On March 27, we issued an updated research report on coal and
natural gas operator
CONSOL Energy Inc.
). CONSOL is set to benefit from its focus on Exploration &
Production (E&P) and added 1.63 trillion cubic feet
equivalent (Tcfe) of natural gas in 2013. However, CONSOL's coal
assets, primarily being underground mines, expose it to a number
of operational hazards.
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CONSOL Energy, a Zacks Rank #3 (Hold) stock, reported
earnings of 3 cents in fourth-quarter 2013 missing the Zacks
Consensus Estimate of 7cents by 57.1%. The margins were
negatively impacted by lower realized prices and increase in unit
cost of natural gas.
Per a U.S. Energy Information Administration (EIA) report, the
usage of natural gas is expected to increase in the industrial
sector. The demand for natural gas from the industrial sector is
expected to touch 20.73 billion cubic feet per day in 2014, up
1.4% from the 2013 level. CONSOL with its E&P strategy stands
to benefit from increasing natural gas usage.
CONSOL operates in a highly competitive natural gas industry
teeming with oil and natural gas operators like
EOG Resources, Inc.
Chesapeake Energy Corporation
Southwestern Energy Co.
) among others.
Natural gas is in demand globally for its clean burning nature.
CONSOL plans to invest $1.1 billion toward natural gas operations
in 2014 to further strengthen its gas operations and achieve a
production level in the range of 215-235 billion cubic feet
equivalent, up nearly 30% from 2013 levels. CONSOL is targeting
30% annual gas production growth in 2015 and 2016.
2014 is likely to be a transition year for CONSOL Energy as last
year, it sold nearly half of its coal business, which contributed
nearly 66% of its total revenues. CONSOL generated 35% of its
total revenue from its four largest coal and gas customers in
2013. The company has 24 coal supply agreements with these
customers, which will expire between 2014 and 2028. If the
company fails to renew or win fresh long-term contracts its
revenue stream will be hurt.
In addition, stringent government regulations on granting
permission to coal-based power units could negatively impact the
prospects of coal miners like CONSOL Energy.