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On Aug 20, we upgraded the multi-fuel energy producer and energy services provider, CONSOL Energy Inc. (CNX - Analyst Report) to Neutral based on better prospects of thermal coal in the second half of 2013 and gas extraction from the Devonian Shale. CONSOL Energy currently has a Zacks #3 Rank (Hold).

Why the Upgrade?

CONSOL Energy now has another natural gas play, the Devonian Shale, in addition to the existing Marcellus and Utica plays. The company was able to extract gas from this shale, which lies just above the Marcellus Shale. CONSOL will find it cheaper to extract natural gas from this shale since it is not as deep or complex as the Marcellus or Utica play.

The deep and diversified asset base of CONSOL will enable it to capitalize on any revival in domestic and international coal demand. Global steel demand is expected to increase by nearly 3% in 2013 and 2014, as per a World Steel Association report, which will assist met coal sales of the company. Moreover, the demand from Asian countries for thermal coal is expected to rise.

On the flip side, 96% of CONSOL’s coal production come from its underground mines. This exposes the company to significant operational risks as underground mines are more expensive to operate on a per-ton basis and show high levels of fixed costs.

However, CONSOL’s research and development (R&D) facility supports the development of economically viable coal and gas assets. In addition, the R&D facility also concentrates on energy development, improving energy efficiency and reducing pollution.

Other Stocks to Consider

Besides CONSOL Energy, other stocks in the coal sector that are currently performing well include Alliance Holdings GP, L.P. (AHGP - Snapshot Report), Alliance Resource Partners L.P. (ARLP - Snapshot Report) and Oxford Resource Partners, L.P. (OXF - Snapshot Report). All these companies carry a Zacks #1 Rank (Strong Buy).

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