CNX Resources Corp (CNX) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to CONSOL Energy's second quarter 2011 earnings 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, Brandon Elliott. Please go ahead.

Thank you, John. I would like to welcome everyone to CONSOL Energy's second quarter conference call. We have if the room today Brett Harvey, our Chairman and CEO; Nick Deluliis, our President; Bill Lyons, our Chief Financial Officer; and Bob Pusateri, our Executive Vice President of Sales and Marketing. Dan Zajdel and I are here representing our IR team.

Today we will be discussing our second quarter results. Obviously any forward-looking statements we make or are comments about future expectations are subject to the business risks we have laid out for you in our press release today, as well as in the previous SEC filings.

With that said we will start the call today with Bill Lyons. Bill?

Thank you, Brandon.

CONSOL Energy had another excellent quarter from both a market and operations standpoint that translated into strong financial results. Before I get into the numbers, there are two events in the quarter that I would like to highlight.

The first event is that in June we reached a new collective bargaining agreement with the United Mine Workers of America. This agreement, which runs through December 31 of 2016, will extend the period of labor stability by another five and a half years. December 31, 2016 will mark a total of 23 consecutive years of uninterrupted service by our represented employees. We believe the agreement to be a manifest of the strong relationship with our 2,900 represented employees to safely provide a reliable supply of critical energy to the nation and the world. We expect our labor costs to increase by about 3.5% per year over each of the next five years.

In the past, some have viewed CONSOL in a disadvantaged light because our reserves were of a higher sulfur content, and we had a significant represented workforce. As our sales volumes and realizations for the quarter will attest, sulfur content has not been a significant issue due to the installation of scrubbers and other pollution control technologies. The high quality and high BTU content of our coals are recognized on four continents. We also hold the premise that our commitment to safety and compliance has helped us to better partner with the union to achieve labor stability. When you look at the global labor disruptions that are present in the mining industry today, we believe that the stability of our workforce -- and that is both represented and non-represented employees -- is a competitive advantage.

The second issue I want to address before my financial review of the quarter is the decision to permanently close Mine 84. We were incurring approximately $18 million of annual cash costs to maintain the underground infrastructure of the mine. A noncash $115 million charge we took for the infrastructure abandonment is actually cash accretive, since we will save the $18 million per year in cash maintenance expenditures. And since this is only an infrastructure abandonment, we still retain the valuable reserves in the area that will be available for future development when this market develops.

Let me now go to the quarterly financial statements.

Total revenue for the second quarter of 2011 was $1.588 billion, up 20% -- 23% year-over-year. This represents the Company's fifth consecutive quarter of record revenues. CONSOL Energy generated $360 million of operating cash flow and $472 million of adjusted EBITDA. The primary economic driver for these results was the $21.56 margin per ton across all tons in the coal division.

CONSOL Energy reported GAAP net income of $77 million, or $0.34 per diluted share, for the second quarter of 2011, compared to $67 million or $0.29 per diluted share for the second quarter of 2010. GAAP net income was lower than our operating results would have suggested because of four discrete items. The closing of Mine 84 was $115 million charge. And a charge associated with the early extinguishment of debt for $16 million. Additionally, we saw an increase in OPEB of $14 million, as well as a contract buyout for $5 million. Now this contract buy will result in $10 million of additional earnings when we sell this coal in future quarters.

Now, after adjusting for these items we earned $174 million in the quarter, or $0.76 per diluted share.

The higher than expected coal sales of 16.4 million tons combined with a $7 increase in average margin per ton were the primary drivers of this increase in profitability. Our cost per are ton increased by $5.79 compare to the second quarter of 2010.

Cost discipline is important. Costs need to be referenced to driving profitability. Of the $5.79 increase in costs, $0.73 is directly related to increased realization, and these are production taxes and royalties. Of the remaining $5.06 per ton increase, about one half is related to maintenance and equipment overhauls and enhanced roof control methods that increase the safety and efficiency of our mining operations. About one fourth of the $5.00 per ton cost increase relates to additional depreciation charges stemming from our capital investments in our mines, alsoto enhance safety, efficiency and reliability of our operations. The majority of the cost increases are high rate of return expenditures that drive improved profitability through margin expansion.

I believe that we can continue to expand [per ton] margins into 2012. We are already seeing this with our thermal coal negotiations for 2012. During the June quarter we closed the sale on over 6 million tons per year, which will generate over $100 million per year in increased realizations to CONSOL. Ultimately our objective is to expand margins, which we have been able to accomplish even with increasing costs. For the second quarter of 2011, total active coal operations earned $333 million. That is up $117 million from the second quarter of 2010.

Our met coal operations, which consists of both our high vol and low vol operations, earned $233 million, which is up $121 million from the second quarter of 2010. This reflects the strong global demand for met coal in general, and the demand for the quality of our coal in particular.

On the thermal side we earned $94 million, which is just under the $98 million from the second quarter of 2010. Keep in mind, too, that we shifted more of our Pittsburgh 8 seam from the thermal market to the higher margin high vol met market, which impacts the thermal comparison with 2010, but increases overall coal profitability.

Our gas business had another outstanding quarter operationally, but was hurt by weak gas prices. Production increased by 18% quarter over quarter to 37.5 Bcf. We grew our Marcellus Shale productions to 6 Bcf in the quarter, or nearly three times the 2.3 Bcf from the 2010 quarter. Coal bed methane operations produced 22.9 Bcf for the quarter, up lightly from the 2010 quarter.

In the second quarter of 2011 we earned $17 million from our gas operations. That's down $33 million from the second quarter of 2010. Average realization was $5.07 per Mcf. That's down $0.96 from the 2010 quarter and was the cause of our reduced profitability.

In gas, a key objective has been to delineate our extensive Marcellus Shale acreage. With our successes this year in the Marcellus, combined with our low cost structure, we believe we can generate attractive returns, even at current pricing. To that end we have contracted for two more flex rigs, which will increase our rig fleet to six on October 1. Five of these rigs will be deployed in the Marcellus Shale, while a sixth rig will be deployed full-time in the Utica Shale formation in Eastern Ohio. The additional drilling in 2011 will have minimal impact on 2011 production. The real benefit will be in 2012. So for 2011 we continue to expect to produce between 150 Bcf and 160 billion cubic feet of gas.

One operational item that we feel is significant is the drilling we did on a ten pad well on Westmoreland County, Pennsylvania. Drilling a large number of wells on a single pad we believe there enable us to continue to reach significant economies of scale. Our large fee and held by production acreage allows to us drill for economics as opposed to holding leases. It also makes a host of other issues easier for us, whether you consider permits, water handling or pipeline construction.

The overall financial condition of the Company has never been better. Cash generated from operation is one of the most important financial metrics in the financial statements. This cash generation enables us not only to invest in our asset base and pay dividends, but also provides us with the financial flexibility to weather changes in the economic environment. And through the first half of the year we generated nearly $800 million in cash. We expect cash flow to be positive for the year even after investing a projected $1.4 billion in our basic businesses.

Our balance sheet remains strong with excellent liquidity. We were very active in March and April this year in restructuring the finances of the Company, and as a result we have no financial debt coming due until 2017. We have more favorable pricing and expanded borrowing capacity on our credit facilities. And we obtained a 20% interest rate reduction in the rollover of our $250 million senior notes due in 2021.

We are encouraged by our second quarter financial and operational results. We like what we see in the Marcellus Shale, and based on early indications in Ohio, we are hopeful in what we can see in the Utica shale. We are growing our coal businesses too,with the reopening of our Amonate complex in 2012, the expansion of our Baltimore terminal also in 2012, and the new BMX Mine which is due to open in 2014.

All in all, it is a testament to our financial strength that we can grow both our coal and gas divisions with projects that are expected to generate significant rates of return for our shareholders. We believe that we continue to make significant progress in achieving our long-term growth in profitability objectives.

Brett, your observations on the quarter?

Thank you, Bill. I think that was a good summary of the highlights of the quarter. I would like to talk more in a general context, I think, for our shareholders, and it's good to be with you all this morning on the phone to talk about it.

As always, I like to talk about safety, and because it is a core value of the Company and very important to us and to our employees and to the image of the Company as well. Let's talk about our gas division first on safety. It was formed in 1994. We've had zero lost time accidents. So wehave one generation of people who understand that zero is a real number and it can be donesafely and effectively at low cost. We have proven that since 1994.

On the coal division side, we it continue to make great strides towards zero accidents in total. Now, that is important for this reason; zero accidents affects us in terms of morale and productivity, and trust between employees and the Company. Those things go together and create value for our shareholders, and I do believe we are hiring today a generation of people that will expect to have no accidents in the mining business for their career at CONSOL for the next 30 years. That is a good thing.

Now let's talk about the divisions themselves. The gas division, the results continue to be on track from what we expected, showing very impressive results. The results give us low cost, even with low gas prices. We are making money in this business, and we continue to expand our volumes to control our costs as well as create a very valuable base. We -- I am very satisfied with what we purchased, and I'm very pleased with the long-term are high value that we see of this -- of these assets going forward. Bill talked about the four rigs that are operating right now. I would say they were probably at the highest standard in the industry. And we have two more rigs coming on with the highest technology and standards in the industry, so we are very excited about that, andI will give be kudos to the gas division for excellent performance.

Now let talk about the coal division. Let's talk about the revenue side. I think it is important. The growth in revenues is very, very impressive. Our ability to produce locally and distribute worldwide, to me, is very impressive, because we have used our port facility to reach five continents now, and we will continue to do that with some very impressive growth on revenues. Our high vol met, our low vol met, our high BTU steam, all are great assets and a great spot in terms of people and productivity, and we have the ability to distribute worldwide and grow our revenues rapidly. And I think that differentiates us from other places. We don't have to mine all over the world, but we can distribute all over the world. That creates real value for our shareholders.

Now on the production side of the coal division. Our development is in place. Our long walls are running well. Our safety is good. And our ratio of long wall coal to development is right on track. So I give real high marks to our people for setting up a system that a couple of years ago where we showed some weakness in terms of development. We've really solved that problem, and I'm impressed with our ability to plan and get that done.

Now, it is interesting that we have the ability to grow on gas and coal at the same time. That is why these assets are impressive and valuable in the marketplace. We have the BX -- BMX Mine coming on track. We have the Amonate Mine that we announced last quarter that is on track. And we are also looking at Central Pennsylvania. We have a lot of reserve there's. Met reserves. We are looking at those to add for blending with our Pittsburgh 8 Seam at our port facilities, and we will be talking more about that in the future.

One very impressive thing when it comes to the market in this coal, though, is this coal is moving. Our inventory is probably the lowest it has been since I have been the CEO of the Company. That is impressive to me. At the highest prices we ever had, the lowest inventory. That tells you there is real strength in the Company and ability to move the products.

Overall the growth in both coal and gas I think give great traction to these assets and great traction in the marketplace and real value to our shareholders going forward. That is why we are on our fifth quarter of record revenues. And I believe our cost structure is tight and very productive, even with the pressures of safety, changing in regulations and the things that plague the industry right now in terms of tighter permitting and safety regulations. I think we are the banner for cost structure controls and productivity.

So having said that, I would like to open it up for questions. Thank you.

(Operator Instructions). First in line is John Bridges with JPMorgan. Please go ahead.

Good morning, Brett, Bill. Congratulations on the results.

Thank you, John.

Thanks, John..

A couple of questions. Our E&P guy, Joe Allman] asked me to ask about trends you are seeing in the Marcellus cost structure?I know you were previously talking about economies of scale helping, but hejust wanted to check how that was going. And then maybe I could get a little bit of detail on this contract buyout, and where it fits inside the income statement. Things have been a bit hectic this morning.

On the cost question about the Marcellus, we expect for the 2011 period of time, both for first quarter through fourth quarter, for all-in unit Marcellus costs to bounce between $3.00 and $3.50 in Mcf. The first two quarters year-to-date have been a good example of that. Basically, as we do work in the field, because the weather improves, in the second and third quarters you see a little bit of the higher unit cost versus the colder months, like first and fourth. And if you look at fourth quarter, we should expect costs to be somewhere between $3.25 and $3.50 for the third quarter, and then trending down to the $3.00 number for the fourth quarter.

So our long-term view, John, is the production ramps up in the Marcellus -- and remember, as Bill said, we are bringing multiple wells on at the same time, because of the multi-well pads. Those productions bumps we expect our all-in unit cost for Marcellus to be somewherearound $3.00.

Excellent. Well done.

And as I said, John, it is really important to recognize that these are all-in costs. They include depreciation and the rest. So when we talk about our costs staying between, say, even $3.50 where they have been, we make money. And I'm talking about actual money, GAAP income, okay? At $4.00 gas. And we make adequate returns, and we make really good returns when the gas prices go up. So, again, it's the advantage we have of being a low cost producer.

Right now the cost of the Marcellus are very similar to the costs of the coalbed methane, which again is a low cost play, and as Nick said, we expect in the longer term the Marcellus costs will drop below that of the coalbed methane. So again, we feel very, very good about our gas operations. And again, we are making money, and we will make even more money whenever gas prices go up.

Now, in terms of the contract buyout, it is not unusual for us to take a look at some of our long-term contracts, and in particular this had to do with some met coal that we sold into the steam market into a utility under a long-term contract. We decided it would be advantageous for both us and them for us buy out of that contract, and literally, as I said, we will make twice as much money in the remaining part of the year whenever we sell that coal into the met market. Generally that if you are looking at the income statement itself, it is in cost of goods sold. If you're taking a look at our functional income statement, it is not in the actual act of coal operations. It would be in the other category there.

Thanks. And well done, guys. Great result.

Thank you.

And next in line of David Lipschitz with CLSA. Please go ahead.

Thank you. Just in terms of the costs, are we looking at a structural cost change, just in it general, into 2012 and 2013, or do we see any moderation in any of that?

Let me take that first before Nick. You got to realize that coal mining is not manufacturing, okay?And every single operation has a different cost structure. So as a result as you move your production from various operations or increased operations, you could have different costs, and ultimately what we look at margins. So like certainly if we have a situation where we can sell coal at $150 a ton, and even if we had a cost structure of $100 a ton, we are going to do that because of outstanding margins. So I think often times people make the mistake of just looking at the cost structure instead of taking a look at margin expansion.

Okay.

The only comment I will add is if you look at the $5.79 increase that we quoted, and you look at the component of that that is operating cost or capital related, things affecting directly at the coal mine, it is about $3.60-some a ton, and those were conscious decisions to improve things like safety, roof support, long wall face extensions, better shield technology on our long walls. Basically what we've done is we've spent $3.50 a ton to get margin expansions north of the $12 a ton. From our perspective that would nothing more than a rate of return project, and we are happy we invested the money.

Okay. And then quickly on -- you only did about a few million tons of thermal coal contracts into this year. Is that the low quality stuff you locked up and there is still the higher quality still available?

David, this is Bob. For 2012 you saw from the report there is about 3 million tons of thermal coal that we firmed up for that year. And it is the higher SO2 -- roughly 6.25 pounds SO2 product. We are pretty much sold out of that product for 2012 and 2013, even though we have an upcoming contract price renegotiation that needs to be completed by the end of October.

Thank you.

Your next question is from Jim Rollyson from Raymond James. Please go ahead.

Good morning.

Hey, Jim.

Circling back to high vol. You mentioned obviously the guidance went up recently to the 4.9 million ton range for this year and 5 million next. You mentioned in the press release the shipments to a couple of new test markets, and I'm kind of curious. A little bit of color on maybe where the test markets are, but more importantly if that works out, kind of what you see the ultimate potential. Last year you were talking maybe 6 million to 8 million tons of high vol eventually, and I'm just kind of curious if that is still in the range if these markets work out, and likewise, what kind of pricing we are looking at. Are we still in the 75 to 85 range for awhile and is that going to trend up as well?

Jim, first I will tell you is that we have been trying over the last six months to get our high vol coals tested and accepted here in the United States. We have been successful. We had a test burn that occurred during the second quarter with a major steel company, and we are looking to enter into to enter into negotiations for a term contract for those tons. We think that our success rate will allow our high vol tons to increase year-over-year by about a million tons. We are still working on that negotiation, but we have no reason to think that we won't be successful. So we think that our high vol tons will actually grow quicker than we originally had anticipated.

And I assume that will come at the expense of the thermal side, correct?

To the extent that our production stays in the same range, the answer to that is, yes.

Okay. And then just the last quarter we talked about the reopening of Amonate, and I want to say about 400,000 tons was kind of the early expectation for 2012. It doesn't seem to be much of that in the guidance when you are just going from this year to next year on total met volumes. Is that just conservatism on your part, or kind of wait until that gets over some hurdles before you throw that into guidance?

Jim, first of all, there is a footnote in the release that addresses the Amonateproduction. And you are correct; the production estimate is around 400,000 tons for 2012. And wefeel confident about putting these tons into the marketplace. Our customers are asking us for these tons. And we feel that they will contribute heavily to our profitability next year and beyond.

Okay. And last question for me, Brett, you talked about -- and I think you and Bill both talked about the additional rigs coming on over the course of this year, which aren't going to have a big impact on production in 2011, but obviously should start to contribute as we get into 2012 and beyond. I know it is early, but any kind of early thoughts to what we might be thinking for production on the gas side as we head into next year relative to the 150 Bcf, 160 Bcf this year?

We have the two additional rigs coming, say, around early October of this year. One will be additionally deployed into Southwest Pennsylvania, where we are in full development mode, and the other in the Utica. With regard to production guidance for 2012, we haven't given and number out yet, and we are not going to be in a position to do that today.

Okay. Thank you.

Your next question from Jeremy Sussman with Brean Murray.

Hi, good morning.

Hi, Jeremy.

Bob, as a follow-up, I guess it's say the US is one potential new market for high vol, and if so what -- can you tell us the other?

We have a steel customer in Europe that, Jeremy, we have been chasing for some time now, and we have had a successful test there as well. So between the two of them, on an annual basis we think our high vol tons will grow by a million tons.

Okay, great. And then as far as Buchanan, obviously, it is running really well right now. Running at a run rate that is above the annual guidance of 5 million tons I guess. Is there some conservatism baked into your estimates? How should we -- orare you expecting it to ramp down I guess a little bit in the back half of the year?

There is a lot of timing issues with regarded to long wall moves, geology, et cetera that affect the annual expected run rates at Buchanan. That is true for any of our long wall mines, but especially for Buchanan. That coupled with the year-to-date performance there being exceptional is why we are just north of 5 million tons projected this year. I think 5.2 million tons. What that becomes with regard to next year and the year on out, I think the run rate between 4.5 millionand 5 million is still a decent estimate as an average move forward.

Great. And just last question as a follow-up. Can you -- you mentioned in the press release obviously some low vol tons that are offline right now in the US. Can you talk about what you are seeing on the pricing front, as your mine is running particularly well?

Our low vol tons continue to attract higher pricing both here in the United States and overseas. We entered into an arrangement with some of our customers to whereby we are selling our tons on a quarterly basis based on the BMA price adjusted for quality. That is some what new for us. Last year we elected not elected not do that. This year we believed that we would try it and see how it turned out. Pricing for the second quarter is the $315. We believe, Jeremy, for the third fiscal quarter, we believe the price will still be $300 and above. So you can see we have tons for sale in the third quarter, and we believe that we will continue to produce very good margins.

Great. Thank you very much. On

Sure.

Our next question is from Mitesh Thakkar with UBS.

Good morning, gentlemen.

Good morning.

A quick question a little bit about the export market, and maybe, Bob, you can help us here on that. We continue to see, if you look at API prices and domestic steam coal prices, it continues to be in and out of the money. How do you think about in the longer term --and I know you do some term deliveries with two or three years time frame into the export market. So where do you see it right now, and how should we think about it going forward?

Into Europe, Mitesh, we'll be -- for the next six months we believe we will put about 1.3 million tons of our high BTU Northern App and Central App coal into Europe. That average price will probably total for a 3% sulfur coal of around $67. We have been able to enter into several contracts for our thermal coal for 2012 and 2013 at very good prices. We think this will continue.

We think that with investment in CONSOL's port facility as well as the rail capacity, this will allow CONSOL's thermal coal exports to grow in the coming years to meet the expected demand. This as you know, this demand continues to be grown by the expected retirements of European nuclear plants, and then also coupled with the phase-out of subsidized mining in Europe. South African, Colombia coals are being pulled into the Asian markets, and we think that the coals from the US will supplement that. And that is why CONSOL decided to expand our terminal from 12 -- from 14 million to 16 million, and we are looking at further expansion correspond that.

And I think last call we talked about you are looking at potential sales into India , and at that time it was like out of the money. The prices didn't work. Is there any change in that, or are we still testing that

Unfortunately, I have no further news on that other than the same $10 to $12 a [net] ton [siff] delivered to India is about where we are out on the market today. But we -- we're are hopeful that will narrow in the months to come. As the Japanese coal plants come back online, I think there is going to be a need for thermal coal, and with the supply constraints in other places, we believe that the Indian market will open up to us.

Fair enough. Thank you very much. I appreciate it.

And next we will go to Dave KATZ with JPMorgan. Please go ahead.

Hi. So, it is our understanding the moratorium on new generation horizontal fracking has ended in New York, but at least to us it still looks unclear what the long-term picture is for the area. If there were some more visibility, would that be an area you would be interested in getting into? Or instead are you guys comfortable with the opportunities that are offered by your current reserve base?

Well, I think that is a very good question. I think it is up in the air up that way, and I think the New York region is way behind Pennsylvania at this point in time. But I can tell you we have a very, very strong position in what we bought. The old CNG property from Dominion had long legs and a lot of held by production advantages. We think the spots that we are in is good from what we know. So we don't really need to go into New York. We have a very strong position with a lot of acres, and it is in our backyard, and it feels very good for us. So you won't see CONSOL head that way.

Okay. Does that mean within kind of the area you are in now, though, that it would be purely expansion of what you have as opposed to acquisitions, at least on the natural gas base?

Yes, we will -- we will drill out what we have on the natural gas side, and we have tens of years -- I mean this is a -- that acquisition was I think a 40 to 50 year project, and we are just in front of it, and we have that many acres.

Okay. Excellent. Thank you.

Our next question is from Holly Stewart with Howard Weil. Please go ahead.

Good morning, gentlemen.

Hi, Holly..

I guess a couple questions for Nick. Nick, one of our E&P peers had a couple wells -- very strong wells out this morning in Marshall County, West Virginia. I recall that you guys have some nice acreage in Marshall, and maybe even five or six wells permitted. Can you talk about your acreage and your plans in Marshall County?

As we said from the get-go, really coming off the Dominion acquisition just over a year ago, we were very bullish on Northern West Virginia, just like we were with Southwest PA and Central PA. Because of the drilling schedule, that was the last of those three regions that we have effectively have got to, and you saw some preliminary results we put in the prior production updates releases, et cetera.

We still are very optimistic and bullish. We think that where we're drilling at with regard to Barbour County, areas like Marshall County, which is more in the dry/wet zone, will be prolific for us. And basically, when people ask us what our expectations are for those two areas sub areas of Northern West Virginia, our answer is expect something very much in line and similar to Greene County, Pennsylvania. Should be a great thing.

Okay, perfect. What's the -- how many acres do you have acres do you have in Marshall?

Holly, this is Dan. We have about 20,000 acres that forms a roughly contiguous block in what we are calling the [Mayorsville] area, which is just on the Marshall Count, Washington Greene County PA lines. We actually are going to move a rig into the Marshall County area in 2012 to fulfill some drilling obligations we have there.

The nice thing about that parcel is it is probably the most consolidated 20,000 acres across the full 700,000 acres Marcellus that we control.

Perfect. And then just one follow-up on your operations update, and kind of sticking with the whole West Virginia theme. You talked about some wells in Upshur County, and once you added gathering in the next week or so, you felt like those rates should get better. Do you have any color on that or just too early to comment?

Our expectation is still that the compression will make a tangible result in the production with regards to the flow rates, and as we move further north with -- remember, we started Northern West Virginia at the southern most point. As we start to drill northward into Barbour County -- and those wells should be coming on sometime in early September -- we should see the results, again, that are very much in line with Greene County, Pennsylvania.

Just if I could add specifically, Holly, at the Alton pad in Upshur County, we have brought the compression on line, and we have one of the wells now producing at about a million cubic feet a day of above and beyond what we report in the ops release. Our operations folks down there are taking a look at perhaps flowing more freely two of the other wells down there.

Perfect. Thanks, guys.

Next go to Andre Benjamin with Goldman Sachs. Please go ahead.

Good morning.

Good morning.

I just wanted to get a little bit more color. You guys have been talking a lot about West Virginia, but in terms of your Southwest and Central PA wells, how have those been trending lately in terms of initial rates of production? And -- I guess I will just start there.

The Greene County Southwest PA area -- we'll talk about that one first -- it continues to, I'll call it, consistently meet the results that we have posted project life to date. We don't think that is going to change. If anything, that will probably only improve because of some incremental completion and operational issues that we look at with regard to these multi-well pads.

When you look at Central, Pennsylvania, we are going to have a significant pad of ten wells coming on sometime around early October of this year, which will be the second major step out within Central PA. As you recall, the first area was quite successful and in line with what we saw in Greene County PA.

So basically, same set of expectations. A lot more data coming down the line here with the additional rigs and wells in Southwest PA Greene and with regard to that additional pad coming on in early October for Central Pennsylvania.

I guess the second question would be if you have any updated thoughts on the 200,000 acres or so of acreage you have in the Utica Shale in Ohio, and any view on whether it is likely oil versus wet or dry gas windows? I think most of our acreage is in Eastern Ohio, correct?

You look at the 200,000 acres in Ohio, I would say there is significant portions of the two -- whether it is 50/50 or 60/40 -- significant portions in what we call the oil zone and what we call the transitional wet gas zone. And, again, in 2011 one of those two additional rigs will be deployed to the Utica to start delineating.

Thank you.

And next we will go to Richard Garchitorena with Credit Suisse. Please go ahead.

Great. Good morning, guys.

Good morning, Richard.

My first question, just on the cost, the 231 this quarter. You are investing to improve safety. Is that an ongoing cost, do you think, going forward? Should we expect that in the coming quarters?

That is a cost -- an investment that we will make on an ongoing basis. When you look at third and fourth quarter, I think we have statements in the press release that's saying basically take the second quarter costs and expect that increase by $1 a ton or so the remaining two quarters. So that is an investment that we continue to make and intend to make on an ongoing basis, and we think that will continue to yield margin expansion with regard to turning the effective market lease that Bob has summarized.

Great. That is very helpful. And also on the new labor are agreement, is there a cost impact you expect from that going forward.

That is in that number, and (inaudible -- multiple speakers) again, when you look at the 5.5 years there, we are expecting on a compounded basis 3.5% increase per, we'll call it, represented ton.

Great, thanks. And then my other question just related some comments regarding inventories. I think Brett mentioned that they're the lowest you have seen since you have been CEO. What is your sense on the inventories at the utilities right now?Do you think they could get to a period where they start to feel tight and look to 2012 and 2013?

June coal inventories were down about 10 million to 13 million tons below a year ago levels. We are seeing that there is still a fairly strong demand. We think that the current weather pattern that we are in will draw inventories down even further despite the fact that there is moderate economic growth. Most of the customers that we serve have inventories probably in the range of 30 days to 40 days. We do have a few that are probably under 20.

So despite everything that you read, Richard, the trains are still loading. We are still -- we still have a high demand for our product and as we pointed out earlier we are sold out in our thermal market for the balance of the year, and we are okay with the position that we are in right now.

Yes, I want to make one thing clear. When says eight to ten year -- eight to ten days down year to year, that is in our area. So if you look at the real striking points of CONSOL's area, it is important that you -- that is a distinction, because if you look at the Midwest numbers where they are overloaded with Powder River Basin coal, that is a whole different marketplace.

So this is high BTU, high revenue places where the margins are high for us, and if it is down eight to ten days that is a good thing. And what my concern is for the utilities, and I will speak for them in this case, if they have to build up for the winter, there is not a lot of high BTU coal to be had to build up for the winter, and that is a concern. I think we would like to have more to help them build up, but we don't at this the a point.

Thanks. That's very helpful. My final question, just on the exports. You are expecting 10 million tons this year. What do you need to see to get that up to maybe 11 million, 12 million tons in the next year and years going forward? Is it rail capacity, or -- and I know you are expanding in Baltimore -- but what's -- is there a bottleneck other than that?

No, as the price for the international demand -- as that price continues to rise, we look at that and compare it to what the domestic price is. We have the port capacity to take more tons export, and we will continue to do that. So it is wherever we can leverage the highest price, that is where the tons will ultimately go. So if we think that selling more thermal coal into Europe results in a higher price, we will look at another 2 million tons or so for 2012 and 2013.

Great, thanks.

Our next question is from Meredith Bandy with BMO Capital Market. Please go ahead.

Thanks. So many questions have been asked. I just have a couple of loose ends to tie up maybe. One is we talked about the 315 benchmark, and then the 210 to 220 guidance for the open tons you gave. Can you walk me through how you translate that? Like what is a quality differential, what's with the rail differential? How should I think about that?

Meredith, if the FOBT price on a metric ton basis is -- pick a number -- $300. That is the BMA price. From that you would have to then deduct the railroad freight, including the dump rate. That would then get you to a net ton FOB mine. And then in some case there's is a fuel surcharge. You would have to subtract that. And then that would then result to what the net price that the mine would see. Some customers -- depending on negotiations some customers pay their own fuel surcharge. Some of them we wrap it up in the price. So if you look at a $300 FOBT price for CONSOL, that equates after fuel to about a $225 FOB net ton mined.

And there is no quality differential? It's all basically transportation?

The quality adjustment usually comes in after that. As you know, the BMA price is for a higher ash product. CONSOL's low vol is one of the lowest ash products here in the United States. It is roughly 5.25% ashversus 9.5% ash. There is a corresponding adjustment made to the price to account for the lower ash.

Okay. And then I guess I was just surprised that the transportation was that high, but fair enough. And then I think we already touched on a little bit, Amonate is not in the breakdown -- if I read the footnote correctly, it's not in the breakdown for the different qualities, but it is included in the total?Is that right, or --

That's right. It is included in the topline of that chart, which is the estimated coal production. Amonate is in there, but as you get below the top line, it is not included in the breakdowns that we have there, mainly because we have decided at this point not to include a mid vol breakout for you yet.

Okay. When I go to 2015, when you will have BMX and you'll have Amonate, possibly at phase two, where would you see your top line at that point? Is some of that growth replacing older mines, or is it all growth?

Well, assuming the marketplace is consistent to where it is today, Amonate and BMX look like growth, because most of our mines have 15 to 25 year lives capitalized today. Now, if the market changes or the demand for coal changes, we will certainly adjust mines to match it. But assuming it is constant, yes, that is growth.

Okay. Thank you.

And next go to Brian Gamble with Simmons & Company. Please go ahead.

Good morning, guys.

Good morning, Brian.

Bob, if I might a little more minutia on Buchanan. Long wall moves. When are the current next couple of moves planned?

Brian, this is Brandon. We are going to I think defer from getting into specific timing on long wall moves. I think we made the point to mention it last quarter just because it was a stand out issue in the production guidance for last quarter. But I think its not a practice we will get into on giving on long wall moves.

Okay, that's fine.

Sorry about that.

No problem. The calculation you ran through, Bob, $300 gets you to $225. Just reading a little bit more into, that if your expectation for the back half of the year is still $300-plus, there might be slight upward bias to the expectations that you gave in the chart?

That is, correct. Good catch.

Fair enough. And then, Brett, maybe bigger picture. You have got all your guys talking about delineating on the gas side, and maybe this is for you, too, Nick. But you are drilling a lot. You have a couple more rigs coming online. Obviously in the past we talked about gas as a potential JV opportunity to try to monetize some of those assets, and I know I'm sure you guys are always out there looking for people that are interested, but any updates last three months or so how that has been developing? Have you seen more interest?Has the deflated gas price environment precluded some of the conversations? Maybe just a little bit of color on what you see over the next couple of quarters.

Well, I think that is a good question. What we have always said is wherever we can bring the net present value of any of our assets forward we will do that, but we really don't discuss any processes or anything, so we really don't have any comment on that. When we have something to say, we will bring it up, okay?

That works. Thanks, guys.

Thanks.

And we'll go to Mark Levin with BB&T Capital Markets. Please go ahead.

Brian just asked my question. I was trying to get an update on the gas monetization strategy, if it still holds through where you are still going through the process of figuring out what makes sense, let's say, the first 10 year drilling plan, and then next year you get into more mean meaningful asset sales or divestitures. If that still holds true. That is my first question. And the second question is just more general on the coal side and what you guys are seeing in terms of spreads between low vol Buchanan met versus some of the lower quality high vol products. Thanks.

Well, on the strategy of assets I think I'm just going to say what I said before. We don't have a comment on that until we are ready to do something. I think we have publicly announced that we are always looking at for opportunities, and we will talk about them it when they are available. And the other I'm going to turn to Bob on.

On the second question, Mark, we believe that the low vol pricing for the third and fourth quarter will look at about $300 a ton FOBT metric. As that compares to the high vol ton say for an A and B type coal, CONSOL doesn't have any high vol tons that are of that quality. Ours are -- our high vol coal mostly looks like a high C-plus, but I would tell you that the A and B tons, as we seam, are probably selling in the range for about $240 to $250 FOBT. We are looking very hard at the disparity between the numbers, given the fact that CONSOL is looking to open up some additional high vol production in Central Pennsylvania. So we think the pricing for the high vol is good enough for us to bring on these coal mines.

And just as you guys think about bringing on the coal mines in the context of some of the comments that were made a maybe by US Steel or AK Steel, some certain, I guess, nervousness I guess about the way the steel markets may be shaping up in the back half of the year. I realize Mittal said something a little bit different. How do you guys think about bringing on additional met projects in a very uncertain macro environment?

That is a good question. You can see what we have done. We have taken our capital and deployed it into different marketplaces without adding new capital to chase a volatile market, like the steel business is. Buchanan certainly is a long-term player and will always be at the base of the steel business.

These other coals that tend to be in and out, dependent on how the steel business is going, CONSOLE is not really excited about chasing new capital or risking capital to match that market, because we have been burned. We have seen other people get burned in that as well. But if we can get some long-term deals, based on the expansion worldwide of China and India and others, we will certainly bring these coals online and match it up with the customer. And we even think some of the customers will assist in capitalizing with us. So we are open to those deals, and you will see us make those kind of moves.

Great. Thank you, guys.

Okay.

Our next question is from Shneur Gershuni with UBS. Please go ahead.

Hi, guys. Most of my questions have been asked and answered. Just wanted to do a couple of quick follow-ups. Your guidance for the full year for production suggests that the back half is going to be a bit lower, and I do recognize that the first half has been very strong. But it is lower than kind of what you have done in the back half in some previous years. Is there some timing issues on anything, or does it include some long wall moves or something of the sort, or is that a potential upside as we think about the back half of the year?

The couple of point there's. First, keep in mind first and second quarters were banner operational periods of time with regard to the coal segment. So we are sort of comparing Q3 and Q4 to what was a -- things went very well in Q1, Q2. We hope that trend would continue. Second thing, there are timing issues with regard to everything from long wall moves to the rest. As Brandon said, we don't try to get into with regard to mine by mine logistics. When you add all that up, our best middle of the road, 50% I will estimate is 62.5 million tons for the year, and the balance for the back six months is to get you there.

Right, I understood that the first six months is really good. What I was saying is more comparing the back half of this year to the back half of last year. You know what I mean? Kind of -- is there something different that is happening this year versus last year or in previous back halves basically?

And really the back half of last year was a pretty strong set of quarters as well. To the extent that things go well and we can manage everything from humidity to long wall moves to the rest, there will be potential upside to the 62.5 million tons, but if you want our middle of the road, 50 percentile guess, that is where we are at with regards to the year and back six months of the year.

That makes sense. If I can just follow up on questions on gas. Nick, maybe you could give us some color with respect to where you are at on days to drill when drilling off a pad and so forth. And also if you can give us the CapEx per well?

The CapEx per well is a bit of a tricky number, only because we want to correlate it to the lateral lengths and the completion stages that we see with regard to the horizontals. And so I can give you sort of an average capital per well number, but you have to normalize it for those two key parameters. The third parameter starting to affect that too is the number of wells on a single pad, because that is trading some capital affects -- positive ones -- with regard to site prep et cetera. When you add all that up, the drill days really still drive your capital per well.

If you look at what we are at today versus what we were at as little as a year ago, we have seen significant reductions in the number of drill days, to the tune of probably a third reduction in our drill days, and that is going to result in lower capital per well. As long as we squeeze efficiencies out of the drill rig crews and drill rig fleet, that will be the best proxy we have got for capital per well continuing on that positive trend.

Okay. And one final question. You are drilling in the Utica. You have drilled one there in the past. You weren't able to complete it because of infrastructure issues and so forth. And you do think it is high BTU content, probably liquid rich. But do you have infrastructure in place now to be able to complete the wells that you plan to drill in the Utica? Are you working with another player? If you can just give us color as to how we will note the flow rates and liquid content as we look into the six months?

It is in many ways the Marcellus all over again, and a lot of the lessons learned from the Marcellus ramp up from the midstream standpoint. Processing, permitting, rigs, regulatory, all of that will be applicable to right across the river with regard to Ohio. Very positive I think environment with regard to the policymakers wanting the development to occur.

And a little bit different from Marcellus, and mainly it is going be with regard to the byproducts, as you mentioned, but all of the plans are in place. We continue to work on that on a regular basis, and lot of the lessons learned in the Marcellus should really shrink that time that you see for ramp up in really what I will call sales meter impact with regard to the Utica.

One thing I would like you to understand is any new project like that we drop back and do a risk assessment in terms of capital risk as well as safety risk on new projects where our technology -- we are very good engineers, but we want to make sure the technology is right as we approach it. That is why we backed off that first well, and I think going in with this new rig, we are well planned to get it right this time.

Okay. But you have a way to complete the wells, though, right?

Yes

Okay

They've all been designed and laid out and we are ready to go.

Perfect. Thank you very much, guys.

John, this is Brandon. Let's go ahead and make this next one our last question.

Certainly And that is from Brandon Blossman with Tudor, Pickering, Holt. Please go ahead.

Good morning, gentlemen.

Good morning, Brandon.

And these will all be follow-ups. I guess one, West Virginia gas. I guess the surprise last night on those well results of a competitor was that they were producing quite a bit of condensate. Did I hear you say you were expecting kind of Greene County type curves in dry gas for West Virginia, or is it the possibility for something else?

For Upshur, that would be the case, yes. Greene County, dry gas expectation.

Right, Marshall County, on the other hand, where we have the 20,000 contiguous acres, we would expect to be liquids rich. And in fact we already signed a processing agreement with MarkWest to strip the liquids out of the gas for us.

Continued success there on that acreage. So congratulations on that. Thinking about the incremental -- just CapEx on the gas side -- incremental two rigs, how about the completion side of that kind of bump up in the program? Do you guys have that locked down, or could we see a little bit of cost creep there?

Again, we look at capital per well, the three big parameters, as we said, one, drill time, drill efficiency, rig efficiency. That number has shown very strong positive efficiency gains over, as I said, even as recent as the last 12 months. So feel very good about that.

The second big parameter is lateral lengths. Now our lateral lengths generally trending longer -- [up]. So that is going obviously increase the capital per well, but when you look at it on a lateral foot basis, it will not be an increase. So we feel good about that.

The third one is the number of completion stages. And generally, just like lateral length, the number of completion stages per well is going up. Not just because the lateral length is increasing, but also because we are typically on average completing them with tighter stages.

When you add all that up and you normalize it for number of stages and lateral length, our well -- capital per well has gone down, and our expectation is it will continue to go down as we start to drill these multi-well pads.

That is helpful. And then quickly shifting over to the coal side. The Central PA possible met incremental production, it sounds like, and I just wanted to confirm that I heard this correctly, that will be contingent upon signing some contracts. So the timing on that sounds like it is customer driven rather than driven on your side.

Well, we think the market is there right now for some of that, and don't underestimate our ability to take some of that coal and blend it with Pittsburgh 8 and create a whole new product in the Atlantic market. So I think it is a little bit of both. We have a lot of reserves in Central PA, and those reserves are good high vol met that have a different sulfur structure than the Pittsburgh 8. So we believe our first look is there is some opportunity from a blending side as well as new products to customers. So we think we can bring customers in with some optionality here. Thanks, guys, and congratulations on a good quarter.

Thanks, Chris.

All right, everyone, thank you guys for joining us today. We obviously appreciate everyone taking the time and your interest in CONSOL Energy. We look forward to updating you again on the third quarter conference call. And, John, could you give the replay information, and then we will sign off.

Certainly. And, ladies and gentlemen, this conference is available for replay starting today at 12.30 PM Eastern Time. It will last til August 4 at midnight. You may access at any time by dialing 800-475-6701 or 320-365-3844. The access code is 211007. The numbers again, 800-475-6701 or 320-365-3844, and the access code 211007.

Does conclude your conference for today. Thank you for your participation. You may now disconnect.