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Consol execs say coal contracting strategy offsets recent commodity volatility

Consol Energy Inc.'s focus on booking long-term coal sales to a diverse customer base is paying off as fluctuating commodity prices have made only a modest impact on the company's 2019 performance so far, executives said on an Aug. 6 earnings call.

The Northern Appalachia coal miner increased its 2020 contracted coal sales volume to 80% and its 2021 contracted sales volume to 34%, Consol reported. The company's strategy is focused on selecting a stable customer base, maintaining consistent operations and keeping its finances in a stable position, Consol President and CEO Jimmy Brock said in an Aug. 6 earnings release.

"We continue to generate robust free cash flow, powered by our differentiated marketing and operating strategy. Our innovative contracting strategy allowed us to improve our revenue per ton compared to the year-ago period, even while spot commodity prices were materially lower," Brock said on an earnings call after results were released. "We believe our contracted position is among the best in the industry, and that significantly reduces the risk to the balance sheet."

Consol reported an average revenue per ton of $47.53 in the second quarter, up from an average revenue per ton of $47.34 in the year-ago period. The company posted net income of $48.8 million, or $1.56 per share, in the second quarter, compared to $52.7 million, or $1.58 per share, in the prior-year period.

"This is a testament to our prudent contracting strategy that is based on de-risking our revenue and production profiles while locking attractive returns for our business," Brock said of the improvement in revenue per ton. "That could mean that we may not be able to perfectly choose the top or bottom of the commodity prices, but in aggregate, on a risk-adjusted basis, this provides a more sustainable business model."

Fixed-price domestic customers account for 40% to 50% of Consol's customer base, Brock said, while exports account for about 30% to 35% of the company's business. Another 20% to 25% of the company's business is tied to customers with netback contracts linked to power prices. In 2018, netback power contracts were the company's top performers, Brock said, but pricing on those contracts declined 21% in the most recent quarter compared to a year ago. Meanwhile, the company has seen higher prices this quarter for its fixed-price domestic and export contracts.

"Despite the swings in commodity markets, we continue to innovate and execute our strategy," Brock said, adding that several favorably priced contracts were recently added to the books. "These moves, along with other smaller customer wins, puts us in a very comparable 80% contracted position for 2020, assuming a 27 million ton production run rate. ... We believe we have one of the best revenue visibilities out there. We still have some work to do, but I'm very happy with where we sit today heading into the fall contracting season."

Based on its current contracted position, Consol expects to sell between 26.8 million and 27.8 million tons of coal from its Pennsylvania mining complex in 2019. The average revenue per ton sold is expected to be between $47 and $48 at an average cash cost of coal sold per ton between $30.40 and $31.40.