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Risk, Reward Balanced at CONSOL Energy

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On March 27, we issued an updated research report on coal and natural gas operator CONSOL Energy Inc. (CNX - Free Report) . CONSOL is set to benefit from its focus on Exploration & Production (E&P) and added 1.63 trillion cubic feet equivalent (Tcfe) of natural gas in 2013. However, CONSOL’s coal assets, primarily being underground mines, expose it to a number of operational hazards.

CONSOL Energy, a  Zacks Rank #3 (Hold) stock, reported earnings of 3 cents in fourth-quarter 2013 missing the Zacks Consensus Estimate of 7cents by 57.1%. The margins were negatively impacted by lower realized prices and increase in unit cost of natural gas.

Per a U.S. Energy Information Administration (EIA) report, the usage of natural gas is expected to increase in the industrial sector. The demand for natural gas from the industrial sector is expected to touch 20.73 billion cubic feet per day in 2014, up 1.4% from the 2013 level. CONSOL with its E&P strategy stands to benefit from increasing natural gas usage.

CONSOL operates in a highly competitive natural gas industry teeming with oil and natural gas operators like EOG Resources, Inc. (EOG - Free Report) , Chesapeake Energy Corporation (CHK - Free Report) and Southwestern Energy Co. (SWN - Free Report) among others.

Natural gas is in demand globally for its clean burning nature. CONSOL plans to invest $1.1 billion toward natural gas operations in 2014 to further strengthen its gas operations and achieve a production level in the range of 215–235 billion cubic feet equivalent, up nearly 30% from 2013 levels. CONSOL is targeting 30% annual gas production growth in 2015 and 2016.

2014 is likely to be a transition year for CONSOL Energy as last year, it sold nearly half of its coal business, which contributed nearly 66% of its total revenues. CONSOL generated 35% of its total revenue from its four largest coal and gas customers in 2013. The company has 24 coal supply agreements with these customers, which will expire between 2014 and 2028. If the company fails to renew or win fresh long-term contracts its revenue stream will be hurt.

In addition, stringent government regulations on granting permission to coal-based power units could negatively impact the prospects of coal miners like CONSOL Energy.

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