average entry price was $38.88 per share. The stock ended the quarter at $37.86 per share.

Net loss narrows, E&P division outlook raised

CONSOL’s 3Q14 results missed earnings and revenue estimates. However, its generally accepted accounting principles (or GAAP) net loss narrowed to $2 million, or $0.01 per share—from $64 million, or $0.28 per share, in the same period last year. Adjusted net income was $20 million, or $0.09 per share. Total revenue and other income increased to $884.62 million—from $803.35 million in the same period last year.

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Its E&P division includes Marcellus, coalbed methane (or CBM), shallow oil and gas, and other gas products. Total E&P production increased 41% to 64.9 Bcfe for 3Q14, compared to 46.1 Bcfe in the previous quarter. As a result, CONSOL raised its 2014 E&P production guidance range to 235–240 Bcfe from the earlier guidance of 225–235 Bcfe.

Coal division updates

CONSOL’s coal division produced 7.8 million tons, which was above the high end of the guidance range of 7.3–7.7 million tons. The company noted, “Weaker coal markets resulted in decreased spot pricing for the company’s low-vol and thermal coals.”

CONSOL’s management added in its 10Q filing, “Despite the recent decrease in the BHP Billiton Mitsubishi Alliance (BMA) settlement price, its Buchanan coal mine’s low cost position keeps it competitive and profitable, in the domestic and worldwide metallurgical markets.”

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Prices for high-volatile coal from CONSOL’s Bailey mine is more stable than other classes of metallurgical coal. CONSOL noted, “End users continue to demand Bailey coal due to its versatility, which allows it to compete as high volatile metallurgical, pulverized coal injection (or PCI) and high-Btu thermal coal.”

CONSOL Energy is shipping low-volatile coal to European and South American end users, focusing on expanding domestic metallurgical sales. It also secured additional new contracts with US customers for 2015. CONSOL believes that “during winter, domestic utility market demand, buoyed by utility inventories remaining below normal levels, will support continued spot market and term contracting activity.”

Soros positions traded in 3Q14

During 3Q14, Soros Fund Management added positions in Travelport Worldwide (TVPT), Alibaba Group Holding (BABA), Yahoo! (YHOO), and Netflix, Inc. (NFLX). Top positions that saw an increase were Dow Chemical Company (DOW), Level 3 Communications, Inc. (LVLT), and Phillips 66 (PSX). Soros sold its stakes in Halliburton (HAL) and CONSOL Energy Inc (CNX) and reduced its position in Herbalife (HLF) considerably.

The next part of the series will highlight the fund’s position change in Halliburton.

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