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CONSOL shares fall hard after Q2 profit beats Street but gas production misses

Despite CONSOL Energy Inc. beating Wall Street's profit expectations for the second quarter, investors fled the stock Aug. 1 after the company failed to meet production growth expectations and unveiled a 14% increase in capital spending to finance gas volumes that will not yet appear in 2017.

Investment analysts had mixed feelings about the second-quarter report, but investors did not, and CONSOL's stock price dropped by as much as 9.6% by noon Aug. 1 under heavier-than-normal trading.

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About $10 million of the $78 million in new spending was eaten up by unforeseen delays in drilling and completing two Utica Shale dry gas well pads in Monroe County, Ohio, executives told analysts on a conference call after earnings were released. The remainder will fund stepped-up drilling of Marcellus and Utica Shale wells in the second half of the year, with the results showing up in 2018.

Despite the Ohio delays, CONSOL reported 17 cents per share in adjusted income for the second quarter, well above expectations of 10 cents per share in normalized earnings, according to a consensus of analysts compiled by S&P Global Market Intelligence.

CONSOL's bottom line was helped by a 7-cent-per-Mcf decrease in its well and transportation costs, to $2.20/Mcf, when compared to the same quarter in 2016, while its realized prices fell 3 cents per Mcf, to $2.47/Mcf.

"[CONSOL] turned in line only 1 of the 3 scheduled Monroe County (OH) Utica pads during 2Q," Jefferies LLC analyst Zach Parham said in a note to clients. "This delay, along with 3.0 Bcfe of production sold during the quarter (~33 MMcfe/d) resulted in 2Q production volume of 1,013 MMcfe/d, ~9% below consensus estimates of 1,109 MMcfe/d."

CEO Nicholas DeIuliis told analysts that the two well delays, which caused 39 and 53 days of extra drilling time, were "one-time" events. COO for Exploration and Production Timothy Dugan told analysts that both incidents taught CONSOL some valuable lessons in how much proppant it can push down the hole.

"We continue to optimize our completion designs in the Monroe County wells with increased proppant loading to improved [estimated ultimate recoveries] and economics," Dugan said. "This increased proppant has presented challenges with frack pump maintenance and tubing erosion. But we have procedures in place to overcome these challenges and to further increase our frack efficiencies."

While DeIuliis was not ready to commit CONSOL's early 2018 addition of another drilling rig to either the Marcellus or the Utica, Dugan said CONSOL's future is likely where the two shales lie one above the other. "We remain steadfast in our belief that the deep dry Utica potential will outpace that of the Marcellus in the coming years," Dugan said. "We are quickly figuring out the formula for this precision play stacked pay development. This is why we are dedicated and delineating the Utica in Pennsylvania and West Virginia and moving more noncore acreage in the core."

"Overall, we view the release as mixed, with some positives and some short-term negatives," FBR Capital Markets & Co. analyst Joseph Allman said. The negatives were in the production shortfalls and the Ohio well delays, and the biggest positive was management's commitment to shed its remaining legacy coal operations by the end of the year and use that money to pay down debt or finance more drilling.