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Consol raises shale forecast but predicts 2Q loss

| Tuesday, July 15, 2014, 2:48 p.m.
Jasmine Goldband | Tribune-Review
Walter Baranowski, 27, of Follansbee, W. Va. bolts the ceiling as part of his training on a piece of equipment at Consol Energy Inc. Bailey Mine Complex in Greene County Friday, June 6, 2014.

More Marcellus gas wells and smarter drilling techniques are driving up production estimates at Consol Energy Inc. even as prices tumble.

Gas production in April, May and June increased 34 percent over the same period last year, “and the Marcellus shale remains the growth driver,” the Cecil-based company said on Tuesday in an update before its quarterly earnings report due on July 29.

The company increased its annual gas production forecast by nearly 10 percent and predicts 30 percent growth through 2016. But it lowered projections for metallurgical coal and warned that it will post a loss for the second quarter primarily because of one-time expenses.

Consol's shares sank $1.05, or 2.4 percent, to $42.51. The stock has retreated from a one-year high of nearly $48 last month amid concerns about the impact on the coal industry from tougher federal regulations on coal-fired power plants.

Consol has been putting more emphasis on gas after decades as a coal company. But increased shale production causes a conundrum for gas drillers: While companies may have more gas to sell, a glut could pressure prices and impact their bottom lines.

The Energy Information Administration predicts daily gas production in the Marcellus, the nation's most prolific shale play, will surpass 15 billion cubic feet, compared with about 12 billion a day at the beginning of the year.

A glut of gas put this month's prices on pipelines into New York and New England at their lowest points in two years, ranging between $2.24 and $2.59 per British thermal unit.

“This supply growth, coupled with known transportation constraints, is responsible for increasing price weakness in the Appalachian region this summer,” Teri Viswanath, director of commodities strategy at BNP Paribas SA in New York, said in a note to clients.

Consol's update did not address prices but said the company would post a second-quarter loss because of bond refinancing, a new revolving credit arrangement and a pension settlement charge, offset by income from a coal contract buyout. A spokeswoman said officials could not elaborate on the “one-time items” before the earnings statement release.

Consol reported a $13 million net loss in the same quarter last year. It posted a $116 million profit in the first three months of 2014.

The company in May laid off 188 workers from its Buchanan Mine in Virginia, which mostly produces metallurgical coal for steelmaking. CEO Nick DeIuliis has called the international market for that coal “horrible,” and the company lowered its expected annual production from that mine by about 8 percent.

Its overall coal forecast remained unchanged from spring estimates because production of thermal coal from the Bailey Complex in Washington and Greene counties remains high.

Consol said it is reworking some wells, getting more gas out of new wells and cutting the time between drilling and production.

“These improvements will not only help compress cycle times, but will also result in growing our gas production even more efficiently,” DeIuliis said in the production update.

J. Marshall Adkins, an energy advisor for investment bank Raymond James, said such efficiencies could make exploration and production companies profitable despite low prices.

“With rising U.S. production and falling costs per unit of production, U.S. E&P companies are now poised to actually grow cash flows even in a flat or modestly lower energy price environment,” Adkins wrote in a note to clients. “This dramatic shift (driven by the increased horizontal well efficiencies) should lead to a more sustainable (5-10 year) improvement in U.S. E&P profitability and capital efficiency.”

Bloomberg News contributed to this report. David Conti is a staff writer for Trib Total Media. He can be reached at 412-388-5802 or dconti@tribweb.com.

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