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CONSOL Energy Inc. (CNX - Analyst Report) has announced its third quarter, fourth quarter and full-year 2012 guidance.

Third-Quarter 2012 Outlook

In third-quarter 2012, CONSOL expects to report a net loss primarily owing to planned and unplanned mines idling, which include idling of Buchanan Mine, Blacksville Mine, Robinson Run Mine and Fola Mine. In addition, the quarterly production at the Enlow Fork and Bailey mines hampered due to the failure of two of the company’s new conveyor belts at the Bailey Preparation Plant. These negative impacts might be to some extent mitigated by CONSOL’s strong balance sheet and liquidity profile.

In the third quarter of 2012, CONSOL's Coal Division produced 11.6 million tons, including 0.8 million tons of low-volatile metallurgical and mid-volatile coal from Buchanan and Amonate Mines. As of September 30, 2012, the company’s total coal inventory declined by 0.7 million tons to 1.7 million tons. During the quarter, thermal coal inventory decreased by 0.8 million tons, while low-volatile and mid-volatile coal inventory increased by 0.1 million tons to 0.4 million tons.

Gas Division produced 39.5 billion cubic feet (“Bcf”) during the quarter, which was marginally down from 40.4 Bcf reported in the prior-year quarter. Decline in quarterly production was primarily due to idling of Buchanan Mine.

Fourth-Quarter and Full-year 2012 Production Guidance

In fourth-quarter 2012, Coal Division of CONSOL expects to produce 13.4 - 13.8 million tons, which includes 0.6 million tons produced from Buchanan Mine.

CONSOL’s Gas division is expected to produce 42.5 - 44.5 Bcf during the quarter.

The company reiterates its full-year 2012 gas production guidance at 157 - 159 Bcf level.

Second-Quarter 2012 Recap

CONSOL reported operating earnings per share of 31 cents in second-quarter 2012, a penny lower than the Zacks Consensus Estimate and approximately 6% below the year-ago quarter’s earnings of 34 cents.

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

In second-quarter 2012, the company produced 14.6 million tons of coal, including 1.1 million tons of low-volatile metallurgical coal, 1.2 million tons of high-volatile and 12.2 million tons of thermal coal.

In this quarter, CONSOL registered year-over-year growth in gas production volumes in Marcellus Shale, but produced lower volumes from Coalbed Methane and Shallow, leading to a substantial decline in production volumes.

Our Take

As the depressed market condition prevails for a long time due to weak demand from Asia, Europe and South America primarily resulting from lower steel production, we believe CONSOL’s several planned mines idling is a good move for its future financial as well as operational performance.

Though these planned production curtailment severely impact the company’s top-line results in the near term, these efforts will enable CONSOL to minimize its cost of operations and reduce pressure on its inventory in the long term.

In addition, we believe that over-reliance on a small group of consumers for bulk sales, stringent regulations and rigid penalties on underground mining are matters of concern for the underground miners like CONSOL.  

CONSOL Energy Inc. currently has short-term Zacks #5 Rank (Strong Sell rating).

CONSOL Energy Inc. is involved in the production of coal and natural gas for energy and raw material markets. The company engages in the mining, preparation, and marketing of steam coal primarily to the electric power generation industry; and metallurgical coal to steel and coke producers. With a market capitalization of $7.82 billion, CONSOL has 9,157 full time employees. The company’s closest peer is Peabody Energy Corporation (BTU - Analyst Report).

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