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Diversified fuel producer CONSOL Energy (CNX - Analyst Report) announced sequentially lower coal and natural gas production expectation for the first quarter of 2013. The company expects coal production in the range of 13.7 – 14.1 million tons, while gas production is expected to come between 39 – 41 billion cubic feet equivalents (Bcfe). The frac schedule and seasonal factors were the root cause for the sequential decline in expected gas production.

2012 Output

The softness in demand in the coal industry had an adverse impact on coal production. During the year CONSOL had to idle mines to lower its accumulated coal inventory. The fourth quarter production of 14.3 million tons and 2012 production of 56.0 million tons were lower than 15.2 million tons and 62.0 million tons produced in the corresponding prior-year period.

However, the gas division fared well year on year both for the quarter and the full year. The increasing use of gas for power generation was the primary factor for the uptrend. The fourth quarter gas production of 41.8 Bcfe and 2012 production of 156.3 Bcfe were higher than 39.7 million tons and 153.5 million tons produced in the corresponding prior-year period.

What Lies Ahead?

As per a report published by International Energy Agency, in Dec 2012, the coal industry is headed for a turnaround. The share of coal in the global energy mix will continue to rise in the next five years. In addition China and India will play a key role, with both countries importing bulk volumes to meet increasing domestic energy requirement.

However, COSOL Energy along with other coal operators like Peabody Energy Corporation (BTU - Analyst Report), Arch Coal Inc. (ACI - Analyst Report) and Walter Energy Inc. (WLT - Analyst Report) will have to face increasing competition from Indonesian and Australian coal producers. In addition, cheap domestic gas prices and a growing consciousness to use renewable power would restrict the use of coal in the U.S. 

Our Take

CONSOL’s coal division contributes more than 90% of the revenue stream of the company. So any improvement in the coal position will help the company to report better results.

Overall, we believe the demand for coal will be driven by import from China, India and Japan. Global demand will start to pick up as the year progresses. We in fact believe CONSOL’s coal guidance in the range of 55.5 to 57.5 million tons for 2013 is on the conservative side.

CONSOL Energy Inc., based in Canonsburg, Pennsylvania, is a multi-fuel energy producer and an energy services provider, primarily catering to the U.S. power producers. The company presently retains a short-term Zacks Rank #3 (Hold).

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