CONSOL Energy EPS Lags, Beats Rev

Diversified fuel producer CONSOL Energy Inc. ( CNX - Analyst Report ) reported operating earnings of 31 cents per share for the second quarter of 2012, a penny lower than the Zacks Consensus Estimate. Earnings were approximately 6% below the year-ago quarter’s earnings of 34 cents.

Earnings, during the quarter, excludes a favorable impact of $82 million from a combination of gains from the sales of some non-core properties, a charge for reclamation and selenium at the Fola Complex, and a charge for the expiration of certain shallow gas leases.

Considering these one-time items, CONSOL Energy posted net income of 67 cents in the quarter under review, comparing favorably with 34 cents earned in the year-ago quarter.

Revenue

CONSOL Energy’s quarterly revenue decreased 8% to $1.45 billion from $1.59 billion in the year-ago quarter. The top line comfortably surpassed the Zacks Consensus Estimate of $1.33 billion.

Operational Update

During the quarter, total costs went down 16% to $1.24 billion from $1.49 billion in the year-ago quarter. A lower cost of goods sold, gas royalty interests costs, purchased gas costs, freight expense, selling, general and administrative expenses as well as interest expense aided the decline.

Earnings Before Interest, Tax and Depreciation and Amortization (EBITDA) improved 29% year over year to $414 million in the quarter.

Segment Performance

Coal Division

In the quarter under review, the company produced 14.6 million tons of coal, of which 1.1 million tons constituted low-volatile metallurgical coal, 1.2 million tons were of high-volatility and 12.2 million tons were thermal coal. Out of the total thermal coal production, 11 million tons came from Northern Appalachia while 1.2 million tons were from Central Appalachia. The company’s thermal coal inventory expanded by 0.1 tons from the previous quarter.

The average realized price for low-volatile metallurgical coal was $121.58 per ton, while the same for high-volatile metallurgical coal was $61.22 per ton. Realized prices for the company's thermal coal production improved 3.5% to $61.29 per ton in the quarter. The combined effect lowered the overall average realized price per ton to $66.00 from the $74.63 realized in the year-ago quarter.

Total costs per ton, in the reported quarter were $52.23, up 1% year over year, mainly due to idling of the Blacksville and Buchanan longwalls during the quarter.

Gas Division

During the reported quarter, the company registered year-over-year growth in gas production volumes in Marcellus Shale, but had lower volumes from Coalbed Methane and Shallow, leading to a substantial decline in production volumes.

However, the average realized gas price decreased by 21.5% to $3.98 per Mcf from $5.07 per Mcf in the year-ago quarter.

Financial Update

As of June 30, 2012, cash and cash equivalents were $200.2 million, down 47% from 2011-end level.

Long-term debts, as of June 30, 2012 were $3.17 billion, flat with the 2011 year-end level.

Cash flow from operations totaled $138 million in the quarter, dipping almost 62% from $360 million in the year-ago quarter.

Capital expenditure totaled $408 million in the quarter, up 23% year over year.

Guidance

CONSOL expects third quarter 2012 coal sales to be 14.9 million tons and 2012 coal production to be 59.4 million tons. The company expects coal production in 2013 and 2014 to be 57.6 million tons and 62.0 million tons, respectively.

CONSOL expects third quarter 2012 gas production to be in the range of 40–42 Bcf (billion cubic feet), and 2012 production to be in the band of 157–159Bcf.

Peer Comparison

Peabody Corporation ( BTU - Analyst Report ) reported second quarter 2012 earnings of 73 cents per share, beating the Zacks Consensus Estimate of 53 cents. However, the company’s profits were lower than the last year’s earnings of $1.16 per share.

The year-over-year decline was due to higher interest expenses and depreciation, depletion and amortization expenses related to the acquisition of Macarthur Coal in Australia.

Peabody’s quarterly revenue was $1,998.2 million versus $1,980.5 million in the prior-year quarter, reflecting year-over-year growth of 0.9%.

The company’s revenue for the quarter fell short of the Zacks Consensus Estimate of $2,067 million.

The company expects earnings per share in the third quarter of 2012 to be in the range of 20 cents to 45 cents.

Our View

CONSOL’s decision to invest more in liquid-rich assets and shy away from natural gas activities bodes well in the present depressed gas price scenario. We believe its deep and diversified portfolio puts it at an advantage compared to its peers.

However, dependence on a small group of consumers for bulk sales, along with stricter legislations and rigid penalties on underground mining, is a cause of concern for underground miners like CONSOL Energy.

Nevertheless, its financial strength and increasing demand for thermal coal from developing Asian countries will benefit this low-cost coal producer.

We have a Neutral recommendation on CONSOL Energy. It presently retains a Zacks #3 Rank, which translates into a short-term Hold rating.