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CONSOL to Sell Assets, Drops Dividend to Counter Weak Coal

Coal and natural gas producer CONSOL Energy Inc.CNX announced that it has entered into an agreement to sell its Buchanan Mine in southwestern Virginia and certain other metallurgical coal reserves to Coronado IV LLC for a total consideration of $420 million.

This decision to shed more coal assets from its portfolio seems to be a prudent move by CONSOL Energy's management. Both the price and demand for coal have gone down significantly from prior levels. Thanks to stringent regulations on emission, a significant drop in natural gas price and increasing competition from the global producers, U.S. coal miners are well past their golden days.

Given the sharp fall in demand, Peabody Energy Corporation BTU has lowered its 2016 U.S. sales volume target by 18 million tons to 28 million tons from 2015 levels. Another large coal operator Arch Coal Inc., unable to cope with the softness in demand, has filed for bankruptcy.

CONSOL Energy has over the last few years gradually shifted its emphasis from coal to exploration and production (E&P). During the second quarter of 2015, the company formed a coal MLP, CNX Coal Resources LP CNXC , to increase its natural gas focus. The decision to sell further coal assets is a step toward increasing the E&P focus.

The transaction includes nearly 400 million tons of proved coal reserves, about 88 million tons of which are associated with the Buchanan Mine. The remaining reserve will come from CONSOL Energy's idled Amonate Mine in southern West Virginia and southwestern Virginia, its greenfield Russell County coal reserves in southwestern Virginia and its greenfield Pangburn-Shaner-Fallowfield coal reserves in southwestern Pennsylvania.

However, the transaction does not include gas rights. CONSOL will retain the right to extract and sell gas from these mines and other properties. CONSOL has plans to utilize the proceeds from asset sales to lower its outstanding debt, which was nearly $2.7 billion at the end of 2015.

CONSOL also decided to suspend its dividend payment going forward, which will increase the liquidity level of the company. In 2015, the company paid dividends worth $33.3 million to its shareholders.

U.S. coal miners are trying out various methods to cope with the difficult situation like selling and idling mines, lowering production rates and reducing operating costs. Though these steps might bring in temporary relief, we believe that unless there is a revival in coal demand more miners would have to file for bankruptcy.

CONSOL Energy has a Zacks Rank #3 (Hold). Cloud Peak Energy CLD is a better-ranked player in the coal industry, carrying a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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