CNX Resources Corp (CNX) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to CONSOL Energy's fourth-quarter 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, Mr. Brandon Elliott. Please go ahead, sir.

Great. Thank you, Tony. I would welcome like to welcome everyone to CONSOL Energy's fourth-quarter conference call. We have in 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. David Khani, our Vice President of Finance, and Dan Zajdel and I are here representing our IR team.

Today we will be discussing our fourth-quarter results. Obviously, any forward-looking statements we make or comments about our future expectations are subject to the business risks we have laid out for you in our press release today, as well as in our previous SEC filings. We are going with a slightly different format this quarter. In case you are not aware by now, we have posted slides that we will be referencing at times during today's call. Those slides can be found on the investor relations link of our website at consolenergy.com under the presentations to analysts section.

We will start today with Brett Harvey, our Chairman and CEO. Then Bill Lyons, our CFO, will cover our financial results. Bill will be followed by Nick and Bob, who will cover our operational performance and marketing outlook. We will begin with Brett.

Thank you, Brandon. I just want to reiterate that these slides is a new format, and I'll be talking originally to slide number 3. First of all, let me say, 2011, we ended with a -- on a good note with a good year that reflects, I think, very powerful, valuable assets. In a good marketplace, you have very good financial results, and these assets reflect that. Bill will talk about that and how we did. Before we go any further, I'd like to talk about our advancements in safety towards zero. We had a better year than we had the year before. We continue to advance towards zero. We're not perfect, but we're striving to be there. And I think advancement every year, as we have done, is good for our people and good for the industry.

We're trimming our capital plans versus what we announced a few weeks ago. Markets change. We have the ability to change based on this great asset base that we have. Nick will talk about that and talk about our approach to that -- our capital plans going forward. We're positioned well for a weak environment on energy as energy cycles. We're hedged well for 2012. And we're in a very solid position of opportunities with our partners in the gas business. And we will talk about those as well. With -- at this time, I'll turn it over to Bill to talk about our performance.

Thank you, Brett, and good morning, everyone. As you have seen in our press release and slide number 4, CONSOL Energy posted several records for the quarter and the year, both operationally and financially. We are positioned to manage macroeconomic volatility with our solid balance sheet, our strong liquidity, and our 2010 contracted -- 2012 contracted position for our coal and natural gas volumes. Net income was $196 million, or $0.85 per diluted share, for the fourth quarter of 2011, compared to $104 million, or $0.46 per diluted share, for the fourth quarter of 2010. This is an increase of 88%. Total sales revenue for the fourth quarter of 2011 was nearly $1.4 billion. That's up 6% year-over-year. For the fourth quarter of 2011, we generated operating cash flow of $275 million and EBITDA of $440 million.

The primary driver for the quarter results was the $17.95 per-ton coal margins, which was an increase of 7%. For the fourth quarter 2011, our active coal operations generated earnings before interest and taxes, or EBIT, of $274 million. This is the fifth quarter in a row of posting consistently strong operational results. Our low-vol and high-vol met coal operations generated nearly $193 million for the fourth quarter in EBIT, an increase of $58 million from a year ago. Bob Pusateri will spend some time on marketing details, but of particular note, we exported 11.4 million tons of coal to Asia, Brazil, and Europe in 2011.

On the thermal side, we earned $81 million of EBIT, which is 45% lower than $146 million from the fourth quarter of 2010. But remember, we switched an additional 648,000 tons of thermal coal into the higher-margin, high-vol met market, when we compare the fourth quarter of 2011 with the fourth quarter of 2010. Our coal costs averaged $54.80 per ton in the fourth quarter, or about $0.80 per ton higher than we had forecasted. Costs have been rising faster than we would like, and we are analyzing some cost-reduction areas that we will share in our next call. In our active coal operations for 2012, we have maintained our production guidance ranges in the midpoint of 60.5 million tons.

Now, let me turn to our E&P operations. The gas division reported net income of $43 million for the fourth quarter. This included a $33 million after-tax gain from the Hess transaction. Excluding this transaction, net income was still higher than the year-earlier quarter. The lower gas prices we experienced were more than offset by higher volumes. We are reducing our capital expenditures and our gas division and focusing on the high-return areas of the Marcellus shale and liquids.

On slide 5 is our cash flow sources and uses. We generated a record $1.5 billion in operating cash flow. We spent $1.4 billion in capital, with the difference going to shareholders as dividends. We received $840 million from our joint-venture transactions and the [Ontario] sale. We used $500 million of these proceeds to repay short-term debt, and we improved our cash position by $340 million.

You turn to slide 6, which is our liquidity position. Slide 6 highlights that we have solid liquidity of $2.7 billion, which includes the $375 million cash at year-end. Now over the past few years, we have been unfolding the investment thesis of CONSOL Energy as a Company with outstanding growth opportunities, a Company with low-cost operations, and a Company that is appropriately and adequately financed. Our December 31, 2011, balance sheet is the manifestation of this investment thesis, and it bodes well for long-term shareholder return.

To sum up, we posted another solid quarter. We have a very strong balance sheet. We are entering the year with outstanding contracted coal sales and price positions, and we have nearly 50% of our forecasted natural gas hedged to $5.25 per Mcf. Nick, your comments on the operations.

Thanks, Bill. Bill gave you the financial highlights for the quarter and for 2011. I'd like to give you some additional operational details. As Bill mentioned, and our press release indicates, our coal division had a record 2011 in many ways. We had very successful year in the consistency of our production and operational performance throughout the year. We were able to deliver on our guidance by consistently overcoming the day-to-day challenges in the mining business. Our ability to hit our targets is a compliment to our operations team and shows our portfolio of mines allows us to overcome any one single mine's short-term production issues.

Coal costs for the year are best understood if we build them up from operating costs at the mines. Controllable operating costs for the year 2011 were up less than 5% from 2010. These are going to include components such as labor, projects, supplies, preparation charges, et cetera. This also adjusts for the higher realization impacts, the new water treatment project that we put online, and a higher percentage of the production in 2011 coming from the Buchanan and Shoemaker mines in 2010. DD&A was up $1 per ton year-on-year. That reflects the investments we made at the mines to improve safety, compliance, and productivity. And overhead, which will include everything from corporate staff to provisions for retiring healthcare and pension, that was up $1.44 per ton year-on-year. As Bill mentioned, we're starting 2012 with a renewed focus on costs.

Now turning to our gas division. And I'll begin on the gas division where I ended on the coal division, which is cost. We were successful driving down our fully loaded Marcellus gas costs during the year. For the fourth quarter, Marcellus all-in costs were $2.74 per Mcf, and we reported $3.10 per Mcf for all of 2011. We'll strive to be one of the lowest-cost producers in one of the lowest-cost basins in the country. But our Marcellus gas is not the only area where costs need attention. Our conventional and CBM all-in costs must also be reduced. So while we continue to target a $3 per Mcf cost structure for our Marcellus production, we also started a process to identify ways to get our CBM gas production below $3 per Mcf all-in as well.

Since shale and CBM comprise over 90% of our future capital expenditures on the gas segment, this bodes very well for the economic vitality of the gas division. We continue to derisk our Central Pennsylvania Marcellus acreage, and we posted EURs at the Hutchison pad of 4.9 Bcf. I'll point out these EURs are set on only two months worth of production data, and we're optimistic cautiously that as we get more production data, we could see those EURs move potentially higher. Barbour County, West Virginia results were solid, and the 5.3 Bcf EUR wells show that derisking has taken place in the Northern West Virginia Marcellus field.

The JVs we announced in 2011 are going to play a significant role in CONSOL's future. The shared expertise of Noble Energy, Hess Corporation, and CONSOL, that's going to help accelerate the economic development of the Marcellus and Utica shales. And it's also going to derisk the capital investment on behalf of our shareholders. We began 2011 with three rigs running, all of them in the Marcellus. Today we've got seven rigs running in the shales, six in the Marcellus, which are two in Central PA, two in Southwest PA, one in West Virginia, and one on the Noble Energy side of the Marcellus. And of course we've got one rig operating in the Utica, for seven again, total, in the shales.

I'd like to turn now to slide 7 through 10, and just summarize those. Our goals for 2012 as noted on slide 7, and supported by the well counts on slide 8, are to continue to take advantage of our world-class assets within the both coal and gas divisions. We'll also be exploring in order to derisk our Utica acreage, and we're going to continue to migrate our activity and capital towards the liquids and oil portion of our holdings. As you can see in the capital slide, our wet and liquids activity is now projected to be roughly half of our gas well count for 2012. And the first quarter shows the first step in the move towards liquids. Slide 9 shows you that we have been getting better results in the Marcellus, and we expect our results to continue to improve as we optimize drilling and completions, methods, and technologies. Between the 2008 and 2009 programs and 2010 and 2011 programs, you can (technical difficulty) on the graph. Obviously, our ultimate goal is not going to be just IPs, but more importantly, EURs. And as we indicated in our operations report two weeks ago, that's where the focus will be.

Additional detail on our revised capital plan for 2012, highlighted on slide 10. As Brett has mentioned numerous times, those of you know us well know that we respond to changing market conditions. Here's an indication of that change. You can see when compared with our January 17 capital release from a week or two ago, that we've already reduced capital spend by $130 million on the gas division and about $50 million on the coal division. In summary, our operations, combined with our marketing and finance efforts, has CONSOL entering 2012 in a very solid position, and for some marketing commentary, we're going to turn it over now to Bob Pusateri

Thanks, Nick. Reference through slide 11, despite the facing strong winds from the global marketplace, CONSOL managed to deliver very strong year-over-year sales volumes and revenues. Year-over-year, CONSOL increased its sales for low-vol coal by nearly 20% from 2010 volumes of 4.7 million tons. Average realized prices increased to $190 per ton from the level of $146 in 2010. CONSOL's high-vol sales improved by 90% to 4.8 million tons in 2011, and the average selling price improved $5 to $80 per ton. The majority of our success was measured by sales into Asia of 3.4 million tons, and roughly 800,000 tons came through South America. The export thermal market remains a large opportunity for CONSOL, given our access to several ports.

Moving on to slide 12, CONSOL remains highly contracted and less susceptible in the short term to recent price weakness. We believe prices for low-vol met coal may be at the bottom in the period of April through June. CONSOL's high-vol coal is holding up very well during the first quarter. Our firm position reflects five Cape-size vessels to Asia. As we look forward to US generators compliance with new regulatory challenges, we believe US coal-plant retirements will be more than offset by increasing generation at remaining plants, coupled along with increased exports. We believe thermal coal supply in Central Appalachia will decrease, ultimately supporting higher coal prices. Our success at expanding into new markets, both in the United States and abroad, has given CONSOL further upside in a difficult market environment. Brett, let me turn it back to you.

Thank you, Bob. As you can see, our format is a little different, but it's given a lot of information. That was our intent, to give you as much information to reset where our assets are, and our divisions are, against where the marketplace is. Our strong financial performance really is driven by a few key features. One is we're low cost in gas, and we're low-cost in coal. In any marketplace, we're going to have the margins. Our shareholders need to be aware of that. We also have a great location to produce it.

We have great assets on the ground, a good environment, well capitalized, and a lot of great people to get the job done to distribute coal on four continents or to distribute gas right at home here. Either one, we have the ability to do it. We now have two very powerful partners who've joined us on this great asset base to accelerate the value of these assets and move them forward to our shareholders as quickly as we can. We are a little disappointed that hasn't reflected in the share price as much as it should, but I think 2012, you'll see us push to get that done because we have to match our financial performance with our share-price growth.

The capital budget, you see a lot of flexibility based on these assets. We are flexible. We have the ability to maintain where we're at, and these projects we have, whether in gas or coal, are discretionary to us based on the rates of return that we look at versus the forward-looking markets. We have a great set of assets. We look at these against acquisitions, and you can see like our BMX Mine, we've chosen to put the money into a mine that'll probably one of the best projects in the United States, right now, in terms of low cost, high margin, and future markets that will last for 20 years.

If you go back two years ago and you look at the deal that we did with Dominion, and then brought our partners in last year, clearly, the gas division is on the move. We don't control gas prices, but we do control gas costs. Those costs will always be competitive. We'll grow this business and create huge amounts of financial value for our shareholders through this gas business. That, tied to the expansion on the coal side and our long-term roots in the coal business with our ability to go through Baltimore and distribute this coal on four continents, is a very powerful model. We think that should reflect in our share price as well.

With that, I'd like to turn it to questions.

All right, Tony, this is Brandon. We're going to try to keep the call today to an hour, so if we can get everyone to ask one question and one follow-up and then jump back into the queue, that'd be great. We can get to as many people as possible. (multiple speakers) follow-up questions.

Thank you, sir.

(Operator Instructions)

Shneur Gershuni, UBS.

Hi. Good morning, guys. My first question is on the natural gas side. I guess more of a confirmation, but your production estimate is unchanged for this year, despite the change in the gas CapEx. If you can confirm that it's basically taking off as wells you were planning on drilling towards the end of the year and that's impacting next year. And if you could also comment about where your 30-day IP booking rates are at these days and where you're booking Bcfs per well on the wells that you've drilled most recently?

Yes, Shneur, this issue really on the capital is exactly what you said it was, which is the capital cuts for 2012 on the gas segment were predominantly on the preparation work to get ready for the 2013 program. So, when you look at production guidance, 2012 is still in that 160 Bcf estimate that we provided. When you look at 2013, we previously wrote about 200 Bcf to 220 Bcf range. That's now 190 Bcf to 210 Bcf.

So, where you see the impact of reduced capital, reduced drilling, it's on the 2013 production guidance because as you said, being back-weighted towards 2012 on the work itself. The EURs in our different locations, they're outlined in our operational update that we put out last week, and we basically break it down for you by the different operating regions within the Marcellus.

So, you will see the recent EUR results for Central Pennsylvania, for Southwest Pennsylvania, and for Northern West Virginia. No results yet of course in Marshall County, where Noble is operating on our behalf with the partnership.

Great. And then just shifting to coal for a minute, you've talked often last year that Buchanan put up a great year. And so we understand that the production guidance for this year should be a little bit lower than it was for last year. But there's also pretty decent delta on the thermal coal side as well. Is that an active decision to sort of curtail a little bit, just given market conditions?

Or did you have an unrepeatable year there as well? Or is there a lot of longwall moves coming? If you can give us an idea of how that number could change throughout the year depending on how things shape up?

Well, we look at -- when we put our budgets together, we look at a bell-curve type prediction going forward of what we think we can on a good, solid budget. We put out is what we think we can do at very high level of availability and our ability to predict what's going to go on.

Now, we have a very productive mine, like we had at Buchanan last year, we can't really budget for exceptional performance, so we bring it back on the bell curve. We look at every mine that way. We look at it against what the geology we see, what we see pacing us, and what the markets are.

We try to attach the mine production to the cash flows and where we see the markets. So, you have the geology, the markets, and the planning gives us this plan that we reset every year in January.

Okay. Great. Thank you very much.

John Bridges, JPMorgan.

Yes, thanks. Congratulations on the results. On -- your crossover tons seem to be doing very well compared to some other stories about difficulties in selling this. Could you talk a little bit about how yours compares to other people's? And what you see the steel companies doing, as maybe they're seeing fresh on their sales prices?

John, in order to answer that question, I need to take you back to about the second half of 2009, when CONSOL began the process to brand its high-vol Bailey coal. At that time, the BMA price was around $210 SIP, approximately. We managed to break into the Asian market with Bailey coal at around 65% to 70% of that $210 number.

And then, in later 2010, the BMA price began to increase, but the Chinese refused to pay the higher prices for coals out of Australia. And CONSOL's Bailey coal stayed in the range of around $147 to $155 SIP, depending on vessel weights at that time. So today, John, we do not -- we did not ride the upside up with the BMA price. So therefore, we feel we do not have to ride the BMA price down.

We still are in the range of $145 to $155 SIP, and right now at this level, this represents the true intrinsic value that Bailey coal gives to the Chinese. It has great coking characteristics. The price has been stable. And granted, we have the ability to put these tons through our own ports, or use somebody else's, for that matter. So, on that basis, we've been successful, and that's what we're going forward with for 2012.

Okay. That's great. That was very helpful. And then this new high-ash product, high-ash, low-vol. Could you give us a bit information on that and what kind of price discount to the benchmark we can expect?

John, the high ash product is where CONSOL has been able to take a very low-ash product of roughly 5.5% dry ash and move it up the scale to somewhere between 9.25% to 9.5% dry ash. And we've been very successful at that.

Our operators have done a fine job, and off of the BMA price, and again, a lot depends on vessel weights to the particular country, but the discount is somewhere between 25% and 35%. But it allows us to put in each train, roughly 400 or so tons of material that would have normally have gone to the refuse impoundment.

And you probably read about three weeks ago, the Norfolk Southern announced the largest vessel ever to load out of Lambert's Point -- was loaded with plus 150,000-some metric tons. And that vessel went to Asia, and it contained -- every ton was a high-ash Buchanan product. So we're very proud of that, with something that we've been able to get done through CONSOL's marketing team as well as our partner, EXCOL.

Great color. Really appreciate it. Well done, guys.

Mitesh Thakkar, FBR.

Good morning, everybody, and great job on the quarter.

Thank you.

My first question is for Bob, kind of continuing on what the previous question was. Bob, how are you seeing the high-vol market shipping out? Because it looks like when you look at your 2011 number and you look at your 2012 number, that is a firm -- you are still optimistic about it, and pricing, a little bit color on that would be helpful too.

Sure. Certainly. Mitesh, right now, for the first quarter, CONSOL has scheduled five Cape-size vessels into China, and so we're very proud of that, given the economic environment that we see and in other parts of the world.

As we go through the balance of the year, we believe that we will have about the same amount of high-vol tons sold for 2012 as we did for 2011. And so, our total high-vol sales for 2011 was roughly 4.8 million tons. And we're actually right now forecasting a slight increase to that number. And we think we're successful for all of the reasons that I named when I answered John's question earlier, and that is mainly because -- it's the strength of the coal.

Yes.

And the fact that we've been able to work on our vessel rates, even though they've been all over the board. It's the fact that we own our own port, and I get asked this all the time, and I really believe that our success rate will continue all the way through 2012 even in a tough market, and we'll grow that not only in Asia, but we'll grow it in Brazil. We've grown it here in the United States, which a lot of people said that that would never happen.

Okay. Great. And my follow-up question is actually for Nick. On the gas side, first of all, I'd like to acknowledge that you're running -- you're doing a very good job and trying to balance interests of two separate types of investor base, one looking for growth, other looking for a more conservative balance sheet.

So, you reduced the growth curve a little bit but still are maintaining the end target in 2015. So when you look across your platform, and given where the gas prices are, what do you need to see to ramp up the curve from there?

What we know now -- first off, the drilling rate by region within the Marcellus will be driven by returns versus our cost of capital, and our partners shares that philosophy, and Noble Energy as well, which was one of the reasons we were excited about partnering with them. They have a similar capital allocation philosophy.

When you look at the Marcellus results to date across the sub regions, Southwest PA right now has greater returns at the current price deck that are well above our cost of capital. Okay, so from that standpoint we will continue to drill in Southwest PA and that's what this current updated plan contemplates and shows.

The other reasons like regions, like Central PA and Northern West Virginia, along with the Marshall County area that Noble will be operating in, where we really see sort of a switch back to increased drilling rates to be somewhere just around $3 to $3.50 an Mcf. That's where the returns, based on what we know today, will start to get back to returns that are well above our cost of capital. So $3.50 or so is sort of the demarcation line there were drilling and drilling rates may increase back to where they were prior.

Great. Thank you very much. Appreciate it.

Lucas Pipes, Brean Murray.

My first question is a follow-up on your prepared remarks where you mentioned you see met coal prices kind of bottoming in the second quarter. Could you provide us a little bit more detail on the analysis behind that or what you could see drive prices higher in the second half of the year?

Yes, Lucas. I think it's fairly simple. The numbers that I gave, we budgeted conservatively for our capital spending needs for 2012. And based on our track record, we hope that we will be able to beat these. But they're certainly dependent on the growth in Europe.

We also believe that the United States mills, while they are running extremely well, we're hoping that they will even increase their capacity over about the 73% level where they are today and get back to some of the levels that we saw in early 2011 and back as far as 2010.

So there's a whisper that things are improving in Europe, but it's certainly too early to bank on that. But as we look at our pricing, we think we see things improving, but I can tell you that when those prices improve, Lucas, we will adjust our numbers accordingly.

That's very helpful, thank you. On the thermal coal side, there were some numbers mentioned up to 85 million tons of coal being displaced. What is your analysis on the coal to gas switching at current met gas prices?

Lucas, the good thing about this is that everybody has a number for the gas -- the coal displacement relative to gas. Our number is probably in the range of 40 million to 50 million tons, and the bulk of this, as everyone knows, will be suffered in the Central Appalachian region to the tune of about 40%.

With that, we think PRB coal will see a loss of about 20% to 24% of their demand will go away, and that for us, in northern App, we only see this affecting us by around 6% to 8%. It's those smaller units, obviously, that are untouched with respect to technology that will go offline.

And CONSOL's coals have been for some time going to a large baseline units equipped with scrubbers and baghouses. So, we think that we will certainly be a winner throughout this next round of environmental challenges.

Thank you. That's very helpful.

Michael Dudas, Sterne, Agee.

Good morning, gentlemen. Thank you for the presentation. Very helpful. Brett, maybe one -- maybe this is for Brett and for Bill. Maybe you can highlight going into 2012, fairly well-hedged. You've adjusted your capital. What are the two key metrics or two key goals that you would like to see CONSOL achieve during 2012?

Clearly, we're going to watch the cash flow. We want to create a lot of cash. We have great assets to put that on, but we don't want to get out there using debt to expand in soft markets where we're not sure. But when we see a turn, we want to have the volumes that create a lot of value.

So one goal is to stay within cash flow and right on the edge of that, to expand and develop assets for our shareholders. And another big goal is always safety. We want to get safety as close to zero as we can get, and we're headed that way. So if you look at that cost structure, safety, and same with our cash flow, I gave you three, you asked for two.

I'm sure Bill had one of those, right, Bill?

That's right. The cash flow one.

I figured. Second question to follow-up, Brett, you indicated in your prepared remarks, and maybe Bob's, about how the US is going to offset some of the issues from regulatory pressures by prior utilization and exports. Are you feeling better or are you about feeling better about the ability of the US to meet the needs of European and Asian coal customers over the next few years? Do you think the industry has the capacity to do so and the willingness to meet those products into the far-away markets?

I think we're becoming a very strong swing supplier to Asia, and we always have been a very strong supplier to the Atlantic markets. So, when you look at the combination and our ability to move it, we have a well capitalized industry in the United States. The fastest-growing commodity worldwide is coal.

So, that gives us a very strong leg up. Being the low-cost producer, we can distribute this coal at very high margins from our well-capitalized position in the United States. So, with port facilities and expansion of port facilities that we're doing, we see long-term markets, as well as short-term opportunities.

Just quickly maybe for Nick on fracking environmental issues. Any thoughts, changes, sense that we get going through 2012 that that could maybe be an issue for the industry in general, CONSOL in particular? Thank you.

The issues there are numerous, as you know, and it continues to evolve. It will evolve on a federal as well as a state-by-state basis. I think the general conclusion across all of them that you look at is that the overall regulatory environment is building going to favor scale. It's going to favor entities that have the footprints and the economies of scale in their unit costs and services, et cetera, that can adjust and comply and go beyond compliance with those regulations versus those that won't be able to because of the cost impacts.

That's something that of course we're very comfortable with because of our footprint. And coupled on that, the other footprint that we've got the coal side within the same region. So, we think we're in very good position to not just comply with the current regulations, but be ready to comply for any future rules of the road, so to speak.

Great answer. Thank you.

Jim Rollyson, Raymond James.

Brett, maybe a follow-up on the answer you gave to Michael's first question. On the cash flow side, you guys have pretty much contended for a while that your cap spending would be within cash flow. And I assume that the initial budget of $1.7 billion was within cash flow, plus or minus the Noble payment.

Should we assume that the decline is mostly based on the weak gas market and returns because of that? And maybe you're actually looking to be a little bit of free cash flow positive this year now? Or does the crappy gas market also take down what your cash flow assumption was, and so you're just basically trimming that to fall back within cash flow?

Well, the crappy gas market takes down cash flow, because we do have some open positions there. We'll make the adjustments. I think you've got a good look at it when you look at the payments that we're getting from our partnerships and so forth.

That's why we're adjusting ourselves. We're also going to the highest rate of return projects. Nick's got all his people together and scrubbed all this down. And when we look at cash flows against opportunities, against future value they're going to create out of this drilling process, we're trying to match up big cash flows with 2013, 2014, and 2015 and in a slow spot. So we're really hitting into the sweet spots, staying with our cash flow, but adding great value to our shareholders for 2013, 2014, and 2015.

That's helpful. And, Nick, this may be a little premature, but looking at what you're doing drilling wise now, as you're maybe deemphasizing dry gas and starting to emphasize the liquids portion of the Marcellus and obviously ramping up in the Utica. Thoughts as to how your liquids contribution starts to show up over the next two or three years, and just as we think about the currently weak gas price, obviously the liquid benefits going to help. I know it's early, but maybe some color there?

The -- there's two phases to that, when we look at the liquids contribution. One will be the component that comes from the Marcellus and through the Noble joint venture. We're much more confident of that. Don't view it as much as exploration or even delineation. And that will start to appear towards that backend of this year as well as in a major more significantly in 2013 and beyond. So that's one component shorter term and higher confidence.

The second component is the Utica, of course. And we still view the Utica, as well as Hess, as more in the exploration phase. We will learn quite a bit about the between seismic and exploratory drilling between the two parties over the course of 2012, and really over the course of the first two-thirds of 2012.

And that impact and when that timing will be has yet to be determined. So, that's how we look at the liquids from those two components. One is more determinable at this point. You'll start seeing it late 2012, early 2013. The other side, let's see what these Utica results indicate across the 200,000 acres, and we'll go from there in terms what that means in the timing.

Helpful. Thanks, guys.

Brett Leavy, Jefferies & Co.

Hey, guys. Can you talk about how the current price environment is impacting your plans for equipment moves, longwall moves, that kind of thing? And then also talk a little bit about whether or not that's going to impact the timing of any infrastructure, gathering systems, or anything else like that that you might be putting up around your shale plays?

Just trying to kind of get a sense as to whether or not only overall CapEx, but timing of projects this year and whether or not you sequenced it a little bit based on your level of optimism about pricing?

The capital budget that you've seen now that's been released today does reflect all those timing issues that you put out, specifically on the gas side. It really is a gas issue more than anything else. So, drilling gets deferred because of the gas-price environment, there's going to be a certain component of capital in the infrastructure side for gathering, processing compression that also gets deferred with it. So yes, you see that.

That reflects itself in the capital budget as well the production guidance that we've updated specifically for 2013, where the change was. On the coal side, basically what we've done there is we've looked more at the efficiency expansion projects at existing mine locations, and that's where we came up with the deferrals or the reductions. So from things like longwall moves and the major infrastructure projects like the Overland Bell project at Enlow Fork, it's still on the schedule that was set in 2011. No changes there.

Is it fair to say that CapEx schedule will be backend loaded?

No. The CapEx schedule, other than the drilling changes, as I said, on the coal side, the $40 million-some-odd of reductions were more on various smaller efficiency expansion projects at already operating coal mines. On the gas side, the capital reductions will probably be more backend-loaded in 2012 because of the focus being on the 2013 program, where we made the reductions in capital in 2012.

Thanks very much, guys.

Thank you.

Kuni Chen, CRT Capital Group.

Hi. Good day, everybody. Just a question on the cost side, I know you're kind of going through the process right now of looking at your cost structure in coal and how you can improve going forward. Can you just, in a general sense, talk about some of the cost buckets that you're going to attack for the year ahead?

There's a couple of different ones, and it's how we described the cost results for 2011, where we build it up. The first component of course in the field operating costs. There's two big issues or components there.

One is the commodities and the consumables that we use across our operations. 2011 was a pretty challenging year on inflation for many of those components, and we expect 2012 to be more potential for some upside and at least the reduction in the inflation rate that we've seen in 2011.

Labor of course is the other, and that's more of a fixed item. So, I feel pretty good about how we can perform in 2012 on the operating fuel costs versus 2011. The components past that, DD&A should be relatively stable compared to what we saw in 2011 on a per-ton basis when you look at our capital program.

And then there's the overhead and provisions. That's going to be a major area of focus for us in 2012, not because they got out of control by any stretch, but because we were ramping up for growth, growth on the coal and gas side. The world has changed the past 30 to 60 days. We need to change those plans with it.

Okay. Great. And just as a follow-up on the Amonate mine, can you just talk about where we are there, and kind of your ramp-up plans, if there's been any change or push out there?

The Amonate complex is ready to go pending two provisional approvals from MSHA and the agencies. We're working on trying to get those approvals that has, but we're hoping to have that product up and running first of the year.

It's been delayed because of those approvals, but from an equipment standpoint, a workforce standpoint, infrastructure, they are ready to go, and our plans are to proceed.

Sure. Also, Tony, from a marketing standpoint, we have managed to stir up a great deal of interest in purchasing that coal, both here in the United States, as well as abroad.

Great. Thank you.

Andre Benjamin, Goldman Sachs.

Good morning. I was hoping for us to spend a little time in the Utica, see if you can give us a little bit more color on your plans to drill, I believe it was 22 wells. We've seen some others' maps, but it if you can remind us how much of your acreage you consider to be in the oil versus liquids-rich windows and how much of it you plan to test in 2012?

The current plans for 2012 in the Utica, what we have ongoing now is we do have obviously, as we said earlier, a rig operating there that we are operating, CONSOL Energy. That well should be completed sometime around mid-April. That's been pushed back a bit. That well was in the process of being drilled at year-end last year and the start of this year.

The reason that's been pushed back is that we're doing additional what I'll call science and coring on that well to get additional information. So first well result from our position should come in sometime around April. You look at the year, it is 16 wells in total as you've -- sorry, 22 gross wells as you've laid out. 16 of those are going to be drilled by CONSOL.

We're basically going to be operating in counties like Tuscarawas, Noble, those counties within the 200,000 acre footprint. Six of the gross wells will be drilled by Hess. Hess is going to be operating in effectively Guernsey, Jefferson, Belmont, and I believe, Harrison counties.

On the oil, to dry split, our best estimate at this point is still about a 50/50 split between the 200,000 or so acres. A lot will be learned as those 22 gross wells start to come on with our production data. So, as I said, 2012 can be a very active year on the Utica in terms of the results that we see and what it means moving forward.

Thank you. That's helpful. And I guess, just to shift a little bit south from there on the West Virginia portion of Marcellus, I know you have one rig running in Barbour County. Where do you plan to drill throughout the rest of 2012? And are you trying anything different now versus your first few wells? And any views on what's going on with the EURs and cost assumptions across the acreage?

The Marcellus continues to be refined and optimized. You can see the specific EUR results by region within the Marcellus in our operations update. You are correct. We've got -- in West Virginia, we are operating one rig in Barbour. Noble is operating a rig in Marshall.

So, if you look at West Virginia overall from a JV total perspective, there's two rigs there. And then there will be for additional rigs in Pennsylvania, two in Central Pennsylvania, up around Westmoreland, Indiana, and two in Southwest Pennsylvania. All four of those CONSOL Energy will operate. So, six rigs in the Marcellus, five of them by us. One of those five is in Northern West Virginia, one operated by Noble in West Virginia.

Around West Virginia, are you planning to just stay in Barbour? Or are you planning to move around and test some more of your acreage other places?

Right now, we're big on, as you know, drilling and hooking up those wells as soon as we can because of the rate of return implications, so most of our drilling and focus in Northern West Virginia will be Barbour rupture.

Thank you.

Brandon Blossman, Tudor, Pickering, & Holt.

Good morning, gentlemen. Let's see. How about exports? Your guidance is down a little year-over-year for 2012. What overall is changing there on your expectations? And is there any mix-shift change versus 2011?

Brandon, as we look at 2012, and the month -- or the year -- is only 27 days old. Our crystal ball is somewhat murky with respect to the demand that's going to be out there. As we put in the release, overall, CONSOL's roughly about 90% contracted for the year. That 6 million tons of that is unsold, about 40% some of that is tons that we will sell on a quarterly basis into Asia.

There is also about 1.5 million in addition to that number that represents a sale of Buchanan coal that will take place, just a matter of pricing the coal. So, when we look at comparison of 2012 over 2011, the amount of coal may shift from steam to high-vol and maybe even back to steam, but it will not be that drastic. So, we're expecting the same kinds of results.

Okay. That's useful color. And kind of staying on the same theme, 2012 sales expectations. Can you provide any more detail around kind of the pieces that moved quarter over quarter on 2012 low-vol sales? Looks like a nice increment up at a very nice price, but it sounds like there's some moving pieces behind that.

Well, for the first quarter, obviously, a lot of those rates were negotiated this time last year for the fiscal year, which begins April 1 through March 31. So there is some enjoyment of higher rates in the first quarter. Our prediction is that based on Buchanan producing between the range that we gave you on page 5, I think it is, in the release, we believe that our Buchanan low-vol ton sales will be strong. We will end the -- end 2012 with about the same beginning inventory of roughly 200,000 tons that we started the year with.

I mean the market for any type of coal overseas right now, especially metallurgical coal, has slowed down. We believe that China will come back. There are signs that the Chinese government is already starting to release the necessary funds in order to be able to stabilize the economy by holding down inflation.

As you well know, the government of China is going to change here this October, and in recent years when this has happened, there's always been a smooth transition. So, we see the government throwing perhaps even slightly more money into the Chinese economy, which will allow us to be able to perform.

And a big part of this is vessel rates. As we look forward and try to get our arms around these vessel rates, vessel rates are broken down into three categories. The first category, the transatlantic rates, they've fallen over the last three months. The US East Coast to Rotterdam today is roughly approximately $14. And that's down from about $16, $18 three months ago.

The Pacific rates are at historic lows. Unfortunately, CONSOL doesn't have anything that loads in the Pacific and discharges in the Pacific, but these rates, as I said, are low. Today, those rates are trading at about $5,000 to $10,000 per day, and that's well below their costs.

And then when we look at the meat of it, the rates that are most important to us, what's commonly referred to as the front-haul rates, these are vessels that load in the Atlantic and discharge in the Pacific. They're impacted by high vessel fuel bunkering. And it's up about $6, but the market is down $6. So this is flat.

So this coupled with rail rates, we measure it all the time. We believe, as we were in 2010 and 2011, that we'll be successful in our negotiations going forward and this will add to a healthy margin.

Great. Super color. Appreciate it.

Meredith Bandy, BMO Capital Markets.

Hey, good morning, guys. Thanks for taking the question. I wondered on Amonate -- you've got that coming on soon, I guess.

Yes.

And how should we think about the pricing for that coal?

Sure. Meredith, we have lots of interest for this coal. This coal has been around since the 1940s. So, most of the major steel makers have used this coal from one time to -- or another. It will become -- at least we hope it will become -- a major part of blend for the steel makers, and so we're projecting that even with the climate that we have today, we're projecting a price in the $140 to $150 range for the first half and maybe $10 higher in the second half of the year as the economy expands.

Okay. Great.

And that's at the mine, by the way.

At the mine. Short term at the mine. Okay. And then on BMX, I know you gave us that new 2014 guidance, and there's a little bump there. So I assume that is BMX coming online?

Correct.

So is BMX than going to be sort of just a quarter high-vol and three-quarters thermal? Am I reading that right?

Well, the good thing about BMX is that it can be whatever we want it to be to go to the highest market possible. It can be 100% steam coal, should the domestic steam coal accept it, or it could go export. Export is a great thermal coal. Or it can be accepted around the world as a high-vol crossover ton.

We take the output of BMX blended with the output of the other two mines in the complex, five reliable longwalls producing nearly 27 million tons, and we'll move those tons, Meredith, around the world to be able to fulfill as many markets as we can at the highest prices possible.

I guess it would called then a true crossover. And can you give us any idea if you have a real crossover coal like that, what are the specs on that coal?

Well, as a thermal steam coal in the United States, it's going to go to a large base-loaded plant that probably is equipped with a scrubber. So the sulfur range that is to 2.5% to 2.75% dry, it has no problem going into those scrubbers. And in fact, it's a benefit because of its lower sulfur, it reduces the scrubbing cost as well as the disposal cost on ash because it -- the product is right under 8% ash.

As a thermal coal, it also enjoys the same benefits going overseas. It's low sulfur and it's low ash, and it travels well because it's high BTU. On the metallurgical side, it has the same characteristics as the other two coal mines, and its sulfur will remain at the 2% dry level. So, all of that flexibility coupled with CONSOL's Baltimore terminal will allow us to meet world benefits.

Okay. Thank you.

Dave Gagliano, Barclays Capital.

Hi. Thanks for taking the question. I just have one quick question on -- In the press release I did notice you had 7 million tons collared of thermal sold forward in 2014 with a ceiling of $60.13. I'm wondering when you sign that deal and if there are more of those being signed now.

David, I'll answer the second part of that first. There are no more contracts being signed with a collar. Those contracts that are in there for 2014 are for one major utility that has a deal with us that I believe -- and I'll have to check on this, David, but I believe it goes out through 2014, and that's the last year of it. So the numbers that we have in there right now are reflective of the current price, and assuming some market price for those years and understanding that the collar either up or down won't let us go above -- if the market is rampant and the price goes to $200, we will not be able to enjoy that price on those tons.

Okay. Fair enough. You mentioned in the prepared remarks the export thermal market, obviously, is still a significant opportunity. I'm wondering, what API 2 price do you need for it to become economic to export thermal given current US prices, freight rates, et cetera?

You know what? The API 2 price is really misleading. It's a published price, but then there are subtractions from that based on how hard a particular producer wants to meet that market. So for instance, today, if the number is $102, it's rumored that there are coal bases out there that are willing to discount as much as $35 off of that number in order to get the business. So, it's hard for me to answer your question with an emphatic number.

But I can tell you we track the possibility to put steam coal into Europe, Eastern Europe, China, India, Korea, Japan. And we update these numbers on a pretty much a daily basis. And so, we're always watching that coupled with vessel rates.

So, right now, given our cost system, CONSOL could get into these markets. However, we have our coal sold other places at higher margins. So, as this balancing act takes place, we'll continue to look for the best suitable market for us.

Okay. Let me ask the question a different way then, I guess. Based on the data that you're tracking, how wide is the spread right now? How much -- presumably it's not -- you can make more money in the US, I guess, rather than exporting it at the moment. And how high do international prices need to go relative to where they are now, say European prices relative to where they are now based on what you see?

Sure. I'll tell you this. Given today's market, if you just took the API 2 index and you had a discount on that number of, say, $15, that number today is roughly $50.50 a ton for a Northern App coal going into Korea.

Okay. All right. That's helpful. And just the last clarification question, the estimated price ranges for your unpriced volumes for 2012. I just want to make sure, are those ranges, your view on where prices are going to settle in, or are they were you think you can sell your coal as of today, or is it both?

It's both.

It's both.

It has to be both. Again, we sell into a world market. And so there's a lot of factors that we cannot control that we have to live with. But as that market changes, we'll change with it, as well. We have a cost structure that allows us to do that.

So, can you sell your coal at those prices today? That are in this --?

Yes, we can.

Okay. All right. Perfect. Thanks for the answers.

Yes, sir.

Tony, this is Brandon. We've run over on our allotment. So if -- I'll just say thanks, everyone, for joining us today. We clearly appreciate your interest in CONSOL Energy. We look forward to updating you on our first-quarter conference call at the end of April. And Tony, if you could go ahead and give -- please give the replay information, we'll sign off.

Thank you, sir. And ladies and gentlemen, this conference call will be available for replay after 12.30 PM Eastern Time today, running through February 2, 2012 at midnight. You may access the AT&T teleconference replay system at any time by dialing 800-475-6701 and entering the access code 231993. International participants may dial 320-365-3844. Once again, those phone numbers are 800-475-6701 and 320-365-3844, using the access code of 231993. That does conclude your conference for today. We do thank you for your participation and for using AT&T's Executive TeleConference. You may now disconnect.