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Coal production at Consol's Pa. complex declines in Q3'18

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Coal production at Consol's Pa. complex declines in Q3'18

Consol Energy Inc. reported coal production of 6.4 million tons from its three-mine Pennsylvania complex in the third quarter, down 17.0% compared to the prior quarter though up 3.7% compared to a year ago.

The company's Enlow Fork, Bailey and Harvey mines all reported decreased production in the third quarter compared to the prior quarter, according to S&P Global Market Intelligence data. David Khani, CFO of Consol's master limited partnership CONSOL Coal Resources LP, said on an Aug. 2 earnings call that production was expected to be lower due to the need for three longwall mining machine moves at the complex in the quarter.

"Typically, we have six to eight longwall moves during the year or average 1.5 to 2 per quarter," he explained. "Due to the unusually high number of longwall moves, we expect the third-quarter production volume to be below the second quarter but then rebound into the fourth quarter."

Khani warned that Consol Coal Resources is also expecting free cash flow to be affected in the third quarter due to an increase in capital expenditures compared to the prior quarter. While the lowered production and capital changes could drive the MLP below a 1.0x distribution coverage for the quarter, Khani said distribution decisions are based on expected annual coverage and the company's ability to pay its distribution is not at risk.

Seaport Global Securities LLC analyst Mark Levin noted that the reported third-quarter production was in line with his modeled expectations for Consol Energy. Levin said prices in the Northern Appalachia coal basin have been rising and higher natural gas prices could benefit coal producers in the region.

"We believe the contracting environment is only getting better," Levin wrote. "In large part, we think higher pricing reflects the strength of the export market."

Consol Energy and its master limited partnership are both rated buys by Seaport, and Levin called Consol "one of our top picks." Levin said he is expecting Consol's third-quarter earnings report, scheduled for Nov. 1, to indicate strong contract prices for both 2019 and 2020.

The company is also expected to benefit from strong export markets, where producers have found prices more attractive than what can be found domestically.

"A strong export market has the added benefit of tightening up domestic supplies," Levin wrote.