Coal producer CONSOL Energy Inc. (CNX) posted earnings from continuing operations of 45 cents per share in the second quarter of 2010, which was way below the Zacks Consensus Estimate of 67 cents. The lower earnings in the quarter were a result of increased interest expense related to the acquisition of the Dominion Appalachian E&P assets.

The company boasted record revenue growth of 20%, which propelled revenues to $1.289 billion, driven by increased contribution from the Coal Division. Compared to the Zacks Consensus Estimate, CONSOL’s revenue fell 4% (negative surprise) from $1.343 billion.

Segment Performance

Coal Division

Revenue at the Coal Division improved 19% from the year-ago quarter to $1.002 billion.

In the quarter, CONSOL produced 1.0 million tons of low-volatile metallurgical coal, 0.7 million tons of high-volatility and 13.2 million tons of thermal coal; a total of 14.9 million tons. Of the thermal coal production, 11.6 million tons were in Northern Appalachia, 1.3 million tons in Central Appalachia, and 0.3 million tons in Western Bituminous. The company also successfully reduced thermal coal inventory during the quarter by about 900,000 tons.

The average realized price for low-volatile metallurgical coal was $151.34 per ton, while realized prices for high-volatile metallurgical coal were $75.52 per ton. Realized prices for the company’s thermal coal production declined 6.1% to $53.97 per ton in the quarter.

Gas Division

During the quarter, CONSOL completed the $3.475 billion acquisition of Dominion’s Appalachian gas assets and the subsequent take-in of CNX Gas Corporation, becoming the largest fossil fuel producer in Appalachia.

The company’s Gas Division posted a revenue increase of 29% year over year, a total of $208.5 million. Total production at the Gas Division, which includes CNX Gas and Dominion E&P assets, shot up 42% year over year to 31.9 billion cubic feet (Bcf) in the quarter, while average realized gas price declined 10% to $6.03 per Mcf. Production from the newly acquired Dominion assets was 6.2 Bcf in the quarter (for two months).

Liquidity

As of June 30, 2010, CONSOL’s total liquidity was $973.1 million, with cash of $33.3 million and $939.8 million available under its credit facility. CONSOL Energy had $292.2 million drawn under its credit facility. CNX Gas had $66.4 million of short-term debt and $619.7 million in liquidity, with $1.0 million of cash and $618.7 million of available credit facility. CNX Gas also had outstanding letters of credit of $14.9 million.

Guidance

Based on expectations of accelerated drilling in the second half of 2010, CONSOL Energy reaffirmed its previously-announced production guidance of 127 Bcf for 2010 and initiated a 2011 production guidance of 170 Bcf, which represents a 21% increase over the 2010 annualized run rate of 141 Bcf (expected production from 12-month operation of Dominion assets). Furthermore, the company targets production to grow to 350 Bcf by 2015.

The company has a total gas production of 12.7 Bcf hedged for the third quarter of 2010 at an average price of $7.56.

CONSOL Energy is contracted to sell 4.8 million tons of low-volatile metallurgical coal from Buchanan Mine at an average price of $146.72 per ton in 2010. For 2011, the company’s Coal Division has 1.1 million tons of low-volatile metallurgical coal priced at $160 per ton.

Additionally, the company plans to sell 3 million tons of high-volatile metallurgical coal in 2010, of which 2.1 million tons are currently under contract at an average price of $76.61 per ton. For 2011, CONSOL expects to sell 600,000 tons of high- volatile coal priced at $77 per ton.

CONSOL plans to invest nearly $1.1 billion in 2010, with about $500 million slated for its Coal and Gas Divisions each and $100 million for other (non-gas) activities.

 
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