CONSOL Reveals 2012 Capex Plans

CONSOL Energy Inc. (CNX - Analyst Report) revealed its 2012 capital expenditure plans besides giving an early update on gas/liquids production for the period 2012-2015. The company expects total capital spending of $1.72 billion in 2012 which includes budget for coal, gas, water and others. The company has invested $1.40 billion in capital expenditure in 2011.

The 2012 budget calls for spending $720 million for coal, $755 million for gas, and $245 million for other purposes.

Within coal, the company expects to invest approximately $310 million on its maintenance-of-production projects and $205 million on projects that will lead to an increase in production. One such venture run by the company is BMX Mine which is expected to add 5 million tons a year of high-quality Pittsburgh seam coal. Of the remaining $205 million allocated for this business, the company expects to spend $155 million towards efficiency improvements on the overland belt like Enlow Fork Mine and $50 million on health and safety items.

In the gas category, the company plans to spend $575 million on developing its extensive Marcellus Shale assets, $50 million on a joint venture between CONSOL and Hess Corporation in the Utica Shale, $65 million on the Coal Bed Methane (“CBM”) program and the balance $65 million for other purposes. The company made gas-related capital expenditure of $662 million in 2011.

The company made gas-related capital expenditure of $662 million in 2011. The company expects the increase in gas investment in 2012 to spur production to nearly 160 billion cubic feet equivalents of oil (Bcfe), up 12.0% year over year. In 2013, the company estimates gas/liquids production in the range of 200 – 220 Bcfe driven by a ramp-up in drilling in 2012. It maintained its 2015 gas production target of 350 Bcfe.

Out of the planned expenditure of $245 million categorized as Total Other, the company expects to spend $135 million for the water category, $30 million for Transportation, $55 million for Coal Land and the balance $25 million for other reasons.

With this increase in investments, the company intends to earn a higher rate of return from the opportunities in coal, gas, and liquids. Moreover, the company seems to be investing in gas/liquids projects as they are currently in vogue sources of renewable energy. We believe that focus on renewable resources would bring a desired balance to the company’s portfolio.

We believe that CONSOL Energy’s deep and diversified portfolio that mainly comprises coal and natural gas is well positioned to cater to the global energy demand. Moreover, it has the largest research and development facility in the industry, focusing on energy development, improving energy efficiency and reducing pollution.

However, dependence on a small group of consumers for bulk sales, stricter legislations and rigid penalties on underground mining are pertinent concerns for underground miners like CONSOL Energy.  The company presently retains a short-term Zacks #4 Rank (Sell). We have a long-term Neutral recommendation on the stock.

CONSOL Energy Inc. is the leading diversified fuel producer headquartered in the Eastern U.S. It has 12 bituminous coal mining complexes in four states and reports proven and probable coal reserves of 4.4 billion tons. Other coal companies with which CONSOL Energy competes are Arch Coal Inc. (ACI - Analyst Report) and Peabody Energy Corporation (BTU - Analyst Report).

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