CANONSBURG Oct 28, 2015 (Thomson StreetEvents) -- Edited Transcript of CONSOL Energy Inc earnings conference call or presentation Tuesday, October 27, 2015 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Tyler Lewis CONSOL Energy Inc. - Director of IR * Nick DeIuliis CONSOL Energy Inc. - President & CEO * Dave Khani CONSOL Energy Inc. - CFO * Tim Dugan CONSOL Energy Inc. - COO of E&P ================================================================================ Conference Call Participants ================================================================================ * Pavan Hoskote Goldman Sachs - Analyst * Neal Dingmann SunTrust Robinson Humphrey - Analyst * Jeremy Sussman Clarksons Platou Securities - Analyst * Jon Wolff Jefferies LLC - Analyst * Holly Stewart Howard Weil Incorporated - Analyst * Evan Kurtz Morgan Stanley - Analyst * Brandon Blossman Tudor, Pickering, Holt & Co. Securities - Analyst * Michael Dudas Sterne, Agee & Leach, Inc. - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by and welcome to CONSOL Energy's third-quarter earnings conference call. As a reminder, today's call is being recorded. I would now like to turn the conference over to the Director of Investor Relations, Tyler Lewis. Please go ahead. -------------------------------------------------------------------------------- Tyler Lewis, CONSOL Energy Inc. - Director of IR [2] -------------------------------------------------------------------------------- Thanks, Ryan. Good morning, everybody. Welcome to CONSOL Energy's third-quarter conference call. We have in the room today Nick DeIuliis, our President and CEO; Dave Khani, our Chief Financial Officer; Jim Grech, our Chief Commercial Officer; Tim Dugan, our Chief Operating Officer of our EMP Division; and Jimmy Brock, our Chief Operating Officer of our Coal Division and Chief Executive Officer of CNX Coal Resources. Today we will be discussing our third-quarter results. We have posted slides to our website. As a reminder, any forward-looking statements we make or comments about future expectations are subject to business risks, which we have laid out for you in our press release today, as well as in our previous SEC filings. We will begin our call today with prepared remarks by Nick followed by Dave and then Tim. Jim Grech and Jimmy Brock will then participate in the Q&A portion of the call. With that, let me start the call with you, Nick. -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [3] -------------------------------------------------------------------------------- Good morning, everybody, and thanks for joining us. Before we turn it over to Dave Khani, I want to provide some general thoughts, highlight a few areas, some of which the team will touch upon in greater detail this morning. Back on our second-quarter call, we started that by emphasizing the 18-month plan that we are executing in order to weather the current environment. We'd like to reemphasize that 18-month plan because we think it's incredibly important that we take the long view of where we're heading is a Company and as an industry. Those who make the prudent decisions now in terms of controlling expenses and deploying capital and pragmatically managing the balance sheet, they're going to be rewarded in the long run. And that's exactly what we're doing. Our 18-month base plan is highly achievable, even as we face continued depressed commodity prices. We will continue to use the proceeds from our asset monetization program to pay down debt. We will continue to grow production on the E&P side, while making important progress in terms of capital intensity and efficiency. We will continue to lock in tons and increase our market share in the tightening coal space. We will continue to drive structural changes that are economically compelling. In doing these things, we will bring forward meaningful value to our shareholders as we unlock the substantial upside that exists with our asset-rich Company. Now let's walk through just a couple of specifics. Some of this you might have heard yesterday on the CNXC earnings call. From an operational standpoint on the coal side, this quarter we increased efficiency; squeezed costs; and, most importantly, we ran safely. Our ability to do so paid off, with the Pennsylvania operations on the coal segments seeing total unit cost reductions this quarter, while operating on reduced work schedule. That's a very impressive result. Our coal marketing team has done a tremendous job locking in contracted volumes in 2016, 2017 and 2018. Specifically, we've contracted an additional 4.7 million tons for the Pennsylvania operations during the third quarter for full year 2016. So that brings our sold position in 2016 to 74% based on our sales guidance. Now, questions have been raised about our ability to lock in coal contracts in this environment, which without question continues to be challenged because of depressed natural gas prices and subsequently depressed thermal prices. So let's put those issues to bed. We've been consistently executing the thermal marketing strategy that we laid out earlier in the year. And we are demonstrating that our Pennsylvania complex is built to compete and thrive, even under the pressures of low prices and regulatory challenges that have many other operators in the coal industry in a precarious position, to say the least. Plus, not only are we seeing success in locking up our tons, but in the process we're also, as I said earlier, taking market share from our competitors. We're entering markets where we haven't previously participated and in a big way. For instance, we're locking up multi-year commitments with key power plants in the upper Midwest and Southeast regions. These are areas that historically, as you heard earlier yesterday, have been served by the Illinois Basin, Central App producers and Powder River Basin producers. Since our coal is 13,000 BTUs per pound, it travels very well. People often forget to take into account BTU adjustments when comparing the different basins. Not all tons are created equal. And CONSOL has a premium product, which is illustrated by our contracting success. We are far from done, so you should continue to expect contracting success moving forward. And we should be well over 90% sold for 2016 by the end of this year. Now, additional pushback that CONSOL has heard recently, besides our ability to lock in tons, is questions about what price we're contracting the tons for. The market has been more challenged lately. You can see this in any public trade publication out there. When looking at Northern Appalachian pricing for 13,000 BTU four-pound sulfur coal, which is the proxy for our Pennsylvania coal operations, our contracts vary across customers and depend on a multitude of factors, including where the tons trends are shipped. On average, though, we are pricing for newly contracted 26 tons at market. So some pain at the current market levels today for much gain tomorrow, so to speak. This is the result of taking market share and solidifying our footprint as the anchor supplier to the largest, most efficient and most environmentally-compliant coal power plants in the PJM and surf regions. For 2017 and 2018, we're not pricing the majority of these tons since we believe that will see natural gas prices recover, which in turn are going to help thermal pricing. Compared to historical norms regarding our contracted position in outer years of this point in the year, we're substantially more contracted when looking at 2017 and 2018. For the tons that are priced for 2017 and 2018, the curve is in contango, reflecting higher prices and a rebound when compared to 2016 levels. Now if we shift over to E&P, I'm not going to steal Tim's thunder. He is going to have more to say about this in a minute, but our excitement continues to grow for the dry Utica. We announced some initial IP rates for our Monroe County pad that has four dry Utica wells and one wet Marcellus well. We expect Monroe County, Ohio, to become a much bigger part of our development over the next couple of years. Last quarter, we announced our first dry Utica well in Westmoreland County, Pennsylvania, with a 24-hour flow test to sales at 61.4 million cubic per day. We are still conducting flow tests on the Gaut well and have seen continued and ongoing positive indications through flowing pressures. We're more excited about Central Pennsylvania dry Utica today than we were when we reported Gaut's 24-hour flow test results in the second quarter call. And again, Tim's going have more to say on the E&P specific shortly. On the corporate side, I want to briefly touch on asset sales. During the quarter, we put out a range of total value for assets available for sale between $1.55 billion and $2.3 billion. As we've discussed previously, we're actively engaged in multiple processes in an effort to monetize a portion of that $1.55 billion to $2.3 billion bucket. And we received pushback or questions in some circles regarding our ability to execute sales in a depressed commodity price environment. These are not unreasonable questions, given the challenges that both the coal and EMP industries are going through. But while they may be reasonable questions, recent deals we've executed give us the confidence that we have in our plan. A case in point is when we recently announced two coal transactions where we received over $100 million, which included assets that accounted for about $6 million of expected EBITDA in 2016. So we are executing in this environment, and we've been able to command premiums. Some areas in assets have a higher sales probability than others. But we are hard at work to try to bring value forward in order to pay down debt. We're creating competitive processes and being methodical in order to increase shareholder value. And given the sensitivity around these processes that are underway, we are limited on what we can discuss. But we will continue to provide updates as they occur. So this is an important quarter when, you look at moving the needle on our base plan. We remain focused on the long-term view and systematically executing that plan. With that, I'm going to turn over to Dave Khani. -------------------------------------------------------------------------------- Dave Khani, CONSOL Energy Inc. - CFO [4] -------------------------------------------------------------------------------- Thanks, Nick. Good morning, everyone. I'd like to discuss our results for the quarter and provide details in some of the areas that will be helpful when modeling our Company. We have posted an updated slide deck to our website. And many of our comments will tie to slides 5 through 10 and 41 through 49. Here are the key points in the quarter. One, our second-half 2015 and 2016 free cash flow plan is underpinned by a highly contracted revenue stream, as we locked in an additional 23% of natural gas volumes, including basis hedges and 20% coal volumes under multi-year contracts with more to come. Two, we achieved strong coal and EP unit cost reductions. Three, we beat our quarterly production guidance in both E&P and coal. Four, we are raising the lower end of our FY15 E&P production guidance to 325 to 330 Bcfe, primarily due to continued well outperformance in our type curves. In essence, our 2013 and 2015 capital is proving to be even more productive, enabling us to manage our inventory of drilled uncompleted wells and significantly lowering our 2016 D&C budget. Five, we continue to improve our Marcellus program. However, successive is mounting within our dry Utica. We have 2 key data points now within the dry Utica, our Gaut well in central PA and our Monroe County, Ohio, well, which is the Switz 6 well. We have 7 data points coming this year to gauge the mainly 100%-owned dry Utica program. Tim will highlight this later, but we have been successfully bringing down D&C costs meaningfully while improving recoveries in EURs. This data will help us set up our drilling program going forward and further reduce our capital intensity and breakeven development price. Six, we successfully executed the sale of some of our coal assets for a strong price accretive to our shares, current with the market multiple. The proceeds from the sales went towards debt reduction, helping us to accelerate our deleveraging goals. As Nick mentioned, we have a comprehensive asset sale programmable at full steam, with more than $2 billion of assets in process that should help us monetize towards our internal goal. So let's start with the results in the quarter. CONSOL reported net income attributable to shareholders of $119 million for the third quarter of 2015 or $0.52 per diluted share. After excluding unusual items, like plan changes from retiree medical benefits, hedging gains and the gain on the sale of our WAE assets, the Company had adjusted net loss of $64 million or $0.28 per diluted share. After adjusting for EBITDA, it was -- to shareholders was $136 million and cash flow from operations was $110 million. The plan change for OPEB resulted in a $101 million gain for the quarter. While we included this gain as an unusual item in our reconciliation table, this gain is recapture of prior-period expenses and should result in annual cash reductions of $15 million to $20 million per year. This OPEB impact is factored into our legacy liability chart on page 44. We expect a similar benefit next quarter. So the of question we ask you is: Is this an unusual item or is this a recurring item? We'll leave it up for you to decide. The main driver of our negative adjusted earnings for the quarter was lower thermal coal production, natural gas, liquids and met realizations. We are almost finished positioning the Company to withstand the lower commodity price environment through highly contracting our revenue stream; driving down our maintenance capital needs; lowering unit operating cost in both divisions; deleveraging and reducing corporate and overhead costs. So despite the commodity headwinds, we expect to be free cash flow neutral in fourth quarter of 2015 and positive free cash flow in 2016 without any asset sales or dropdowns. Now I'd like to discuss our segment operating results for E&P and Coal in more detail. Starting with E&P, lower realized prices for gas, NGLs, oil, condensate was the main driver of the results in the quarter. On a per-unit basis during the quarter, CONSOL's average sale price for gas before the impact of hedging was $1.77 per MMBtu. This included a $1 per MMBtu basis differential, which is slightly greater than our guidance of negative $0.95. Our Ohio Utica gas realization has continued to drive the discrepancy. I will also note that we do not add in any resold unused FT into our realizations. So be careful when comparing margins when -- between companies. This will become an even bigger discrepancy when looking to all the future capacity coming online. We expect basis differentials will improve modestly into the fourth quarter and to the first half of 2016, as local demand picks up but take-away capacity continues to lag supply. As a result, we expect our basis differentials for the fourth quarter of 2015 will be between $0.43 and $0.53 per MMBtu. Looking forward, rationality is starting to take hold within Appalachia, as rig counts are coming down and other companies are recognizing what we did last quarter. Capital needs to be cut harder in 2016. This is why we announced that we would drop rigs on our second-quarter call and manage our drilled and unconnected inventory next year. Capital discipline is now being exerted onto the E&P industry, reversing the last several years of outspending. The sharp growth in Appalachian gas and NGL production has begun to slow. We expect the backlog of uncompleted wells will be needed to essentially offset the underlying 32% to 35% base PDP production decline rate within the basin. Overall, US natural gas production will flatten and begin to decline next year, with associated gas falling and net imports declining with higher exports to Mexico and LNG. This should translate into higher NYMEX, assuming normal weather demand next year. We see potential for basis differentials to begin tightening into the start of 2017, driven by up to 4.5 Bcf per day of additional takeaway capacity out of the basin, as well as slowing supply growth. Year end 2017 looks even better with an additional 9-plus Bcf per date of capacity coming online and incremental demand rising further. While we expect gas differentials to improve starting later in 2016, we are currently modeling conservative basis differential assumptions in our base case plan of between $0.40 and $0.50 per MMBtu. And again, we have hedged a considerable amount of this basis. NGL realizations were also significantly impacted in the third-quarter from widening basis differentials, as compared to Mont Belvieu pricing on the Gulf Coast. We see potential for improvement in NGL realizations on the horizon. This includes the addition of ethane deliveries on the 70,000 barrel per day Mariner East pipeline in January. And the improved regional access to the TEPPCO pipeline that transports NGL products to the Gulf markets, starting in the fourth quarter. Additional export capacity is also coming online next year on the Gulf Coast. And the first wave of new ethylene crackers comes online in 2017. Furthermore, NGL supply growth will likely slow considerably as current low prices have materially impaired liquids economics, with NGL extraction often generating a flat to negative margin when including processing costs. While our primary method of managing our liquids risk has maintained a balance approach to our development plans, with volumes making around 10% to 15% of our total production, we have also proactively executed on a limited amount of takeaway options to diversify points of sale. We have agreements in place with INEOS to export 3,000 barrels a day of ethane starting in January 2016; 4,000 barrels a day of ethane starting in January 2017; and a cumulative 4,000 barrels a day of propane and butane beginning in early of 2017. The INEOS propane and butane shipments will likely represent approximately 25% to 35% of our daily production volumes of those products. While we're not prepared to discuss pricing details, our propane and butane sales agreement is linked to Brent crude pricing. We have updated our NGL realization outlook for FY15 and FY16 to $12 to $13 per barrel and $12 to $14 per barrel, respectively. While we cannot control pricing, our operating team is posting very strong results in both exceeding production targets and driving down unit costs. Total operating costs, including DD&A during the third quarter, improved 16% year over year, and 9% sequentially, to $2.63 per Mcfe. This outpaces our 10% to 15% expectation and is a strong results when considering that liquids represented 4% higher production year over year. We continue to expect production costs to fall further next year to $2.52 to $2.65 per Mcfe. Now let's look at the Coal operations. During the quarter, the Pennsylvania operations margins expanded year over year as improved unit costs more than offset the decline of realization. Considering that PA operations sold 0.05 million less tons in the current quarter year over year, this decrease in costs illustrates the team embracement of the zero-base budgeting effort we underwent. Spot prices for both thermal and met coal have declined throughout the quarter. We have shipped about 1 million tons of thermal coal into the spot market into the quarter, and this negatively impacted our realizations. As Nick mentioned, we are making significant strides in contracting our thermal coal portfolio. While we're not finished contracting out, it's important to understand our contract strategy. Our goal is to be 90% contracted for 2016 thermal coal tons with multiyear contracts with the highly efficient and must-run power plants. The current coal and natural gas market remains oversupplied, negatively impacting realizations. However, supplier response for both coal and natural gas is underway. And the thermal markets are displaying contango pricing into 2017 and 2018 based on some of the contracts we just signed. However, our goal is to lock in 2016 pricing and keep 2017, 2018 more open to capture the future market recovery. We expect 2015 US and NAPP coal production to decline about 90 million tons and 14 million tons, respectively. According to our analysis, as well as a confirmation from GTC, the NAPP market has experienced the largest production cutbacks year-to-date versus the other areas. And this is before we see mining closures starting to kick in. Our Virginia operations Buchanan mine has more exposure to the international markets. As we've experienced BME prices ticking down, our average realized prices have followed. To help offset this, we continue to focus on increasing our domestic sales mix. All of our cost forecasts are inline with the last quarter and show substantial improvements when looking back over the last several years. For PA operations, we continue to expect full-year 2015 total operating costs, including DD&A, to be between $40 and $43 per ton and Virginia and other operations between $50 and $56 per ton. Now let's talk about the balance sheet and the liquidity. On the debt side, CONSOL remains committed to managing our balance sheet and improving our liquidity position in what continues to be a very challenging commodity price environment. As we previously see stated, we used the proceeds of $419 million of the CNXC IPO and cash proceeds of the recently-announced divestiture to help pay down our credit facility. As a result, our leverage ratio has slightly improved to approximately 3.75 net debt to EBITDA, as calculated per our credit facility agreement. Our goal is to continue to improve this ratio with our base free cash flow plan, while accelerating it meaningfully with proceeds from asset divestitures. Our liquidity position remains solid, at approximately $855 million at September 30, 2015. In addition, CONSOL holds 12.7 million shares of CNXC limited part units, with a current market value of approximately $160 million and 19.1 million CNX limited partner units with a current market value of about $180 million. We've also made significant strides in reducing our off-balance sheet liabilities. You will recall that this has been an ongoing process since 2013, over which time we have proactively addressed our legacy liabilities. We reduced them by nearly $2.8 billion to date, and lowered our cash servicing costs by over $250 million. We now expect legacy liabilities to be approximately $1.5 billion at year end 2015, with an annual servicing cost for 2016 of approximately $107 million versus the $143 million expected for 2015. As we have said, the decisions that have resulted in these reductions were difficult because they affected our retirees. But they were necessary and prudent to strengthen CONSOL's balance sheet and lower our cost structure to become profitable in a sustained low commodity price environment. Now, one question we also consistently get and that I would like to address is: What would we need to see in order to bring drilling rig activity back early? First, we focus on generating 15% after-tax rate of returns for full field economics, not single [OIRRs]. While Monroe and PA dry Utica might be able to generate these returns in this pricing environment, we want to watch flowing production a little longer before committing capital. Second, we want to lower our cost of capital, which has risen in this environment and warrants debt pay down to calm both debt and equity holders. In any case, we are very flexible in how we can adjust our 2016 capital. We will move it up and down to meet our required thresholds. Some other things to think about in summary. Looking forward, we have several things that will positively benefit net income, EBITDA and cash flow from our operations. We will receive a full-year benefit from the continued focus on zero-base budgeting, resulting in decreased G&A and operating expenses along with our increased E&P and coal production. Also benefiting cash flow for 2016 will be reducing E&P CapEx, asset sales, legacy liability reductions, and reduced financing costs. So with that, I'd like to pass it over to Tim Dugan to talk about some of the E&P side. -------------------------------------------------------------------------------- Tim Dugan, CONSOL Energy Inc. - COO of E&P [5] -------------------------------------------------------------------------------- Thanks, Dave. I'll provide an update on CONSOL's progress in the dry Utica and some of the recent successes we've had in the play which continue to look better each day. First, a brief update on the Gaut 4IH well that we announced last quarter and then some new results in Monroe County, Ohio. As you recall, the Gaut 4IH is located in Westmoreland County, Pennsylvania, somewhat at the frontier of the dry Utica play in Southwestern Pennsylvania and Eastern Ohio. On the second-quarter conference call, we reported that the well had a 24-hour IP rate of 61.4 million cubic feet a day, with an average flowing pressure of 7,968 pounds. This outstanding flow rate is the second-best IP result in the Utica play to date. We are now about halfway through a 65-day multi-rate flow test that we are conducting to determine reservoir deliverability in well drainage, which will aid in future well layouts and pressure draw-down management. Through these tests, the Gaut 4I continues to show increasingly strong performance. And we have some slides in the investor presentation highlighting the flow tests. We're currently about halfway through the extended flow portion of the test, where we are flowing at net 20 million cubic feet a day and have seen flowing casing pressure decline by only 350 pounds over the last 10 days. Preliminary analysis of the data indicates permeability to be in the microdarcy range, which is orders of magnitude better than a typical Marcellus well. And we don't expect to see the extent of the reservoir in this three-week flow period, as we had originally thought. High reservoir pressure, high reservoir deliverability and large reservoir extents make us all very excited about the potential of the Utica in this area. Sticking with the Utica, but moving westward to Monroe County, Ohio, an area which is emerging as a core part of the dry window of the Utica Point Pleasant, we recently began flowback on our first Utica well on the Switz 6 pad, which contains four Utica wells and one Marcellus well. The first well to flow was Switz 6-D, achieved an average 24-hour IP rate of 44.7 million cubic feet per day at an average pressure of 6,835 pounds. This is an extremely strong result, nearly 40% higher than the prior highest IP reported in Monroe County. These positive initial results caused us to challenge our prior type curve assumptions from Monroe County. As a result, we've increased our EUR estimates from 2.2 Bcf per 1,000 foot of lateral to 2.4 Bcf per 1,000 foot of lateral. Some of our peers are estimating as high as 2.6 Bcf per 1,000 foot for offsetting wells. So there is the potential for this to move even higher pending additional data. CONSOL has identified an inventory of approximately 40 additional locations in a contiguous block of approximately 13,000 net acres in the Monroe County. We also recently cemented the casing on the 6,100 foot lateral of our GH9 well located on CONSOL C acreage in Central Green County, Pennsylvania, less than four miles from EQT's successful Scotts Run well. This well is scheduled to be fracked in the fourth quarter, and we expect it to be turned in line in early 2016. Perhaps most important and encouraging recent development in the Utica has been our ability to lower drilling costs, which dropped by 55% while reducing drilling days by 60% from the first well CONSOL drilled in Monroe County to the fifth. This confirms our view that drilling and completion costs in the Utica will follow the same downward trend as the Marcellus, as we move up the learning curve and demonstrate CONSOL's ability to successfully execute on our cost-reduction goals. CONSOL's Utica drilling experience in Monroe County, Ohio, should serve as an analog for deeper Utica drilling in Pennsylvania and northern West Virginia. And we provide some detail in the presentation as to what buckets those cost savings will come from to get us to our target range of $12 million to $15 million per well in the Pennsylvania dry Utica and $10 million to $12 million in the Ohio Utica. In summary, we're highly encouraged by the success we have seen in the Utica to date. And over the next two to three years expect the dry Utica to become the primary focus of our development plan and a greater and greater contributor to production growth. Our increasing productivity per well is enabling us to increase production with less capital. And we're finding our prior capital investments are paying greater and greater dividends in terms of production growth and operational improvements. Cost improvements in the Marcellus, in addition to the strong potential of the Utica play, are lowering our required breakeven realized price and increasing our IRRs and NAV. While there may be some fear in the market regarding the impact of Utica protection on gas prices, with the potential of structurally lowering the threshold price for development, we are relatively agnostic to that potential impact due to the fact that we have over 600,000 net perspective acres for the Utica Point Pleasant. Furthermore, if the Utica truly does move the cost curve down within the basin and across all plays in the US, logic indicates that Utica development will displace other higher-cost development and not be additive. With that, I'd like to turn it back to Tyler. -------------------------------------------------------------------------------- Tyler Lewis, CONSOL Energy Inc. - Director of IR [6] -------------------------------------------------------------------------------- Thanks, Tim. Ryan, at this time could you please open up the call for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Okay. (Operator Instructions) Pavan Hoskote, Goldman Sachs -------------------------------------------------------------------------------- Pavan Hoskote, Goldman Sachs - Analyst [2] -------------------------------------------------------------------------------- Thanks a lot. Good morning, everyone. A couple of questions on the cost structure to start with. On the E&P side, you break out unit production costs, transportation costs and taxes but when we reconcile these costs with the E&P cash costs that you report on your income statement, we typically see additional costs per quarter of about $50 million per quarter. Can you talk a little bit about the nature of these costs and whether we should expect a reduction going forward? And then on the coal side, that seems to be a pretty significant reduction in cost quarter on quarter. Can you talk about whether that is secular or one-time? -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [3] -------------------------------------------------------------------------------- Okay. The $50 million of additional cost, some of that would be in unused FT that would be in some of the compensation plans that we have as well. And we can provide a breakout for you if you'd like further off-line. -------------------------------------------------------------------------------- Dave Khani, CONSOL Energy Inc. - CFO [4] -------------------------------------------------------------------------------- Pavan, there's a couple of line items, the corporate expense line item, which has utilized FT in it. There's also the G&A. We provide a breakout for those line items in our guidance and our investor deck now. -------------------------------------------------------------------------------- Pavan Hoskote, Goldman Sachs - Analyst [5] -------------------------------------------------------------------------------- Got it. And then on the coal side, there was a pretty significant reduction quarter on quarter. Is that something we should assume going forward or what are some one-time items in there? -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [6] -------------------------------------------------------------------------------- Those were part of the cost-reduction effort that we have undertaken. I think we've mentioned that we went through headcount reduction. We've also spent a lot of time with our suppliers and we found some ways to de-bottleneck and get better production. -------------------------------------------------------------------------------- Pavan Hoskote, Goldman Sachs - Analyst [7] -------------------------------------------------------------------------------- Got it. And then an unrelated question on E&P CapEx. It's still very early days to talk about 2017 and lots of moving pieces between now and then. But big picture, can you talk about you expect 2017 CapEx to trend with the 2016, given that unlike in 2016 you will not have the benefit of backlog reduction in 2017? -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [8] -------------------------------------------------------------------------------- Yes, that is correct. We will not have the drilled uncompleted wells, but we will have the dry Utica and the impact of it to help us here. I think what we've done is, we've created the ability to go on to existing pads and start to drill either Marcellus or Utica wells and bring them on within three or four months. We don't need a long lag time to do it. The question comes down to, what's the capital intensity of our dry Utica program, versus effectively our either wet Marcellus, wet/dry Marcellus and wet Utica. If the capital intensity comes down and we can effectively dial up the capital to some level to solve for some production growth rate, and that will be a function of what kind of rig return we're looking at, what the commodity price will do and what we're trying to solve for. -------------------------------------------------------------------------------- Pavan Hoskote, Goldman Sachs - Analyst [9] -------------------------------------------------------------------------------- Got it. Thanks a lot. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- Neal Dingmann, SunTrust. -------------------------------------------------------------------------------- Neal Dingmann, SunTrust Robinson Humphrey - Analyst [11] -------------------------------------------------------------------------------- Good morning, gentlemen. Nick or Dave, a quick question on the asset sales. (Inaudible) to me your liquidity appears actually quite decent, around $1 billion or so, but I've heard some others say -- definitely some numbers they throw out on what you -- their thoughts on what you have to raise here in the near term or further out. Any color you could add. I know you've got a number of packages out there. Your thoughts on either what you think or what you'd like to sell on s asset value either near term or a little bit into 2016. -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [12] -------------------------------------------------------------------------------- I think that the first thing to keep in mind is that if you look at the plan between now and year end 2016, our plan that we've communicated is an organic free cash flow plan, meaning that it's exclusive -- it's a free cash flow plan exclusive of asset sales that we're talking about here. The asset sales would be additive and again, the use of proceeds there would go towards liquidity and debt. Now, with respect to the magnitude, timing and specifics, we purposely didn't want to say much there because of the sensitivity of where they're at, other than to say we've that 30 of these processes running, give or take, concurrently, so there's, again, a collection of assets that could statistically hit at different points in time. Dave, if you want to add some thoughts to that? -------------------------------------------------------------------------------- Dave Khani, CONSOL Energy Inc. - CFO [13] -------------------------------------------------------------------------------- Sure. From a liquidity standpoint, I think we're almost exactly where we want to be. From a leverage ratio, our goal is to be down in the three range or lower and so the asset sales will effectively help us solve for how we get there. So depends on if we sell all non-generating EBITDA assets, we could get there with a certain number. If we sell some generating EBITDA assets we'll an even little bit higher because we'll loose some EBITDA. We're trying to solve for, effectively, liquidity and leverage ratio, and as Nick said, we have lots of processes going on of which we've got a lot of competition on each asset, and we have competition between each asset, and we'll execute on the ones we think are the best ones. There are going to be times when we pull things back because we think that the value isn't what we are going to get. -------------------------------------------------------------------------------- Neal Dingmann, SunTrust Robinson Humphrey - Analyst [14] -------------------------------------------------------------------------------- Nick, that's a great point, that the free cash flow is exclusive of that. Let me ask on that free cash flow assumptions around that, I guess particularly with what's going on. I think I've got you a little over 30% hedged. What are you assuming for prices, either coal or gas, when you are looking at that assumption or anything you could say around your assumptions to base on that free cash flow? -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [15] -------------------------------------------------------------------------------- Yes. So we give you -- in the slide deck, we give you a lot of a line item guidance so you can go in there. We made some adjustments for a little bit of the basis and/or the realizations on some of the liquids. For the coal side, we're about -- almost 75% locked up. For the E&P side, we're actually about -- on the gas side we're about 68% to 70% roughly and growing. And so we're almost there, where we want to be on the gas side and we've layered on a bunch of basis hedges. We really are, for the most part, locked in on the revenue side with a little bit more to go. I don't know if, Jim, you wanted to add anything to that? -------------------------------------------------------------------------------- Tim Dugan, CONSOL Energy Inc. - COO of E&P [16] -------------------------------------------------------------------------------- I would like add on the coal contracting side, both Nick and David said in their comments that we're in that 74% range contracted right now and we do expect to be at 90% plus by the end of the year and we are on path to do that, so we will be locking in those sales on the coal side by the end of the year. In hedging, as David said, we're very close to where you want to be as far as getting all those basis hedges in place along with the NYMEX hedges that we already have. -------------------------------------------------------------------------------- Neal Dingmann, SunTrust Robinson Humphrey - Analyst [17] -------------------------------------------------------------------------------- Okay, and then last question if I could, Nick. Maybe for Tim, after this -- I thought it was a tremendous result in Monroe and then obviously the result you've had -- I think the Gaut well sort of speaks for itself. How you're going to attack the Utica dry gas or just the Utica in general next year, given the massive acreage that you all have. That's all I have, thanks. -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [18] -------------------------------------------------------------------------------- Generally, and Tim can follow up with some details here, but generally, really see, three to four promising areas of dry Utica. One, of course, is central Pennsylvania, which is Gaut. There is over 100,000 acres that we control in the dry Utica up in that range and this flow data and test data will tell us more and more about what to expect from well profiles. Second, of course, is Monroe. We've always been excited about Monroe, frankly, just because of what the geology told us and what also the other third-party well data we're indicating, and this is better than that. So I feel good about that. That's, of course, 100% controlled area. We've quoted the number of locations. That's an opportunity there to not just have stack pays, but to control the pace of activity and the production growth the next two to three years. And then the third and fourth areas are, of course, Green County, PA, with our GH wells coming at the end of January, as Tim said, coupled with what we've got going on with opportunity on the dry Utica and the panhandle of West Virginia. Noble, our partner on the Marcellus side, will be looking at a JV Utica well result coming online at some point soon, which will give us some indication there. So amongst those four sub-areas of the dry Utica, we think we've got very promising, rate of return-driven capital deployment opportunities compared to what we've got with any existing in portfolio. As Dave said early, we will be rate of return driven, we'll take the NYMEX forward curves, we will look at what the well profiles are shaping up to be coming off the test data and last but at least, we will have to demonstrate and put in a reasonable drilling and complete cost. Tim talked about the accomplishments and what we've achieved on drill and complete cost just within Monroe County to date, getting down to those targets of $12.5 million and $15 million in PA and $10 million to $12 million in eastern Ohio. You couple all those together, the geology, the drill and complete costs and the forwards, we think we've got those four areas that give us a lot of opportunity to measure activity level and measure production growth rate over different gas price regimes. -------------------------------------------------------------------------------- Tim Dugan, CONSOL Energy Inc. - COO of E&P [19] -------------------------------------------------------------------------------- I think as Nick said, we are, just as we did in the Marcellus, we are developing a broad list of opportunities in the Utica and I think nothing really speaks to that more than the Gaut well. It's in an area that most others didn't put much credibility up there as to the quality of the wells that would see, but it says a lot about -- that well says a lot about our geologic and technical staff, our engineering staff. The tests we're doing our confirming the results we saw, the initial IP of 61.4 million. This well looks stronger and stronger the further into the test we get. We're confirming what our technical staff told us we would find and it's going to turn out to be a huge opportunity. Everybody knows about Green County, I think, because of some of the results that have been advertised from our peers. Monroe County, there is additional data points and as Nick said, in the Panhandle of West Virginia we've got a new data point coming there shortly. We're excited about it. We think it gives us a lot of different opportunities to drill some very successful and good rate of return wells. -------------------------------------------------------------------------------- Neal Dingmann, SunTrust Robinson Humphrey - Analyst [20] -------------------------------------------------------------------------------- Thanks for all the details. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- Jeremy Sussman, Clarksons. -------------------------------------------------------------------------------- Jeremy Sussman, Clarksons Platou Securities - Analyst [22] -------------------------------------------------------------------------------- Yes, thanks very much for taking my question. First, you talk about being free cash flow positive next year. Obviously, E&P CapEx coming down is a big year-over-year delta. First, can you remind us what level asset sale proceeds you assume in that number? Second, maybe go through some of the more specific productivity initiatives that you're undertaking on coal or gas. Thank you. -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [23] -------------------------------------------------------------------------------- Sure. So Jeremy, I think before what we said in the second quarter was that we would need somewhere between $75 million and $125 million to generate free cash flow. What were saying today is with all the things that we've done in locking in revenue and taking costs out, we will be free cash flow neutral in the fourth quarter and we'll be free cash flow positive in 2016, with zero asset sales and zero drop downs. -------------------------------------------------------------------------------- Jeremy Sussman, Clarksons Platou Securities - Analyst [24] -------------------------------------------------------------------------------- Got you. Okay, that's helpful. Maybe just changing gears, David, we've seen a couple of coal bankruptcies the past quarter or so. Obviously, these have been high-cost met coal producers, but at the same time, you divested a lot of coal assets and legacy liabilities over the past couple of years. What I'm getting at is, for argument sake if there are further bankruptcies in this space, is there a risk that some of these liabilities could flow back through CONSOL, or do you feel pretty comfortable about where you stand today? Thank you very much. -------------------------------------------------------------------------------- Dave Khani, CONSOL Energy Inc. - CFO [25] -------------------------------------------------------------------------------- Jeremy, it is a good question and we've been getting it too, so thanks for asking this question on the coal and hopefully we can put it to bed. We have received a bunch of inquiries about the possibility of legacy liabilities from Murray Energy coming back to CONSOL. And you'll recall that in December 2013, CONSOL sold the subsidiary to Murray Energy, the stock of CONSOL's consolidated coal company subsidiary and other subsidiaries that held certain UMWA pension, retiree, medical another liabilities. The transaction was structured as the sale of stock of these subsidiaries. CONSOL and Murray Energy exchanged at fair value in that transaction, with CONSOL receiving $850 million of cash for the stock of CCC. The subsidiaries of stocks CONSOL sold were generating sufficient cash that satisfies the liabilities and those liabilities remain the liabilities of those subsidiaries. So what I'm saying is, we think it's really unlikely that those liabilities will come back to CONSOL and we are fairly confident. -------------------------------------------------------------------------------- Jeremy Sussman, Clarksons Platou Securities - Analyst [26] -------------------------------------------------------------------------------- Great. Thank you very much. -------------------------------------------------------------------------------- Operator [27] -------------------------------------------------------------------------------- Jon Wolff, Jefferies. -------------------------------------------------------------------------------- Jon Wolff, Jefferies LLC - Analyst [28] -------------------------------------------------------------------------------- Good morning. Just looking at the handout on the Gaut well in Westmoreland, obviously it came of a big peak, which is expected. I'm just trying to understand from the 20 million a day or so that you're producing now, the 25 to 30 PSI draw down per day. Does that keep the well relatively flat at a plateau level until you reach line pressure or we expect declines, ratable declines? -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [29] -------------------------------------------------------------------------------- Well, we're still in the middle of our testing and the pressure decline, it's getting shallower and shallower each day. The last 24 hours it dropped about 28 pounds. So pressures are remaining higher than what we had originally anticipated. We're not going to reach radial flow through this flow period, but will be able take that data and extrapolate and make some estimates. But we're halfway through the flow period, so I don't think we're ready to talk about what we think that well is going to do, but we certainly expect that it's going to flow at a stable rate for some period of time. But I don't know that we're ready to say that it's going to do that for three months, six months, nine months. -------------------------------------------------------------------------------- Jon Wolff, Jefferies LLC - Analyst [30] -------------------------------------------------------------------------------- Can you tell us what the initial pressure PSI was and where you are today? -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [31] -------------------------------------------------------------------------------- We're still over 9,000 pounds. I believe we're about 9,100 today and we started out after the extended shut-in period where we were installing our production equipment. We're just under 10,000 pounds, about 9,940. -------------------------------------------------------------------------------- Jon Wolff, Jefferies LLC - Analyst [32] -------------------------------------------------------------------------------- Okay. So from a linear standpoint, if I take 25 to 30 psi per day, that would suggest a 7-, 8-month plateau? And the line pressure is, what, 500 or 1,000? -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [33] -------------------------------------------------------------------------------- I guess -- that's your math, yes. -------------------------------------------------------------------------------- Jon Wolff, Jefferies LLC - Analyst [34] -------------------------------------------------------------------------------- Okay. What I'm trying to ask is, does the plateau rate -- do you stay relatively close to the plateau rate until you hit line pressure or are there declines expected, or some amount of declines? -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [35] -------------------------------------------------------------------------------- Well, our technical team is analyzing all the data. At some point, yes, it's got to decline. I don't think we're going to hold at 20 million or 30 million a day until we hit line pressure, but we're not ready to say how we think that flat rate is going to hold. It will be a managed pressure decline. That's the reason we are doing this testing. We want to understand the extent of the reservoir. This is going to give us more information to help us design our frac -- our stimulation times of the next wells more optimally and also understand the unilateral spacing between wells and understand the draw-down of pressures as we produce these wells further and further. -------------------------------------------------------------------------------- Jon Wolff, Jefferies LLC - Analyst [36] -------------------------------------------------------------------------------- Okay. And last one on that, obviously you're trying to monetize assets quickly. Not a lot of drilling rigs or no drilling rigs running. Do you think about putting a little more activity here to try to solve this one more quickly? Or is it better to just watch the well for a while? -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [37] -------------------------------------------------------------------------------- I think the data will tell us much more than throwing additional capital on the learning curve. I think the data will give us the learning curve that we need and you get into the first, second quarter of 2016, we should be sitting in a position where we have an order of magnitude we're confidence in which of those four sub areas of the dry Utica we want to look towards when you get into 2017 and beyond on production growth and to what extent those activities levels are warranted. We're able to get the data and the insight and learning curve that we need based off of the test program for the dry Utica that we've already laid out and we're watching the data on curve. -------------------------------------------------------------------------------- Tim Dugan, CONSOL Energy Inc. - COO of E&P [38] -------------------------------------------------------------------------------- If you think about it, we'll have seven data points to look at, probably more than anybody else in the industry, so we should get to a pretty fast decision point and that's why we put a band around the capital number $400 million to $500 million. We get ourselves the flexibility if we want to add back activity based on the Utica results, we can do it. -------------------------------------------------------------------------------- Jon Wolff, Jefferies LLC - Analyst [39] -------------------------------------------------------------------------------- Okay. In Ohio, on the Hes JV, are there no rigs running? Anything completing? I believe that carry is done now? Is that accurate? -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [40] -------------------------------------------------------------------------------- The carry is pretty much exhausted and I think we pretty much have stopped activity, as well. It's not economic really to want to drill wet wells today. -------------------------------------------------------------------------------- Jon Wolff, Jefferies LLC - Analyst [41] -------------------------------------------------------------------------------- Got it. Thank you. -------------------------------------------------------------------------------- Operator [42] -------------------------------------------------------------------------------- Holly Stewart, Scotia Howard Weil. -------------------------------------------------------------------------------- Holly Stewart, Howard Weil Incorporated - Analyst [43] -------------------------------------------------------------------------------- Good morning, gentlemen. A couple of questions. First, what was driving the production beat for the quarter? And then maybe an extension upon that would be, are you still expecting the same amount of ducks as you head into 2016? -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [44] -------------------------------------------------------------------------------- I think the production improvements this year are twofold. One is just timing of getting some wells online and the quality of those wells, we are seeing -- continuing to see better results than what we anticipated. The other big factor is some of our midstream debottlenecking projects. With the loop line we're laying in North Niniva has contributed significantly. We've had an additional tap we put on our NFG line and we've able to take advantage of some interruptible volumes there and those two combined have contributed to the majority of the production growth. -------------------------------------------------------------------------------- Holly Stewart, Howard Weil Incorporated - Analyst [45] -------------------------------------------------------------------------------- So same kind of expectations for the number of ducks heading into 2016? -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [46] -------------------------------------------------------------------------------- Yes. If anything, we could actually have a little bit more. We want to manage the production growth rate. -------------------------------------------------------------------------------- Holly Stewart, Howard Weil Incorporated - Analyst [47] -------------------------------------------------------------------------------- Okay, and then maybe a long the same lines is do you have much in the 20% growth number for the dry Utica for next year? -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [48] -------------------------------------------------------------------------------- Just the seven wells that we're drilling this year that some will be coming on at different points over the next several months. -------------------------------------------------------------------------------- Holly Stewart, Howard Weil Incorporated - Analyst [49] -------------------------------------------------------------------------------- Okay. And then my last question would be, you made me think, on the INEOS contract, are you currently in ethane rejection or extraction mode? -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [50] -------------------------------------------------------------------------------- Holly, we're in a majority ethane rejection. We have very small amount of extraction going on right now. -------------------------------------------------------------------------------- Holly Stewart, Howard Weil Incorporated - Analyst [51] -------------------------------------------------------------------------------- Okay, so the INEOS contract would put you into extracting. -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [52] -------------------------------------------------------------------------------- That's correct, yes. -------------------------------------------------------------------------------- Holly Stewart, Howard Weil Incorporated - Analyst [53] -------------------------------------------------------------------------------- Okay. Sorry? -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [54] -------------------------------------------------------------------------------- That's correct, yes. -------------------------------------------------------------------------------- Holly Stewart, Howard Weil Incorporated - Analyst [55] -------------------------------------------------------------------------------- Okay, I lied. One final question, if I could. Is there much on the midstream side at this point? I know you've got $50 million of CapEx in next year's budget for additional midstream. Is there much left at the CONSOL level to drop into CONE? -------------------------------------------------------------------------------- Dave Khani, CONSOL Energy Inc. - CFO [56] -------------------------------------------------------------------------------- Well, yes. We have EBITDA outside of the anchor system, which we have only 75% in. We have EBITDA in the additional and growth system, which is only 5% inside the MLP, so 95% is owned by the sponsors. So there is -- yes, there is a lot of drop-down inventory. -------------------------------------------------------------------------------- Holly Stewart, Howard Weil Incorporated - Analyst [57] -------------------------------------------------------------------------------- Okay, great. Thanks. -------------------------------------------------------------------------------- Operator [58] -------------------------------------------------------------------------------- Evan Kurtz, Morgan Stanley. -------------------------------------------------------------------------------- Evan Kurtz, Morgan Stanley - Analyst [59] -------------------------------------------------------------------------------- Good morning. Just a question on Hes. There was headline that hit Bloomberg a little over a week ago so maybe they would -- were looking to exit the JV. Would you -- I know you consider that core acreage, but would as you consider exiting with them or do you have a right of first refusal? Would you actually buy their stake? Is that something you're looking at? -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [60] -------------------------------------------------------------------------------- We don't comment on specific assets, so it's hard for us to answer that question. Just know we have multiple processes going on and when we feel ready to announce something, we'll announce a sale. -------------------------------------------------------------------------------- Evan Kurtz, Morgan Stanley - Analyst [61] -------------------------------------------------------------------------------- Okay. And then just an update on domestic met contracts. How are those shaping up for next year? -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [62] -------------------------------------------------------------------------------- Evan, in our domestic contracting front, we're going to probably see an approximate doubling of the tons that we put on the domestic market year over year from 2015 to 2016. We're probably in the range of 20%, give or take, domestic tons this year and we expect be in the 40 to -- maybe mid- to upper-40% range by the time we're done with our contracting for 2016, which we are in the middle of right now. -------------------------------------------------------------------------------- Evan Kurtz, Morgan Stanley - Analyst [63] -------------------------------------------------------------------------------- Does it feel -- is it too early to say whether it will be down $10 a ton or $20 a ton? Where is it a shaking out? -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [64] -------------------------------------------------------------------------------- Evan, right now, since we're right in the middle of the contracting I really don't want to comment on pricing, but domestic prices are giving us better margins, better overall prices than export pricing, and so that's why we've turned our focus to getting more domestic tons and again, if you follow up what's happening in the domestic metallurgical coal markets and the weakness of the lot of suppliers, it's given us more opportunities. That's why we're building our position domestically. But again, since we're in the middle of contracting right now, I really don't want to get into talking about any type of pricing. -------------------------------------------------------------------------------- Evan Kurtz, Morgan Stanley - Analyst [65] -------------------------------------------------------------------------------- Okay. I understand. Maybe just one final one if I may. If you look at your price tons for next year versus this year and the delta -- I'm sorry, the price tons versus what you had this quarter versus last quarter for next year, and run the math on the delta, it was pretty low. It was a little over $27. I know there's always a lot of moving pieces and things shifting in and out that make that number fairly questionable, but could you give a sense of what those tons are priced at for next year? -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [66] -------------------------------------------------------------------------------- Evan, first off, you're right that the pricing that you have there is very questionable. When you take the changes that go across the whole portfolio, because on the base tons, we have changes that occur with them as well. And you put all those changes just on what appears to be incremental tons, you have a skewing of the data and you get the averages. What looks an average sales price is really something that is not indicative at all as to what we're selling the coal for. With that said, and we are, we go to a lot of different markets, Evan, metallurgical, thermal and various regions the Midwest, the Southeast, Northeast, so the pricing is different across all of those markets. I would just say in general we're selling, if you see the indices that are out there, the 13,004 pounds, those types of pricing that you see in those market indicators is generally what we're realizing for our pricing, as well. -------------------------------------------------------------------------------- Evan Kurtz, Morgan Stanley - Analyst [67] -------------------------------------------------------------------------------- Okay, great. I'll turn it over. Thank you. -------------------------------------------------------------------------------- Operator [68] -------------------------------------------------------------------------------- Brandon Blossman, Tudor Pickering Holt. -------------------------------------------------------------------------------- Brandon Blossman, Tudor, Pickering, Holt & Co. Securities - Analyst [69] -------------------------------------------------------------------------------- Good morning. I'm looking for any incremental color on how basis moves over the next two to three quarters and specifically with open now commercial, does that change your realization picture, and narrowing your basis that you're protecting, is that a seasonal trade, or is that related to some incremental infrastructure coming online? -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [70] -------------------------------------------------------------------------------- Well, Brandon, the basis we do have with our portfolio for next year, we've got about 47% to 50% of the portfolio covered NYMEX and basis. Let's just say we had approximately half of our portfolio covered basis wise for next year and we are working on increasing that percentage every day, looking to increase. For the half that is exposed to market, it varies greatly by season with the different sales points that we have. And for example, in the first quarter of next year, we're probably looking flat to negative $0.10 type of basis and then as you get into the middle of the year, we're in the $0.55 to $0.65 negative basis and then get to the year and you end up negative $0.40 basis. It varies by time of year. On that half of the book that we have exposed overall average, basis is probably going to be in the negative $0.40 to negative $0.50 for the year total -- for the total book that we have out there. -------------------------------------------------------------------------------- Dave Khani, CONSOL Energy Inc. - CFO [71] -------------------------------------------------------------------------------- And if you look out at the forward curve and what it implies, that $0.40 to $0.50 will start to go down into the $0.30 range just using the strip, although the strip's very liquid. -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [72] -------------------------------------------------------------------------------- And again, Evan, that's on our total book, hedged and unhedged. You put that together and you're going to get those basis ranges that I just laid out for you. -------------------------------------------------------------------------------- Evan Kurtz, Morgan Stanley - Analyst [73] -------------------------------------------------------------------------------- That's helpful. And then what's the -- any color available on the current FT resale market, either buying or selling? -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [74] -------------------------------------------------------------------------------- We've had some good success so far on the resale market. In the release, we referenced $4.3 million of release capacity. We expect by the end of year to at least double that, if not improvement slightly more before the end of the year with some deals that we have going on right now. -------------------------------------------------------------------------------- Evan Kurtz, Morgan Stanley - Analyst [75] -------------------------------------------------------------------------------- Any color on what term? Is that just short term? -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [76] -------------------------------------------------------------------------------- Yes, Brandon, it's all very short term type of release sales that we are doing. -------------------------------------------------------------------------------- Evan Kurtz, Morgan Stanley - Analyst [77] -------------------------------------------------------------------------------- Thank you for that. And then the second question. I'm not going to ask about any particular asset sales, but any color from your perspective in terms of what the A&D market looks like for raw acreage in the basin? -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [78] -------------------------------------------------------------------------------- Constantly changing and more a function of what the new data coming in is looking like across different horizons, as well as geographic locations versus what pricing will do. Pricing is, I think, less of a driver on the valuations versus data in geology and well results. -------------------------------------------------------------------------------- Evan Kurtz, Morgan Stanley - Analyst [79] -------------------------------------------------------------------------------- So sounds like maybe some potential good news there. Thank you. Appreciate it. -------------------------------------------------------------------------------- Operator [80] -------------------------------------------------------------------------------- Michael Dudas, Sterne Agee. -------------------------------------------------------------------------------- Michael Dudas, Sterne, Agee & Leach, Inc. - Analyst [81] -------------------------------------------------------------------------------- Maybe big picture here for Nick or the panel. Given where nat gas prices are and coal prices are, it seems like we're reliving the winter of 2011 and 2012. How better positioned or different is CONSOL to weather and recover from this environment than it was three years ago? Certainly not being reflected by -- certainly with the stock prices and reflecting in the near term here, in spite of everybody's doom and gloom on energy prices. -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [82] -------------------------------------------------------------------------------- It's a little bit of two different stories on the coal and E&P sectors. On the E&P sector, I think Dave mentioned that we're seeing activity levels and capital expenditure levels starting to finally shift within a rationalized level of activity and capital expenditures that reflect those commodities. That is good. So we're starting to see those responses as we speak. On the coal side, a little bit of a different situation where from our perspective, we've see within the United States a significant and a permanent shift of market share on the generation grid from coal to natural gas and that significant, permanent shift is going to require a significant, permanent supply response, emphasis on both significant and permanent. We've seen some of that. I think we're going to see a lot more of that as time goes on. So that's more of a fundamental change that we're watching the fall out occur as we speak versus E&P more traditional activity level responding to pricing forwards. -------------------------------------------------------------------------------- Michael Dudas, Sterne, Agee & Leach, Inc. - Analyst [83] -------------------------------------------------------------------------------- Terrific. The follow-up is looking at your potential on drop downs for coal in 2016, any thoughts or visibility relative to the performance and how you are thinking about it given the current environment? -------------------------------------------------------------------------------- Nick DeIuliis, CONSOL Energy Inc. - President & CEO [84] -------------------------------------------------------------------------------- Yes, I would just say we modeled in a 20% drop every year, sort of the base way to do it. But I would say we also created a lot of flexibility and timing and sizing and ability to how to finance it, so there's a lot of ways in which we can do this. We'll watch and see and figure out how we want to drop it in. But know that we think about that. -------------------------------------------------------------------------------- Michael Dudas, Sterne, Agee & Leach, Inc. - Analyst [85] -------------------------------------------------------------------------------- Excellent. Thanks, gentlemen. -------------------------------------------------------------------------------- Tyler Lewis, CONSOL Energy Inc. - Director of IR [86] -------------------------------------------------------------------------------- Great. Thank you, everyone. This concludes our third-quarter earnings call. Thank you all for joining. -------------------------------------------------------------------------------- Operator [87] -------------------------------------------------------------------------------- Ladies and gentlemen, as you heard, that does conclude today's call. Thank you for your participation. You may now disconnect.
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