Consol to resume gas drilling in Utica, Marcellus shale
Consol Energy Inc. executives think natural gas producers have turned the corner on low prices and tepid demand, prompting the company to begin a slow return to drilling in the Marcellus and Utica shales.
“We're now starting to come off the bottom of the market,” David Khani, chief financial officer at Consol, told analysts Tuesday after the company said it would put two drilling rigs in Monroe County, Ohio, and Washington County next month. Consol halted drilling of new wells last year.
Consol's return — which follows an announcement last week that fellow shale gas producer Southwestern Energy would resume drilling with five rigs — comes as benchmark prices for gas have risen more than a dollar since hitting 17-year lows in March and a warm summer drives demand from power plants.
“In general, the fundamentals across the board are improving,” said Tim Dugan, chief operating officer at Cecil-based Consol, during a call to discuss second-quarter financial results.
He noted more pipelines to take gas and liquids to lucrative markets will come online over the next two years.
Nationwide gas production appears to have peaked in February before falling slightly in March and April according to the most recent data from the Energy Information Administration, easing the glut that sent prices tumbling.
The market improvement occurs at a key time. Consol, which continues to focus more on gas as it moves away from its legacy of coal mining, reported a loss of $469.8 million, or $2.05 per share, during the quarter, an improvement over the loss of $603.3 million, or $2.64, during the same period last year.
The company boosted gas production to a record level and increased revenue from gas sales, but recorded losses from commodity contracts and a write-down on low-performing coal operations in West Virginia that it is selling.
Fellow shale driller Range Resources Corp. also expressed optimism.
Announcing its second-quarter results after the markets closed, CEO Jeff Ventura said, “We are encouraged by the recent improvement in commodity prices, particularly natural gas and natural gas liquids.”
The quarter's results were less encouraging. Range reported a loss of $224.9 million, or $1.35 per share, deeper than the loss of $118.6 million or 71 cents per share from the same period last year. Revenue from gas and liquids sales fell 13 percent to $225 million and Range also recorded a loss from commodity contracts.
The Fort Worth-based company, which announced in May it is buying Louisiana driller Memorial Resource Development for $3.3 billion in stock, plans to maintain its three Marcellus drilling rigs through 2016.
Range can quickly ramp up drilling on 200 existing well pads in the region, which “will allow Range to reduce costs and increase efficiencies for future development and, importantly, speed the pace of development when warranted, as much of the required infrastructure is already in place,” Ventura said in a statement. The company will discuss the results in a call with analysts Wednesday.
Before Range reported its results, its stock closed up 2 percent to $41.87.
Consol's ability to return to drilling without increasing capital spending is notable, said analyst Neal Dingmann of SunTrust Robinson Humphrey in Houston.
“We hear it a lot from the (gas exploration and production companies) about monetizing, cutting costs, efficiencies. They're generally running ahead in those areas,” he said.
Consol's stock closed up 6.9 percent at 18.35, more than triple the 52-week low of $4.54 reached in January.
“These guys are executing on the plan ... they set out mid-last year” to operate on free cash flow, Dingmann said.
Like others, Consol is getting more gas from fewer wells that cost less to drill and frack. Two years ago, the time between starting on a well pad and flowing gas into a line was about two years, Khani said. Consol cut that by six months, saving money with each day that crews were not working on the wells.
Two years ago, Consol brought online 150 wells. This year, it will connect 40 wells, yet it will still increase production.
“That shows the magnitude of change,” Khani told the Tribune-Review.
The 10 wells Consol plans to drill this year won't come online until 2017. The company is drilling them only in locations that have access to pipelines.
CEO Nick DeIuliis called the return to drilling “modest” as Consol pivots from a defensive mode as it battled a tough market.
A concern remains among industry leaders and analysts about ramping up drilling and production too quickly, putting supply back into a glut. A continued warm summer will help eat away at the supply, though.
Warm weather also is driving improvements in coal markets, which would help Consol at the Bailey complex, its last remaining coal mines beneath Greene and Washington counties. Consol spinoff CNX Coal Resources said it restarted the longwall machine there that it idled in January.
Consol said this week it will off-load its Miller Creek and closed Fola coal mines in southern West Virginia to a Kentucky company. Consol will pay Southeastern Land LLC $44 million to assume control of the mines and responsibility for $103 million in closing and reclamation costs there.
David Conti is the assistant business editor at the Tribune-Review. Reach him at 412-388-5802 or firstname.lastname@example.org.