CNX Resources Corp (CNX) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the CONSOL Energy and CNX Gas second quarter 2009 results conference call. As a reminder, today's call is being recorded. I would now like to turn the conference call over to the Vice President of Investor Relations, Mr. Dan Zajdel. Please go ahead, sir.

Thank you, John. Good morning, everyone, and welcome to our joint earnings call with CONSOL Energy and CNX Gas. With me this morning is Brett Harvey, Chief Executive Officer of CONSOL Energy and Chairman and CEO of CNX Gas. Also with us today are Bill Lyons, Executive Vice President and Chief Financial Officer for both companies.

This morning, we will be discussing second quarter results for both companies. In addition, we will be discussing our views on the outlook for the remainder of 2009. Any forward-looking statements we may express or our expectations for business results--actual results, as you know, are subject to business risk and we have enumerated those risks in both earnings releases issued this morning and on our SEC 10-K filings. In addition, the U.S. Securities and Exchange Commission permits oil and gas companies in their filings with the SEC to disclose only proved reserves that a company has demonstrated by actual production or conclusive formation tests to be economically and legally produceable under existing economic and operating conditions.

We may use certain terms in this conference call such as unproven reserves or reserves which SEC guidelines strictly prohibit us from filing with our filings with the SEC. We also caution you that the SEC views such unproved resource or reserve estimates as inherently unreliable and that these estimates may be misleading to investors unless the investor is an expert in the gas industry.

With that let me begin our remarks and then take questions. We'll start today with Bill Lyons. Bill?

Thank you, Dan. And thank you everyone for joining us this morning for the joint CONSOL Energy and CNX Gas earnings conference call.

CONSOL Energy is reporting net income of $113 million or $0.62 per diluted share for the second quarter of 2009, compared with net income of $101 million or $0.54 per diluted share for the second quarter of 2008. Net cash provided from operating activities is $316 million, just about equal to the $324 million in the second quarter of last year.

We are very pleased with these results, particularly in relation to the back drop of the current economic environment. To put these quarterly results in another perspective, CONSOL Energy earned $1.25 million per day. And these are quality earnings, supported by cash generation of $3.5 million per day.

This past quarter, again, illustrated the financial power of being a low cost diversified energy company. Let me highlight some of the second quarter results.

For our coal segment, our total margins for the second quarter were $10.94 per ton. Now even though this was down from the record setting $17.38 per ton coal margins we achieved in the first quarter of 2009, it's a meaningful increase of $4.04 per ton or 59% from our coal margins in the second quarter of 2008. Margin expansion is the key driver in our step change in profitability.

Our 14.4 million tons of production this quarter is down 2.2 million tons from the second quarter of 2008, and down 1.6 million tons from the first quarter of 2009. This decrease in production is not operations related but market related.

CONSOL Energy made production cuts to help bring the coal market into equilibrium. Demand is down for our steam coal customers. We have worked with them to address their coal stockpile issues while preserving the value of these contracts for CONSOL Energy. We're beginning to see steel producers slowly bring back coking capacity.

Net coal deliveries are resuming from the Cannon mine in the second half of this year at production levels that will, again, contribute to earnings and cash flows. We have reduced our overall production guidance for the year to 58 million tons. We expect to ship based on this revised production schedule, which should reduce CONSOL Energy's coal inventories to beginning of the year level of 1.6 million tons.

From an operational standpoint, the mines are doing well. We believe we have addressed and corrected the systemic issues we had through capital investment and management changes. When the economy recovers, CONSOL Energy's coal segment is ready to move. As the low cost producer in northern Appalachia, we are positioned for additional profitable growth.

As for our gas segment, CNX Gas had an outstanding quarter. Production increased 20% quarter-over-quarter to 22.5 BCF, a record. This record production was driven by better than anticipated results in the Marcellus Shale and coal bed methane. This quarterly production record is even more impressive considering the fact that the Buchanan long-wall was idled for almost the entire quarter which deferred 1 BCF of gas production.

We are very excited about our Marcellus Shale opportunities. I'm sure you have read our Marcellus Shale press release earlier this week where we announced that we have expanded our footprint in that play by 40,000 acres, bringing us to over 230,000 acres in the Marcellus Shale.

We are both expanding and consolidating our position in the Marcellus Shale. Our Marcellus delineation continued this quarter as we completed three more wells. We now have eight horizontal wells and seven vertical wells in production.

The refinement of Marcellus Shale drilling techniques continues with cost now trending to below $3.5 million per well. Multiple wells are being incorporated into a single pad with plans to drill up to six wells per pad, thus reducing costs.

In the second quarter of 2009, overall costs at CNX Gas operations were $3.57 per MCF, slightly better than they were in the second quarter of 2008. However, the production volumes and controlled costs were not enough to overcome the depressed spot price for natural gas. Even though we had over half of our gas production hedged at $8.96 per MCF, our per MCF realizations dropped by $2.92. That income at CNX Gas was $33 million or $0.22 per diluted share. This is about one-half of the net income earned in the second quarter of 2008. The decrease in net income was a result of the lower spot prices.

We thought it prudent to lock in pricing on more of our gas production for the next three years especially with futures' prices being much higher than the forward month. For 2010, we have 46 BCF locked in, at just under $8.00 per MCF. The earnings release has the complete details.

We think this is a good hedge position at this point. We still have upside when prices rebound, but we locked in a significant portion of our 2010 gas revenue. This will provide financial support for next year's drilling and leasing programs.

The production we achieved in the second quarter has given us the confidence to raise our full year gas production guidance from 87 to 89 BCF. The 89 BCF will represent a 16% increase over the 76.6 BCF we produced in 2008.

As our financial results continue to show, CONSOL Energy's solid balance sheet and excellent liquidity has enabled us to continue to prudently invest in our businesses without diminishing our earnings power. At June 30, 2009, CONSOL Energy--that's excluding CNX Gas had $62 million in total liquidity, which was comprised of $101 million of cash and $361 million available for immediate use at below market interest rates. This credit facility does not expire until June 2012.

Separately as of June 30, 2009, CNX Gas Corporation had $112 million in total liquidity, which was comprised of $8 million of cash and $104 million available for immediate use, again at below market rates. This credit facility does not expire until October 2010.

Our short term borrowings under these facilities was $452 million at June 30th. This is down $106 million since the beginning of the year. The weighted average interest rate on these borrowings was under 1.5% of the first six months of 2009.

During the second quarter of 2009, we have expended $200 million in CapEx and for the six months, our CapEx is $500 million. This is split about 55% in coal and 45% in gas. This is consistent with our comments that we made during last quarter's conference call where we stated that we will continue to identify and allocate resources to strategic areas that are critical to our long term success but to proceed carefully to ensure that we protect our financial position.

Determining the proper level of capital spending is always a challenge, and the challenge is magnified in this difficult economic environment. Our goal is to provide and allocate capital in a manner that maximizes long term shareholder value. In the energy business, this requires a high degree of understanding of pricing, demand, cost, competition, and project investment requirements. It also requires flexibility to change directions when our CapEx models indicate a change is needed.

We expect our CapEx spending to be around a $1 billion in 2009, which is at about the same as it was in 2008. We will complete the cost improvement projects at our longwall mines like the Bailey Overland belt system and the Shoemaker haulage system to enhance our position as the low cost producer. We will probably ratchet back our spending in other areas of the coal segment until there is more clarity in the market.

On the gas side, we will limit our spending on drilling until gas prices rebound. However, with the success we're having in the Marcellus Shale, we expect to allocate more capital to acquire Marcellus Shale acreage.

We remain steadfast in our confidence in our business model. Our powerful balance sheet and our status as a safe low cost producer enables us to effectively compete and produce strong earnings and cash flows, even during times of economic turmoil. Between our coal and gas reserves in Appalachia, CONSOL Energy controls the greatest concentration of BTUs in the eastern United States.

We believe our diversification into two premium fuels, high BTU bituminous coal and natural gas give us a diversified portfolio that will prosper in the decade to come by providing safely and economically a fundamental human need, which is energy.

Brett, your comments?

Thank you, Bill. And welcome to everybody. It's good to spend time with you again to discuss the quarter and where we see the future.

I'm going to talk about the energy markets first because I think that sets a framework of our strategy and gives you a good look at the way I see us going forward. Coal markets are down because of demand for electricity is tremendously down, especially in Appalachia, Northern App, Central App. The entire region sees a drop of anywhere from 10% to 18% at our utility demand for energy. And that's at their level. And then of course, that backs up into the stockpiles.

So we see the stockpiles at the plants rising, probably more dramatic in Central App but to Northern App also. We are concerned, and I am concerned that the supply is still too much for the present demand on the electricity side and that's why the stockpiles are rising.

I'm concerned about restraint that has been announced in the coal markets as not showing up at the mining operations of some of our competitors. They're building stockpiles against growing stockpiles at the utilities, which I think in the long run is going to create a problem for them and for the industry over the next 12 months.

The demand for steam coal is very weak and we continue to use our contracts to deliver, and we make those deliveries based on the need of the utilities and then the economics between us is stretched out and captured over time.

It is not an easy energy world. Even on the gas side we see the demand for gas is down just like all demand for energy. The storage is going up, gas prices are down.

Now, the advantages that we have is we are the low cost producer in both of these energies. And in any given market, we're going to have the highest margins, but we have to control our financial capabilities in cash and balance sheet as we work our way through this.

What we've decided to do, and I reiterate this again, is we're pulling back on the coal side to match our shipments. We'll continue to do that and we'll still be the highest margin producer as well as the highest performance on the coal side. If you look at what we did for the entire year, we were the highest performing coal company on our coal segment of any public coal company in the marketplace.

The flip side of that, we are the lowest cost gas producer with a very high rate of growth. We will continue to grow the gas company because of its low cost structure and prepare ourselves for higher margins and the returning gas market as we see it turn.

Let's talk about gas in general first. We are a low cost growth gas company. That's a good thing to say. We increased our guidance by 2 billion cubic feet this year to 89. We are margin driven. We are focused on getting the highest margins for the gas that we return. It's not about having more gas, but being the highest margin gas in any given market.

We're having great success in my opinion in the Marcellus Shale. As Bill talked about, average drill hole production hole is about 3.5 million and we expect those costs to maintain or even drop from there.

We are in a position where we can drill these holes together. We don't have big obligations to hold land by minimum drilling techniques. A lot of our feed position gives us the opportunity to mix our Marcellus Shale gas with our coal bed methane gas and create optimum value.

When Bill talked about in Appalachia having the highest concentration of energy, we really do have between our coal estate, our gas estate, our Marcellus Shale estate, all within the same acreage. It's a very powerful position and we plan to take advantage of that.

Our success in the Marcellus Shale, we will continue to keep one rig running in the Marcellus Shale and drill holes as fast as we can to develop that. But rather than spend a lot of our capital on drilling at this point in time, we're looking to spend more of our capital on acquisition and consolidation of Marcellus Shale plays in the sweet spot that we see. Especially within the coal estate where we have maximum control of how we optimize the use of coal and the use of gas in our region.

So the other day I went down to visit our Marcellus Shale operations, and I want to tell the shareholders that we have a long history of being world class coal operators, longwall operators, and doing the right thing in extracting BTUs at very low cost. My impression of our operations in the Marcellus Shale, as well as our CBM operations, we are now world class across the board in all of these gas extractions as well. Very impressed with our techniques, our technology, and our ability, and the average age of this young work force coming into the gas business is very impressive.

So I personally observed a world class operation that five years ago was an infant in the industry. So that's good for our shareholders to be aware of.

We are well hedged in gas for '09 and '10, as Bill talked about. And I think that's important that we see these financial margins and our shareholders can count on us making good money and high margins through this very difficult energy world.

Okay, let's talk about coal. Our watch word at CONSOL is to manage inventory, that's our number one objective. That creates a lot of innovation in my opinion on how we get things done.

As we saw coal deliveries slow down in the second quarter, we had to be very nimble of how we handled our production versus our stock piles. We intend to have our stockpile at the end of the year for CONSOL Energy at where we started in the fourth quarter at 1.6 million tons. That means we have to manage it because the stockpiles of our customers are rising and moving around and we need to react to that.

We have slowed our longwall production down in the second quarter to match the shipments. That means that we have accelerated our longwall development ratios against longwall coal production, and that has raised our costs for a couple bucks in the short term.

Now, think about it. We outperformed everybody else in the coal industry as we raised our costs purposely to accelerate our longwall position for the future. So we are setting ourselves up, even in a marketplace where we're performing very well, to have higher margins going forward.

We've had some one time adjustments for the quarter. You'll look at those and decide what to do with those. But I can tell you, we had a good quarter. It was well managed, and we are on the right track.

The marketplace is something that we can't dictate. That's a function of the national economy. But what we can dictate is how we handle our cash, where we deploy our cash, and what we do in the short term. Those things are all very focused within CONSOL Energy. We are building up for the long term. We are building, I think, a bridge for 2010 to a better energy market in 2011.

You'll watch us hedge our position on coal and gas as we strengthen the balance sheet and weather this storm. We are concerned about inventories at the coal supplier side. We are concerned about production coming from the west.

In the second quarter where production out at Powder River Basin actually went up, which I think is a mistake. We're not showing enough restraint in the marketplace as coal producers -- against the demand for energy.

With that, I'd like to open it up for questions.

(Operator Instructions) And first we'll go to the line of Kuni Chin with Merrill Lynch.

This is actually Chris Brown filling in for Kuni Chin. Good morning. On the gas side will you continue to layer in hedges at about 22 BCF per quarter or do you slow back your hedging activity at these low gas prices?

Right now we have a hedging strategy that layers in. And as we see it move up about $0.50 increments, we'll lay in. But if it starts to drop, of course, we won't hedge on the drop. So we tend to hedge on the spike. So we'll take advantage of that as we see that happen.

And also, Chris, we have the advantage of having both coal and gas. So we look at the total risk portfolio, and if one side is doing better than the other, that influences how we do our hedging. But, again, we think we're in an excellent position on our hedging. We're very pleased to have a lot of that gas hedged at almost $8.00 an MCF for next year.

Then on your guidance, you added about 10 million tons to committed and priced tonnage for 2010. I think incremental tons seem to carry a pretty high price in the 60 plus range. Can you give us some color there or is that more of a mix issue with perhaps more met coal being booked for the year?

Well, I think no, it's mostly steam coal. I think we did about--we got about 1.3 million tons of met that is priced as well as I think we're open about 3.3 million tons of met for next year as well. So the met isn't the big influence, but I think the steam price is going to hold.

If you look at our average price, I would predict that our average price for next year is going to be very similar to that average price for 2010. And having said that, that's why I call it a bridge, I would expect 2011 to rise off of that number.

And then just finally, a question on the cost side. Obviously there's the cost absorption issue at these lower volumes. Do you expect that to get worse in the second half or do costs basically stay at similar levels that we've seen this quarter?

I would say you'll see the cost drop over the second half. Now, I want you all to keep in mind that at 13.1 million tons in the third quarter, you'll probably see the costs stay up a little bit and then you'll see them drop in the fourth quarter. Third quarter is always tough for big underground operations to do a lot of our maintenance in the third quarter, and we have a lot of vacation in the third quarter.

So you'll see the costs move around, but if your look at history, the third quarter is always tough. All longwalls will be operating in the second half, which should drop our cost structure versus our development structure that we talked about--I talked about earlier.

Great. Thanks.

Our next question is from Michael Dudas with Jeffries. Please go ahead.

Hi, Michael.

Good morning, gentlemen.

Brett, could you characterize how the industry comes out of this downturn in the sense that are we going to see further Appalachian production cutbacks, which is pretty much most people anticipate the marketplace? And how quickly could we see that? And is there a scenario when if the rest of the global markets recover, which seems to be occurring at a pretty reasonable pace that we could come back to some tighter coal conditions in later 2010, 2011?

Yes. I think in the short term we have to--for lack of words, we have to burn our way through this large volume. They're on the ground today, and that's going to create for marginal players, a financial problem. So I think you'll see some forced financial situations where people close down, not by option but by force. And that's in the short term. I'm saying six 6 to 12 months.

After that, that means supply destruction has happened so at the end of the 2010 and through 2011, the utilities are going to read that and see that the supply is down. They're going to probably keep their stockpiles up a little bit higher out of fear in my opinion. And you'll see--that with the global markets will move coal prices, I think, pretty rapidly towards the end of '10 into '11.

And also the met demand. As we've already seen, the met demand will continue to increase and we'll see very strong met prices. That's why we're open at 3.3 million in 2010. We see some opportunity there to go back to some pretty high margins based on our low cost position.

Do you see those negotiations maybe accelerating a little bit quicker than you would have thought a few months ago on the Buchanan product?

I don't think so. I don't think so. I think that market, even though it's moving--the steel market itself, even though it's moving, it's very tenuous. And they're taking it day by day. The steel companies were in shock, as we all know, and they're walking out of it very slow. So I don't think they're going to negotiate very fast. Hoping on their side, I think, that the supply goes to their side but I don't think it will.

And my final question, Brett, is how important do you think coming out of this downturn in the coal markets will the international market be for U.S. producers and especially somebody like yourself who's very well positioned in the export market?

In our position to move to our own port facilities, we expect that capacity on our own port facilities to be an outlet for a hotter market, so to speak. And we'll move to the highest margin marketplace and we're capable of doing that as you know.

Thank you, Brett.

Our next question is from the line of Rehan Rashid with FBR Capital Markets. Please go ahead.

How are you doing?

Are you there?

Rehan? Apparently, he's not there.

And we'll move on. We'll go to Brian Yu with Citi. Please go ahead.

Thank you. With the metallurgical coal shipments, it looks like the [biller] shipments impacted your pricing in the second quarter a bit. As we look out on the back half, where would you expect met coal shipments to rebound to? Maybe the half million ton mark on a quarterly basis?

I think we expect by the end of the year to be at 2.3 million tons of shipments. And July through December that's another 1.7 million, almost 1.8 million tons of shipment leaving Buchanan. We are running the Buchanan mine on two shifts. And we have potentially another 500,000 tons if we can sell it.

Now, I hope we can sell the other 500,000 tons because that will lower our cost structure and raise our margins over the rest of it. Right now we're predicting that the average sales price for the year on the tons that I just mentioned are about $100 a ton.

All right. And then just a follow-up on that. We're hearing a lot about the demand out there from China for metallurgical coal. Is there a particular market that's better positioned to serve, because other coal producers have reporting--they're saying yes, the demand is strong but it doesn't seem like anybody is getting the volume benefit this year?

I find it interesting for eastern coal producers to talk about the Chinese market because nobody ever really moves coal to that marketplace. It's just--when that marketplace is strong, it tends to have an influence on world pricing.

The natural markets for eastern coals are Brazil, Europe, and the general domestic steel industry. And when they strengthen, we will strengthen. And those are the markets that we look at. Those are the markets that we have contracted for. And those are our long term customers.

So if we can get the right price, we'll move coal to China. But China is a long ways away from eastern United States, and I would take a grain of salt when people talk about China and their shipments.

Thanks for that. And then just switching topics a bit with the utilities, we are seeing very high stockpiles as you mentioned. Now, with the lack of global warming helping the coal burn this year, would you expect additional cutbacks in production later during the summer if the burn rates don't improve?

Based on our--for CONSOL itself, based on the second half, we believe we're going to be able to run our longwalls and sell the coal that--there's more clarity in the market in the last two quarters than there were in the first two quarters. So we believe we'll be there.

In terms of the overall marketplace, I would say as I said in my remarks, there's going to be some forced production to go offline. The marginal high cost players are going to be pushed out just based on financial problems. This isn't--when there's a big pile of coal like that out there at the utility level across the board, it creates real strain on those with weak balance sheets and their marginal producers.

Thank you.

They'll be forced out.

Our next question is from Bill Egan with Raymond James. Please go ahead.

Morning, guys. With what you guys see today, do you expect any volume growth next year or are you thinking it's more flattish with this year?

Well, I think the volume will grow because we have--when you look at CONSOL, we have the Shoemaker mine coming online. It's contracted for. You have the met business coming back online which would be about 5 million tons a year. And so those two pieces you're going to see the growth.

And I think where we've seen a cutback even in the pit of about 4 million tons, you'll see it come back. I wouldn't be surprised to see us in about 65 to 68 million tons next year. But I can tell you this right now, if the market is not there, we're not going to mine it. And we will do what we did this year and manage our costs and our development and our prices without building inventory. Okay?

And it looks like the tax rate took a little bit of a step up this quarter. What are your thoughts for the second half of the year?

The tax rate is probably going to be around 29%, 30%. As you're aware, tax rate is very dependent. It's based on our mix of income and also percentage depletion is very mine dependent. But I would say a good number is about where we have it for the six months.

Thank you very much.

And next to the line of Shneur Gershuni with UBS. Please go ahead.

Good morning, guys. I don't want to belabor the whole 2010 thing too much, but I was just wondering if you can walk me through a thought process. You kind of have despite higher costs this quarter, you still have kind of the lowest cost relative to your peers in the marketplace.

I was just wondering if you can walk me through your contract and thought process for 2010? Do you undercut competitors and take share or are you more focused on returns? And kind of if you can talk about your appetite to keep production at current levels or given your inventory balance if it doesn't change to actually reduce production even further?

We believe for '10 we have about 21 million tons that are unpriced. Those unpriced tons, we will negotiate the price, but we will only--we're not driven towards more volume or capturing market share. We're driven more towards the highest margins and controlling the inventory of our own operations. And I think that's where we make the most money, that's the sweet spot. I think by trying to grab market share it affects the price of the entire marketplace, and I don't think that's the right path to go on.

So you'll see us be very aggressive on our pricing. We've already locked in about 40 million tons at good prices and I think that puts us in a very good position.

Happy to hear that actually. I was wondering if you can--just another question or two here. If you can talk about acquisition opportunities for both CNX and CXG. Do you expect just a few tuck ins like you just did with NiSource, or do you see something bigger on the horizon?

Well, I can tell you on both coal and gas, we're looking at small deals and big deals. And when the time is right, we will move. Our balance sheet is prepared and sitting there to make these kind of moves. That's our intention--is to consolidate as we see the bottom of the market opportunity where somebody is willing to jump in with us and create a bigger company.

And one last final question, do you foresee any reclamation or development type work over the next two quarters that will continue to pressure costs?

Well, we are getting some pressure on our longwall subsidence and that showed up as a cost, a one time cost on the second quarter. There's always pressure on--there's always pressure on our environmental issues, but that's a matter of compliance. And we are seeing from the present administration, from the EPA and things; tighter controls. And I think over time that will limit the volume response on the coal side as well as it will slow down some of the gas permits over time as well too. But that's what we deal with everyday, so I don't see it as being a big problem. So there's nothing really new out there.

Great. Thank you very much.

Our the next question is from Scott Hanold with RBC Capital Markets. Please go ahead.

Yes, thanks. Hey, good morning. The horizontal CBM well in the Pocahontas seam, is that something new you all are trying? And what is the potential there? Can you kind of talk about cost versus rates? And relative to the Pocahontas forest seam, I thought that was pretty thin and just kind of wondering the logistics of staying in zone there?

We have a few wells in that seam, and there's a lot of gas in that seam. We're trying to build extraction techniques that fit similar to what we do in the thicker seams. I think that's yet to be determined in terms of what its cost structure is. If it's economical we'll continue to do it.

But if you look at what we do, we tend to move to the sweet spots as the price drops and the sweet spots right now are the thicker seams and also the Marcellus Shale play, which we will continue to add land positions for more opportunities and we'll continue to optimize our tremendous feed position on the coal bed methane side.

Okay. And can you talk about your current thoughts given the continued improvement in Marcellus well results? How you think about drilling coal bed methane wells versus Marcellus wells when you're kind of doing your capital budget. And actually, if you could parlay that into the bigger picture of CONSOL as a whole, where does coal fit into that picture when you're deciding where your best dollar is spent?

Well, I can tell you this, we looked at our capital across both companies and where we see the highest rate of return opportunity, we certainly do that. And where we have commitments on contracts on coal, of course, we have to do that.

The nice part is we have the balance sheet to grow both of them and we've been doing that. We put a lot of money into the coal side to reestablish the high margins there. And we could probably--we'll probably be in a position for the next couple of years of harvesting the coal side and growing the gas side rapidly on the Marcellus Shale side. So I think you can look at CONSOL Energy from that perspective.

The coal bed methane piece, that is very low cost down in Virginia, and we'll weigh that against Marcellus on a dollar for dollar basis. But it's nice to have those kind of options and that is the optionality of this company.

One last question on sort of the ownership as it is now. What are your current thoughts? You're obviously out in the market picking up CXG shares late last year, early this year. What are the current thoughts there as far as what you're thinking longer term for the ownership in CXG?

Well, we picked up those shares because we thought they were extreme undervalued and that was our strategy at the time. That was more of an investment. We invested in something we really know. And as the board has announced, we made an offer for the other shares, it didn't work out. So we have partners out there and we'll continue to grow as partners until the board makes a different decision.

All right. Appreciate it. Thanks.

And next go to the line of Amir Arif with Stifel Nicolaus. Please go ahead.

Thanks. Good morning, guys. A couple of quick question on the gas side. You mentioned that you want to live within cash flow but you want to keep that one horizontal rig active out there, but that rig can handle--drill twice as many wells. So can you just let us know what we should be thinking of in terms of new well completions in the Marcellus for the second half?

Well, we've drilled eight wells and I would say we're going to keep that rig going all year. Our intention is to keep it running, and I think we'll still stay within our cash flows doing that.

So we're looking for 12 wells instead of 6 in the second half?

We could end up--yes, I would say. Yes.

Okay. And the increase in the production guidance, I'm guessing a lot of that second half drilling is really just going to show up in the 2010 numbers, not really showing up in that '09 increase, is that a fair statement?

I would say yes.

Okay. Also in the Marcellus, in terms of--you mentioned that you're looking to increase your acreage position out there. Are you looking to stay focused then in the southwest Pennsylvania, West Virginia region or are looking to move to other areas like the northeast Pennsylvania?

We're going to stay focused on where we have massive land controls based on our coal estate and because we have a lot to do and a lot to say about the permitting process and where we drill on our fee positions. So we'll continue to consolidate around southwest Pennsylvania and northern West Virginia. That's the sweet spot for us.

One final question on the Huron Shale. You've got a lot of acreage and a lot of potential out there, but it did take that $6 million charge for the test well. Does that reflect or reduce outlook on that play or is it simply just Cannon rules and the low gas price at the end of the quarter?

I think in this marketplace, we have less appetite to develop that. We will in the future, but it's based on higher gas price. And that was on the edge of the Huron. So I would say--I wouldn't take anything serious about that. I think that was just a well and then the market changed and we'll go back to that in a big way when we see the opportunity.

Sounds great. Thanks.

Thanks.

Our next question's from Pearce Hammond with Simmons. Please go ahead.

Good morning. Brett, can you provide an overview of the current permitting environment from your perspective? And then what the potential impact might be to CNX operations over the next year or so?

I would say that if you look at the--the EPA has been very aggressive with the change in administration especially on mountain top mining. So those areas where we have mountain top mining associated with AmVest acquisition, or our Miller Creek acquisition, those things are I would say very gray.

We get the court against us at one point, and then you got the EPA reinvestigating at another point. So it's a very unsure situation in mountain top mining in central Appalachia, which I think threatens the state and threatens the region based on the government's approach to it.

Now, where it pits CONSOL Energy, clearly we want to operate the mines we have, but it's not a major contributor to CONSOL Energy. Central App in total to us is 7 million to 8 million tons, and we could go either way with that. And that probably could enhance the value of Northern App coal if we saw huge constraint there.

So I think that plays out based on--it's a political debate more than I think an engineering debate. Will the political debate decide if mountain top mining is something that can be done in a big way going forward? It's gray and I would say that we got 12 months of discussion before it becomes clear.

How would you see it potentially impacting underground operations in Central App? Would there be any impact, and specifically to Buchanan?

I don't think it would affect Buchanan because the underground operations tend to be isolated from the mountain top issues. But all issues related to mining are being reviewed. And I think underground mines have less impact, but all mining is being reviewed for its impact. And it's like over time, regulations get tighter and tighter and you just have to learn to deal with it and it becomes part of your cost structure.

Great. And then one other question, if A&R and FCO, if they do merge, do you expect any sort of change in the competitive dynamic in northern Appalachia?

Actually, I don't. I would say that they have two well capitalized mines in northern Appalachia. We've competed with them for 30 years, and I don't see a big change there in the marketplace. They're already there. They're not new mines, and they're already part of it. They're well run, and we don't mind competing with them. I think they've just made a bigger company to compete with, and maybe their balance sheet structure will give them an opportunity to show more restraint in the marketplace.

Great. Thank you, Brett.

And next go to Brian Singer with Goldman Sachs. Please go ahead.

Thank you. Good morning.

Good morning, Brian.

Just following up on the earlier questions with regards to the second half production outlook and specifically your expectations for higher fourth quarter volumes, you mentioned greater clarity there. And I was wondering if you could add a little bit more color on if inventories do stay high, what is driving the clarity that either market conditions will improve or the volumes will ship?

I think it's a matter of the contractual relationships, the pushback from the utilities has been pretty well dealt with. The tons are sold, they're scheduled. We know what the inventories are of the major customers, and it's like any other year, the closer you get to the end of the year, the more clarity you have. And I would say that's really where it's at. We've had major discussions with most of these unities, and you also got the met coal coming back at almost 2 million tons per year.

Great. Thanks. And then can you differentiate a little more on the conversations you're having with customers--thermal customers taking your Northern App coal versus Central App and how that translated into thermal ton's price during the quarter in the current environment.

Well, we were already priced. It was just a matter of them having the ability to take the coal physically because the stockpiles were rising rapidly across the board. When we talked about pricing, we're more talking about pricing in '10 and even in some cases '11.

And I'm sorry, that is what I was referring to. So yes, thanks.

All right. Well, we see the pricing as firm. And we've taken some of the economics that have been deferred for '09 pushed into '10, which I think helps us build a bridge into '11. And then other couple of cases, as you saw, people have actually paid us not to take the tons, which we'll see the value of that unleashed in 2010 as well.

Great, thanks. And lastly, geographically, when you think about acquisitions, do you think--are you thinking more about consolidating the Marcellus and Appalachia coal assets, or are you focusing more on diversification into non-eastern coal and gas plays?

Well, I guess from my perspective, I'm going to go for the highest margin acquisitions. And if they're out west or if they're in the Marcellus Shale, that's where I'm going to go. So I think right now from our perspective and the assets that we do own, the highest margins are coming from our assets within the region we're at. When we talk about the concentration of BTUs in the eastern United States and the position we're in, it's hard to step out of that without reevaluating what's around us first.

Thank you very much.

Our next question is from David Lipschitz with CLSA. Please go ahead.

Good morning. A question for you on your inventory, you said you wanted to get back down to 1.6. Where do you stand now?

We're about 2.8.

2.8.

And we ended the second quarter at 3.5. We think by the end of the third quarter we'll be at 2.2 and then end the fourth quarter at 1.6.

Keep in mind, Dave, that's very critical to us because if you put that on the ground, it's cash laying on the ground instead of in the bank and we take that serious.

So in the third quarter then your production will be 13.1 but your shipments, obviously, would be significantly higher than that?

Oh yes. In fact, we're already--if you look--by the end of the second quarter in the first month we dropped 700,000 tons.

My next question is you say you potentially could do 65 million tons next year if the market is there. Do you think then we'd pretty much be in a balanced situation by the end of 2009 with inventories for the fact that you and some other potentially could increase production from this year's to next year's level? Or is it going to be a lot of smaller producers out of our business you are going to take their market share?

I don't think the stockpiles will be in balance until probably the end of the second quarter next year. And I think the utilities are going to see a supply risk as people drop out based on economics on the supply side. And so they'll pick a higher level, I think, for a couple years just for insurance. And that'll create some--it won't drop clear to where it was when everything fell off. So we're looking at the end of the second quarter of next year.

Okay, thank you.

You bet.

And next to the line of Lasan Johong with RBC Capital Markets. Please go ahead.

Thank you. In terms of number of days, how much storage do you think is left out there from your customers' perspective?

I think they're up from last year's average of about 25 up to about 45; 45 days overall.

45 days overall current storage?

Yes. And that's storage at the utilities. Some of them are as high as 80 days. It depends on what utility or what--or whether they're merchant generator or a regulated utility, but it varies quite a bit. But I would say their storage is double what it was this time last year.

Okay. And how much coal to gas switching do you think you'll see this year?

I think about 25 million tons, and we're seeing a lot more in the Central App area.

But do you think there's a higher probability of that increasing or decreasing over time?

I don't think it can increase very much because you have a fixed amount of gas units can burn against coal. So if you ran them all, probably a yearly move would be about 35 million tons, if you ran them all year long.

So max is 35 million?

And it would take time to build new plants. So about 35 million tons on the margin between the two.

One last question, the acreage that parent sold to CXG 20,000 acres, how much more of that potential is there?

That was just a cleanup of what we had within the coal estate and we sold it back to CXG along with our consolidation with the deal with NiSource. That's all we have.

That was it.

It was a nice piece to find.

So that's it. There's no more of that kind of synergistic sale you can do?

I wish there was. No.

So do I. Great. Thank you very much.

And next go to Justine Fisher with Goldman Sachs. Please go ahead.

Good morning. I have a question about the inventory building at the mine because I think most of what we read in the papers is about inventories at utilities. And I know you guys have commented on your inventories. But are the builds you're seeing at your competitors -- are those based on, you think, production that they've already kind planned to sell? And then turns out there's not a buyer, so they're building it. Is that utility build based on their current production or is that just a hangover from coal that was produced over the last few months before they may have announced recent cuts?

I don't really know. All I can tell you is when I drive by them, it makes me nervous. And the issue is if you see inventory build at the utilities and inventory build at the coal mines that just extends the life of the coal that has to be burned through. And I think it really puts pressure on marginal producers. Because that coal is going to move to the utilities before you see any price movement, and the marginal guy is going to have more quarters of pain before it turns.

This may be an unanswerable question. But if we know how many days are on hand at the utilities, how many days might it add to the total inventory in the U.S. that needs to be burned through before we get to a normalized level? Is that a number that you guys could even hazard a guess at?

In my opinion, that's a number you ought to be asking coal companies. We don't know how much is out there. We can tell you what we're doing and that's why we're announcing it.

Okay, and then one last question. I know the consistent question for you guys about consolidation typically tends to within--between Appalachia and the PRB. But would you guys consider acquiring international assets? I'm thinking more Latin America than anywhere in Asia?

If we could add value and take our expertise there, certainly we would.

Great. Thanks.

And we'll go to Paul Forward with Stifel Nicolaus. Please go ahead.

Morning. On the all-in production costs in second quarter, they rose all the way up to $45.42 a ton. When you consider the moving parts going into 2010, you'll have recovering longwall production. You should add, I believe, a step up in labor cost as well. But if you can get up to that 65 million ton run rate, where would you anticipate costs go from 2009? Are they flattish, is there a chance to possibly pull them down?

I think it would look like more like the first quarter.

All right.

I think it would look like more like the first quarter because we have pressure on our purchasing, we have pressure on all of our commodities. And if this market tends to stay like that, it should be right around that level.

Now mostly because--when you look at the first and second quarter, the biggest movement in cost was a change in ratio between longwall coal and longwall development. We're developing--if you look at a development ton against a longwall ton, it's probably 4 to 1 in terms of cost. And so when you change that ratio, your costs rise but you also increase the value of the company based on--it's almost like having inventory in a strip mine pit because your last step is to run the longwall through it. And it's a very powerful position in the changing market.

Okay. And on the 2011 commitments, just from the previous quarter to this quarter it looks like they went down in aggregate by about a million tons. I was just wondering why were they down. And as far as not much in the way of new commitments happening for 2011, there's always a difference between yourselves and your customers on what an appropriate price is. But would you describe it that--that gulf between yourselves and customers on an acceptable price for 2011 and beyond as being unusually wide?

I don't think--philosophically that's not the issue. I think the issue is we have--the customers are readjusting and we are too and so there's some open issues between us. I think if you'd call Dan Zajdel offline he could probably walk you through that whole thing.

Okay. Thank you.

Thank you.

And we go to Garrett Nelson with Davenport & Company. Please go ahead.

Good morning, everyone. Most of my questions have been answered. But what kind of export volumes are you anticipating for the CNX marine terminal for the year? And are you expecting a meaningful balance in export demand in 2010.

Well, we expect about 4.7 million tons to move through the terminal this year, and about 3 million of that is CONSOL. And next year, I would say--it all depends on your European pricing. But it could go up as high as 8 million to 9 million in some of the stuff we're looking at for next year.

Okay. Through the first half, where do exports stand?

About 2 million tons.

Okay. And how much of that is your coal?

1.3 million.

Okay. Great. Thank you.

And we'll go to Mark Caruso with Millennium Partners. Please go ahead.

Hi. Good morning, guys. I just had a few clarification questions. The first was, Brett, you'd mentioned earlier the--getting back to running the longwalls throughout the continuous mines, which should help cost. And did I hear you right that that should start to happen in the second half of the year given more visibility?

We believe by September 1st all longwalls will be running at their normal capacity.

Okay. And then you guys plan on shipping more from inventory. Should that impact cost negatively since it's higher cost? Or I'm just trying to think about how to think about that from a high level?

Yes, that will affect cost.

If inventory is already sold as priced so it won't affect our cost structure at all.

Okay. Perfect. And then lastly on the Marcellus. You guys just increased the acreage position here to 230,000. As you look at the landscape, you'd mentioned earlier you'll look at some gas fields; small and large. Are you seeing opportunities to pick up some of those assets from some of your coal competitors or do they sort of realize what they have now?

And second to that is would you consider doing a JV or considering a lot of the international majors have been hot to trot to get into the play?

Well, we're okay with JVs. We've offered some of that. In some cases we've done that. You saw we did a deal with Massey last year. We're looking at all these opportunities.

The gas piece and the Marcellus Shale, I can't emphasize enough to our shareholders, that's a valuable position that we're already in. We don't have obligations to drill, to hold the land that we have, it's already in fee. This that we announced is a major deal. If we were on 80 acre spacing, looking at the same kind of success we're seeing in the Marcellus Shale right now with the wells that we have, it's anywhere from 5 to 8t within that 40,000 acres we've just announced.

Now that's got to be proven out, but I'm telling you this is a powerful position and we're going to continue to enhance it moving forward. Our capital--any discretionary capital that we have moving forward for the rest of the year is going to be an acquisition of opportunity.

Great. Thanks, guys.

I think we're going to wrap it up here and I'll be available in my office the rest of the day if anybody else has any questions.

But, operator, could you please instruct the callers on the replay information please?

Certainly. Ladies and gentlemen, the replay starts at 1:00 p.m. Eastern and will last until August 6th at midnight. You may access the replay at any time by dialing 1-800-475-6701 or 320-365-3844. The access code is 106655. Those numbers again, 800-475-6701 or 320-365-3844, and the access code at 106655.

Mr. Zajdel, any closing comments?

No, I'd just like to thank everybody for participating. And, again, I'll be in the rest of the afternoon. Thank you.

And ladies and gentlemen, that does conclude your call. You may now disconnect.