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CONSOL Energy Inc. ( CNX - Analyst Report ) has entered into an all-cash agreement, worth $170 million, with Cloud Peak Energy Inc. ( CLD - Snapshot Report ) to sell its non-performing Northern Powder River Basin (“PRB”) assets. The transaction will be effective from June 29, 2012.
Per the contract, CONSOL Energy will keep an 8% production royalty interest on 200 million tons of fee coal. CONSOL Energy's Northern PRB assets include Youngs Creek Mining Company LLC, CX Ranch and Sheridan in Wyoming.
The PRB is one of the important sources of coal in the U.S. and is situated across northern Wyoming and southern Montana. Including these assets, CONSOL Energy has already sold $224 million worth of non-revenue generating assets till date and redeployed the funds for its 2012 capital expenditure program.
In the year 2012, CONSOL Energy plans to invest $1.7 billion under its capital expenditure program. Besides using the fund generated from divesture of assets, the company will also utilize its cash balance, which was $1.6 billion as of March 31, 2012, to meet a part of its 2012 capital investments for growth and maintenance projects. The budget includes $755 million for gas, $720 million for coal, $135 million for water, and $110 million for other purposes.
It is a regular practice for companies like CONSOL Energy to sell its non-producing assets. This strategy helps the company to minimize its operating and maintenance costs. In September last year, CONSOL Energy entered into an agreement, worth $193 million, with Antero Resources Appalachian Corp., pursuant to which CONSOL Energy assigned Antero, overriding royalty interests of 7% for 115,647 net acres of Marcellus Shale assets.
We view CONSOL Energy as a well positioned organization with a strong diversified portfolio primarily comprising coal and natural gas, which enable it to meet energy demand. In addition, the company has a low-cost coal producing profile in northern Appalachia. The company also resumed production at its idled Backsville mine due to gradual increase in thermal coal demand from emerging markets primarily China and India. This is expected to boost the company’s financial position.
However, there are several factors that could undermine CONSOL Energy’s performance, which include increasing competition from renewable energy producers, dependence on a small group of consumers for bulk sales and the possibility of non-renewal of long-term contracts at favorable prices.
CONSOL Energy currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
Based in Canonsburg, Pennsylvania, CONSOL Energy is a multi-fuel energy producer as well as energy services provider, primarily catering to the U.S. power generators.
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