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CNX to Shed Coal Assets, Focus on Gas

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In a drive to concentrate on natural gas exploration and production, CONSOL Energy Inc. (CNX - Free Report) has entered into an agreement to shed five West Virginia longwall coal mines and related assets for $3.5 billion. CONSOL Energy will sell its Consolidation Coal Company (CCC) subsidiary, which operates these assets, to a subsidiary of Murray Energy Corporation.

Per the agreement, CONSOL Energy will be selling the McElroy, Shoemaker, Robinson Run, Loveridge and Blacksville No. 2 mines, which produced a combined 28.5 million tons of thermal coal in 2012. In addition, the company will also sell its river and dock operations with a fleet of 600 barges and 21 towboats.

CONSOL Energy will receive $850 million in cash on closing of the deal while a further payment of $184 million will be due for the retention of a royalty on select reserves, certain water treatment payments and tolling fees at CONSOL's Baltimore Terminal. In addition, Murray Corporation will take on $2.4 billion of liability from CONSOL’s balance sheet.

CONSOL Energy has been systematically shedding its coal assets and putting more emphasis on natural gas. Natural gas with its clean burning nature is widely favored in the U.S. The usage of natural gas is expected to increase further following the climate action plan from the U.S. President, and more stringent policies being adopted by the U.S. Environmental Protection Agency (EPA) for granting permission for setting up new coal power plants.

If these proposals are implemented it will make electricity generation from coal costlier than ever before. So the next best option available to the electricity generators will be the use of natural gas as a fuel source.

In addition, the United States Department of Energy has begun to grant permission to the U.S. natural gas producers to export LNG. Though it might sound premature, CONSOL Energy with its increasing focus on natural gas operation might consider that as an option.

The increasing vigor in natural gas production will definitely put CONSOL Energy in a better position to meet  its 2014 gas production guidance of 210–225 Bcfe and achieve a production growth rate of 30% in 2015 and 2016.

CONSOL Energy currently retains a Zacks Rank #3 (Hold). The company is scheduled to release its third quarter earnings on Oct 31, 2013. The Zacks Consensus Estimate is pegged at 3 cents for the quarter.

Some other coal operators have already released their earnings reports. Among them Peabody Energy Corp. (BTU - Free Report) reported third quarter 2013 earnings of 5 cents per share, widely beating the Zacks Consensus Estimate of a loss of 3 cents. SunCoke Energy, Inc. (SXC - Free Report) also matched Peabody, with its third quarter earnings per share of 9 cents beating the Zacks Consensus Estimate of 7 cents by 28.6%. However, another operator Alliance Holdings GP, L.P. reported earnings of 91 cents per unit in the third quarter, lagging the Zacks Consensus Estimate of 93 cents by 2.1%.

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