June 11 As the U.S. Environmental Protection Agency rolls out tough new rules designed to slash power plant emissions, Consol Energy Inc is showcasing its transformation from a coal miner to a producer of cleaner-burning natural gas.
Founded when Abraham Lincoln was president, Consol was once one of the world's largest coal producers, with a niche natural gas operation. Last year it sold five large coal mines to Murray Energy Corp as part of a plan to flip that dynamic on its head.
Despite the transformation, some investors still think of Consol primarily as a coal company because executives have not shared as much data about drilling results and other well performance metrics as their peers.
But Consol is quickly changing tack. It is hosting a full-day analyst meeting on Thursday in New York to review in detail all coal and natural gas assets, a step executives hope will sate investors.
"The more information we can get, the better," said Clarkson Capital Markets analyst Jeremy Sussman. "It would allow analysts to evaluate them more as a gas and a coal company, as opposed to a coal company with a gas business."
Consol doubled natural gas production in the first quarter and told investors that output could grow 30 percent per year through 2016 by developing land in Pennsylvania and Ohio bought from Dominion Resources Inc in 2010. It was a deal initially unpopular on Wall Street despite the estimated 40-year supply.
Executives have also vowed not to open another coal mine and to spend most of the company's nearly $1.5 billion capital budget on drilling new natural gas wells.
The metamorphosis comes at a serendipitous time for Consol. Last week the EPA said it would require the U.S. power sector to cut carbon dioxide emissions 30 percent by 2030 from 2005 levels, a step largely expected to slash the amount of coal used to generate electricity and encourage utilities to use more natural gas.
"We've seen this coming," Consol Chief Executive Officer Nicholas DeIuliis said in an interview. "We've positioned the company to not just survive in the changing regulatory environment, but thrive in it."
Consol's shares are up more than 20 percent this year, helped in part by rising natural gas prices but also due to cost cuts at its coal mines, analysts said.
The company's earnings before income taxes, depreciation and amortization in 2013 were roughly two-thirds coal to one-third natural gas. By the first quarter of this year, the split was even.
FROM COAL MINER TO ROUGHNECK
Consol's evolution comes as the coal industry prepares a legal challenge against what it considers a direct assault from the Obama administration.
Arch Coal Inc said Monday that the EPA proposal would be "remarkably punitive" and would not have a noticeable effect on curbing greenhouse gas emissions.
Consol, which operates the largest underground coal mine in the United States, plans to maintain a sizeable coal portfolio for some time and has no plans to sell any more mines.
That is partly because Consol captures coal bed methane, a type of natural gas that leaks from its mines and would otherwise be wasted, and sells it at a profit. The company has also hired some former coal miners as roughneck workers at its natural gas wells, keeping their expertise in-house.
This model could be emulated by the coal industry in the eastern United States as it adapts to the new EPA regulations, Sussman said.
Setting up the equipment and processes to collect and sell coal bed methane could be too expensive for some coal producers, but it ultimately could help the industry ride out the new EPA rules.
Consol is "really the only coal company that generates any real meaningful profit from (coal bed methane) in the U.S.," Sussman said. "In a perfect environment, others would do that." (Reporting by Ernest Scheyder; Editing by Terry Wade and Lisa Von Ahn)
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