
Consol Energy Inc. operates a large coal mining complex in Pennsylvania. The company is one of many in the industry that has shunned the notion of growing coal production volumes absent a compelling case that does not increase risk on the balance sheet. |
Consol Energy Inc. executives are feeling good about coal's future in the U.S. and abroad but said the company will be moving cautiously to work within its cash flow and keep risk off the balance sheet.
The pure-play Pennsylvania coal operator reports plenty of export opportunities and does not see domestic markets shrinking much further in the near term. Still, as many competitors return to profitability after a wave of debt-fueled bankruptcies, Consol is judiciously watching its spending, President and CEO Jimmy Brock told S&P Global Market Intelligence. Like several coal companies in recent months, Consol said its cash flow is more likely to go toward paying off debt or returning cash to shareholders rather than growing coal volumes.
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"I am a firm believer that coal is going to be a viable part of the energy mix for the foreseeable future," Brock said on the sidelines of a May industry conference. "But, we have to do things differently."
Seaport Global Securities analyst Mark Levin recently wrote that Consol "blew the doors off the barn" in the first three months of 2018, beating earnings expectations with help from a contracting strategy that sells coal to utilities at a base price but includes an upside for Consol when power prices rise, as they did during colder weather in the first quarter. At the same time, the company is reporting a high degree of demand for its coal in places such as India and Turkey.
Now, while many observers are expecting natural gas prices to remain low and continue to pressure coal-fired generation, Consol is thinking natural gas exploration and production companies will soon face the same sort of investor pressure to rein in volume that coal companies have experienced. If that were to occur, it could raise natural gas prices and offer a boost to coal producers.
"We think in the energy business, you should be working within your cash flow," said James McCaffrey, senior vice president of coal marketing, at the same conference. "Our thesis is that the [exploration and production] companies are going to end up having to work within their cash flows too. We don't believe in this deflation of the gas price."
In addition to export markets serving as an outlet for U.S. coal supply, McCaffrey said that in the markets Consol serves, most significant power plant retirements are already "behind us." He added that what remains of the fleet will have excess capacity to adjust for increased coal consumption if pricing becomes more favorable to coal.
M&A in play
Consol operates a highly productive complex in Pennsylvania that produced about 6.7 million tons of thermal and metallurgical coal in the first quarter. An advantage of that complex is that it is already heavily capitalized, Brock said. It also operates a marine export terminal in Baltimore.
Not long ago, Consol management was part of a larger team that commanded an operation consisting of a more expansive coal footprint alongside natural gas exploration and production. The company divested several of its coal mines before splitting the natural gas and coal segments into different entities in late 2017.
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While he can appreciate the earlier attempt to diversify the company with natural gas assets, Brock said Consol is happy to "control our own destiny" as a pure-play entity and not see coal's cash generation flow to developing the natural gas segment of the business. Investors have also appreciated the clarity provided by the separation of the two entities, he said.
Though any growth opportunity would have to compete with shareholder return or debt payment initiatives, Brock said Consol has formed a team of employees to evaluate internal and external opportunities.
He said he has taken calls about a joint venture to develop Consol's metallurgical coal reserves in southern West Virginia. Under such an arrangement, he envisions another company would bring in equipment and mine Consol's 1.6 billion tons of reserves. If Consol was to mine that reserve itself, Brock said, it would have to be tied to a contract.
"We want to grow, we want to find the right thing, but we want to make sure to do the due diligence," he said. "We don't want to have to infuse a ton of capital to get what we thought we could get at the purchase price."
Before the spinoff, Consol had greater exposure to metallurgical coal markets with its Buchanan mine in Virginia, consistently the top-producing mine by volume in the Central Appalachia basin. The company sold the mine in early 2016, just before the market for metallurgical coal boomed. Brock said that at the time, the mine was projected to be a low-to-zero cash generator for the company.
"Seeing Buchanan go was the toughest thing of all the coal assets I've seen go," Brock said. "I knew the true value of it. I know how hard those people worked down there and they were just really good."


