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On Nov 20, we maintained our Neutral recommendation on the multi-fuel energy producer and energy services provider, CONSOL Energy Inc. (CNX - Analyst Report). CONSOL Energy currently has a Zacks Rank #3 (Hold).

Why the Reiteration?

CONSOL Energy’s earnings per share in the third quarter were lower than our expectation, while the top line was marginally ahead.

CONSOL is presently more focused on natural gas production and has started to shed its coal assets. At the beginning of the year, the company sold some of its coal assets in Canada and recently decided to shed more coal assets for a total value of $3.5 billion. All the sales proceeds will be directed to enhance the gas operation of the company.

CONSOL Energy depends on a small group of customers for its bulk coal sales. In the previous year, 35% of the total revenue of the company was generated from four customers. Customer concentration runs its own risk as any failure to renew or get into fresh long-term contracts will adversely affect the operational health of the company.  

Even after downsizing its coal assets the company still retains a few low-cost, high-quality coal mines. The company is likely to utilize these assets on any rebound in coal demand either in the U.S. or in international markets.
On the flip side, a significant portion of CONSOL’s coal production come from its underground mines. This exposes the company to operational risks as underground mines are more expensive to operate on a per-ton basis and show high levels of fixed costs.

Other Stocks to Consider

Stocks in the coal sector that are currently performing well include Alpha Natural Resources, Inc. (ANR - Snapshot Report), Suncoke Energy Partners, L.P. (SXCP - Snapshot Report) and BHP Billiton Limited (BHP - Analyst Report). All these companies carry a Zacks #2 Rank (Buy).

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