CNX Resources Corp (CNX) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the CONSOL Energy's first quarter 2012 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. Dan Zajdel. Please go ahead, sir.

Thank you, John. I would like to welcome everyone to CONSOL Energy's first quarter conference call. We have in the room today Brett Harvey, our Chairman and CEO, Nicholas DeIuliis, our President, Bill Lyons, our Chief Financial Officer, Bob Pusateri, our Executive Vice President of Sales, Marketing and Transportation, as well as David Connie, our Vice President of Finance.

Today, we will be discussing our first quarter results. Obviously, any Forward-looking statements we make, or 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 our previous SEC filings. We will also have slides that I should make you aware of. We will be referring to our slides which you can find on our website. We will be referring to those off and on today.

With that, let me start the call with Brett Harvey. Brett?

Thank you, Dan. It is good to be with you all again and talk about CONSOL Energy's quarter, as well as how we see the energy market futures going forward. CONSOL Energy has a portfolio of assets that no stand-alone coal company or gas company can match. Having this portfolio enables us to allocate labor and capital to develop these most valuable assets in a timely manner for our shareholders. So on both coal and gas, we continue to invest in the most profitable markets. And thermal coal and met coal and high vol met coal, that means sell into a very expanding global market. All three of CONSOL's coal expansion projects are geared, at least in part, to serve these global markets.

The Amonate Project that is now in operation is a mid-vol project, and different than low-vol projects in a different marketplace. The Baltimore Terminal Expansion is valuable in terms of expanding our coal into the world markets. Our BMX Project is also a very low cost, high volume mine that will expand into the world markets. In gas, we've already moved twice away from the dry shale gas areas, and towards liquids rich areas and the oil windows that we see. We know that energy markets are soft now due to the very warm record winter, the continued weak economy, and the demand for power continues to lag. In some cases, clear back -- from some customers, clear back to the demand of 2007. We have decade low natural gas prices, but what we do know is all this will change. Everybody knows this.

We have all begun to trim our capital budgets in response to where the markets are today. We also idled two longwall's in response to pricing issues. Energy markets have always been very volatile. My challenge as a CEO is to manage the downturn in such a way that we don't miss the up-cycle when it begins, especially off powerful assets like CONSOL has. Already, we're starting to see signs that the low-vol coal market has bottomed. This is consistent with what we said during the January earnings call. And while I'm not ready to call about them in the thermal coal or gas markets, production cuts and reduced drilling, mostly by our peers, will eventually bring the market back in balance. I will talk later about natural gas.

In the meantime, CONSOL Energy should fair better than most of our peers, due to our having nearly sold-out position in thermal coals for 2012. Even though they have been pushed back, that value is still in place, having one-half of our 2012 gas production hedged at 525, and having the strongest balance sheet of any of our coal or gas peers. CONSOL will emerge from this downturn stronger than its peers as long as we can continue to operate safely and efficiently to keep our license. Marketing astutely across the globe is very important to us, and we need to prudently invest and be ready for the up-cycle. Now, let's look into the details of the last quarter and I will turn it over to Bill right now.

Thank you, Brad, and good morning to everyone. As have you seen in our Press Release in slide number 6, CONSOL Energy posted solid operational and financial results in the quarter beset by record unseasonable weather, a continued weak economy, and a decade low level of natural gas prices. One of the lessons learned from the quarter is the in escape ability of risk. The three years of risk I just mentioned, the weather, the economy and natural gas prices, are areas of risk CONSOL Energy can neither influence nor control. Risk cannot be avoided, but it can be mitigated, and the main way that CONSOL Energy mitigates these risks is through the strength of our balance sheet. We have the scale and the financial means to absorb the inevitable cyclical downturns that occur in the energy industry.

We entered the quarter having liquidity of $2.7 billion, including cash of nearly $400 million. We entered the quarter having nearly all of our thermal coal sold, and having nearly one-half of our gas production hedged, at $5.25 per Mcf. It is having this financial strength that has enabled us to idle the longwall Buchanan because we are not satisfied with the prices we are offered for this premium low-vol coal. And also idled the longwall at Blacksville because of customer push-backs due to lack of electrical generation. In both of these instances, we did not shut down the coal mine, but we invested time and money in major maintenance and development projects. These projects will enable the mines to run more efficiently and effectively when we bring both the longwall's back online on May 1. If CONSOL were in a weakened financial state, we might have had to continue to run the longwalls at a high opportunity cost solely to generate cash. Our financial strength is a key differentiating factor for CONSOL Energy.

Let me discuss our quarter's financial quarter. Net income was $97 million or $0.42 per diluted share for the first quarter of 2012, compared to $192 million or $0.84 per diluted share for the first quarter of 2011. Total sales revenue for the first quarter of 2012 was $1.4 billion, or just under last year's first quarter. We generated operating cash flow of $229 million, and EBITDA of $324 million. Again, both were below last year's levels, due to factors that I have already cited. In CapEx, we invested $306 million in our businesses. The shortfall between operating cash flow and CapEx was the main reason for our $88 million decrease in cash for the quarter. Our budget and capital spending for 2012 remains under review, due to current business risks, particularly natural gas prices. Our goal to remain neutral -- cash neutral for 2012, may prove to be more challenging than it looked at the beginning of the year.

We're paying close attention to unit costs. And coal, while unit costs were higher than the year earlier quarter, I think it is important to note that they were actually down $0.37 per ton from the December 2011 quarter, after excluding the effects of the longwall idling's in March. During the remainder of 2012, we will place special focus on cost control. You saw from our release that we have taken a number of steps to keep our full year 2012 administrative and support service expenses flat with that of 2011 levels. And, our supply chain management group has met with all our major vendors to jointly identify cost saving opportunities. In gas, unit cost declined from the year earlier quarter.

On the coal side, for the first quarter of 2012, we produced 15.7 million tons, which was the midpoint of our guidance range. We feel this is a remarkable achievement since we idled two longwall's for a combined seven weeks during the quarter. Idling the Buchanan longwall, of course, increased low-vol unit cost during the quarter, and idling the Blacksville longwall similarly increased thermal costs during the quarter. In the high-vol segments, costs were higher because of the mix of mines issue, which we detail in our release.

Now, let me turn to our E&P Operations. The gas division produced 37.7 Bcf, and reported net income of $7.5 million for the first quarter. This was about one-half of what we earned in the year earlier quarter. Lower unit costs and higher production volumes could not overcome the effect of sharply lower prices. So far in 2012, we have twice reduced our capital budget in our gas division, but still are focusing on liquids-rich areas of the Utica and Marcellus shales. In the dry gas area of the Marcellus shale, we are drilling mostly on 100% net revenue interest acreage, which continues to have positive returns, even in this lower gas price environment. In summary, we believe that CONSOL Energy continues to be one of the premiere names in the energy space, as we continue to combine safe, low cost efficient operations with worldwide marketing to generate solid shareholder returns. And we continue to watch over our financial resources while investing for the long term in both coal and gas, where we have tremendous assets.

With that, let me turn it over to Nick.

Before we review the quarter operationally, we wanted to highlight a safety milestone for everyone. Since 2006, this company has now invested over $1 billion cumulatively on safety compliance efforts. So we've clearly put our money where our mouth is on our top values of safety and compliance. We've come a very long way, we still have a ways to go, towards absolute zero. But our safety events -- investments provided you, the shareholder, with increased reliability, and that's going to translate directly into better margins because customers also pay, of course, to have CONSOL as a more reliable supplier. Our mines and gas operations ran well during the quarter. We issued a very detailed operations release a couple of weeks ago that laid out the milestones and achievements.

But just to touch on a few of the highlights. In coal, we produced at the midpoint of our production guidance range, and that was despite not having two longwall's available for a combined seven weeks during the quarter. It's even more impressive when you consider that we didn't run our longwall's on most Saturdays to accomplish that. So we were able to spend those Saturdays working on continuous improvement, doing things like adding lead days and strengthening seals. All of these tasks, of course, are going help us to safely and efficiently produce coal after May 1, when our two longwall's restart. On the gas side, only the idling Buchanan longwall kept us from beating the high end of the production guidance range, which of course is due to the deferred gas production associated with the mining process. We achieved our first production from our Amonate mining complex, and Td'd our first Utica shale well in [Hoffman] Ohio.

Now, that's behind us, let's review where we are currently. And we will start with the restart of the Blacksville /Buchanan longwall's because those are obviously important, but the restart decisions were based on marketing considerations first and foremost so Bob Pusateri will address that in a couple of minutes. From an operational perspective, we're hopeful we will have results on the Utica shale well in Tuscarawas County, Ohio, in the next month or so. We know there is a lot of investor interest, but we're not just ready to discuss results today. In the Marcellus, our JV partner Noble is completing the first five well pad in Marshall County, West Virginia. And we should, or could, have results to discuss in June. This of course will be our first foray into the liquids rich area of the play, where we've got 39 wells planned between ourselves and our joint venture partner for 2012.

In the dry gas windows in Marcellus, we've received many questions about the economics of drilling, and the low gas price environment. As Brett said, we're mindful, potentially getting whip sawed by laying down rigs and then seeing the gas prices rebound. But our 2012 program in the dry gas area has attributes that you may not be aware of, and I just want to run through a few of those. First we are increasing our lateral lengths when you compare 2012 to prior years. In fact, our God pad in central Pennsylvania, we just drilled four lateral's that are each over 8,000 foot long. Across our entire 2012 program we expect lateral's to average around 5000 foot perch to perch, so those lateral's are growing.

Second thing, we're also emphasizing pad drilling more. We can do this because most of our acreage is either owned or held by production. Across our 2012 program, we should average about four wells per pad. Third, we're getting our completed wells into the sales meter in a timely fashion, so that by the end of this quarter we expect to have all or nearly all of our 2011 wells completed and online. This goes back to not having to drill to hold acreage. And we would encourage you to compare this to peers to assess how many 2011 wells remain to be turned online out there. Fourth item, we're also drilling more 100% NRI wells, as Bill mentioned, especially in Green County. And fifth and finally, don't forget that our finding costs of the drill bit last year came in at under $0.50 per Mcf, which is among the industry's lowest.

So you add all of these attributes up, it able enables us to enhance our well economics in the dry gas window in the Marcellus. That, of course, is especially important during times of low gas prices. As Brett said, though, during the remainder of 2012 across all of our home gas projects, we are going to continue to evaluate our level of capital spending in response to changing macro conditions.

With that, I am going to turn it over now to Bob Pusateri for an update on our marketing efforts.

Thanks, Nick. Despite several challenging factors during the first quarter, CONSOL finished with a strong sales performance from all of its product statements. The domestic thermal market was severely impacted by mild winter weather, low natural gas prices, in an economy that could not get lasting traction. Our order book was full for the quarter when the year began. But as generators started to push back tons, a number of contracts were reopened to preserve the contracted value. To date, value has been preserved in the form of buybacks, shipment schedules weighted towards the second half of the year, and delayed shipments into years 2013 and 2014. As the year proceeds, we expect more normalized shipments from our domestic customers based on normal summer burn.

Our Blacksville mine is returning to work on the strength of thermal sales to China and India. CONSOL continues to leverage its export capabilities through our Baltimore terminal. Shipments for the rest of the quarter should be at record levels. We are expecting to expand our thermal sales volume in the second quarter to equal 1.7 million tons. Thermal sales for the quarter will go to Asia, Europe, Central and South America. We are expecting an increase in export thermal coal pricing for the second half of 2012, due to monetary policy easing, and the need to restock inventories. Chinese and Indian buyers have aggressively re-entered the market beginning in mid March. Since that time, buyers in both countries have purchased significant quantities of steam coal for the balance of 2012.

In order for CONSOL to meet the challenge of ensuring a competitive supply chain to customers in Asia, CONSOL, in concert with its partner, Xcoal, will continue to top off vessels off the coast of Nova Scotia. This permits our customers to realize the benefit of lower ocean freight, while reducing the delivered cost of coal. Our low-vol met shipments will resume now that the Cannon mine is returning to normal production. We are forecasting between 700,000 and 900,000 tons of shipments for the second quarter. Since we are currently in negotiations with several customers at this time, we are unable to comment on the price of our unsold tons. We are seeing signs of increasing demand for our premium low-vol coal for the second half of the year. Spot prices for May alone are up $8 to $10 a metric ton above the April/June quarterly benchmark price.

Our unsold position for the second half of the year currently stands between 1.2 million and 1.6 million tons. We continue to have strong demand for our high-vol Bailey coal in all parts of the globe. China's steel production remains solid. We believe we will be successful in selling two Cape size vessels of our high-vol Bailey coal per month to Asia for the balance of the year. In total, high-vol met sales for the quarter will be between 1.2 million and 1.3 million tons.

Now, turning to the gas side of the business, CONSOL has placed financial hedges on its gas production for 2012. 77 Bcf is hedged, at an Mcf equivalent price of $5.25. For 2013, 51 Bcf is hedged at a price of $5.06. The 2014, we have hedged 44 B's, hedged at $5.20 in Mcf.

Now, let me turn it back to you, Brett.

Before I sum up, I want to touch on the current natural gas prices and provide some perspective from where we are at. We did not expand our Marcellus position for a short-term price jump, but more for the long term value extraction of only the large gas fields directly on the same footprint as our coal position. While we do not like the current price, note that the gas will find a solid footing based on fundamentals because of our low cost structure. Looking long-term, we expect natural gas prices to rise to more normal level, and then expect to see a rise in demand for gas on the domestic front.

Let's talk about power generation on demand. Power generation over the next several years, we expect that to expand dramatically. In fact, every CEO that I talk to on the utility or generation side expects the next round of generation to be natural gas. That is a real positive for CONSOL, and I believe we will see that. The chemical industry itself, there has been a lot of investment. Shale gas could top $16 billion, and that puts the US a lot more competitive on the gas side, as the Middle Eastern and Asian people use oil as feed stock versus natural gas. That gives the US the advantage, we think that will grow very rapidly. Also on the fertilizer front, we lost a significant amount of domestic fertilizer based on natural gas prices and feed stock in the past.

The USDA forecasts 2012 and 2013 corn plantings to rise to nearly 96 million acres, which will be the largest in history. And we know that needs fertilizer and that low cost, high value gas is going to be part of that growth industry. You talk about ethylene, we're looking at a renaissance there. We've seen Dow and Shell announce crackers, we know other people are looking into the same issues, where the gas is. So we see that as a real growth issue, and we see coal as a growth issue worldwide. We also see gas being used as a primary form of transportation on fleet vehicles and so forth going forward. Now, this all takes time, but with a great asset like we have held by production, time is on our side. I feel good about that.

We had a solid quarter, despite the macro environment. We will continue to focus on reducing capital and costs to optimize our low cost position. We have a strong balance sheet and we have a lot of liquidity. We have some key areas where we see real value coming on in the Utica, as well as the wet Marcellus side and the Baltimore expansion, to move more coal offshore. As the US chooses gas, we will sell gas to the United States markets. As the world chooses coal and gas, we will sell the world coal and gas. We have a strong position with our asset base. This is what we're about, this is what we're going to do.

Now let's open it up for questions.

John, could you please instruct the callers on the procedures for dialing in for questions.

Certainly.

(Operator Instructions)

Jim Rollyson, Raymond James. Please go ahead.

Good morning, gentlemen. Brett, with the new guidance on low-vol coal of 4.1 to 4.2, you guys did 1 million tons in the first quarter, and obviously Buchanan is going to be idle for a month in the second quarter, but you are essentially implying about 1 million tons a quarter. I'm curious if that somewhat conservative for the second half of the year, just given your comments and some others recently about the improving outlook on the met side of things. Is that more conservatism and/or just waiting on pricing to improve before you would ramp that back up to the 1.3 to 1.5 type of numbers we saw last year?

That's a good question. I see it this way. We see those kind of markets and we see an improving market, and we saw very tight liquidity in terms of volume in the first quarter. If this thing cycles at all, we will show the discipline. So, I guess I would say that we are being somewhat conservative, but we're trying to match what we think we can sell at valuable prices to our shareholders.

Helpful. And on the thermal side, you have, I think mentioned in the press release, 5 million tons of domestic thermal that got deferred into later this year, and some into future years. Two questions around that. One, how much got pushed out of this year and into future years? And do you get some economic value from your customers by delaying it that far into the future?

Well, one of the things is to capture the economics of the contracts that were in place, but I will let Bob talk to you about the volume.

Jim, of that 5 million tons that we talked about in the press release, roughly 2 million of that 5 million is going to be moved into calendar years '13 and '14. And the value that we get for that is an increased price over the 2012 number, based on the change of a certain set of indexes for the most part. We have about another 500,000 tons of coal that is in that 5 million that we expect for the second half of the year that the generators will actually pick that up, and will receive that value in 2012.

We have ongoing negotiations with customers for about another 1.1 million tons of the 5 million. And then the remaining roughly 1.4 million of that, a number of those tons, Jim, was force majeured, or we have requirements contracts. And as their requirements were decreased due to lack of weather, and also low natural gas prices, we will just lose those tons for this calendar year.

Sure. Well, you've done a great job of being able to replace those volumes into the international markets, and actually bump up your thermal volumes on the export side. Just one question there. You've got thermal going into China, India, and other places, and it doesn't look like your overall pricing in the contracted status has changed dramatically. Just kind of curious, how the pricing net-backs for some of this export thermal compares to generally, and how you think that goes forward compared to what you had been doing domestically.

You know, Jim, the price for thermal coal into China and India is basically sold on a monthly basis, and it is truly a negotiated price. It is not the API 2 index adjusted, or the API 4, it is a face to face negotiation. And we have been able to do that and keep our prices high, because last year, when we started to see a downturn, we went into the vessel market and we locked up a strong volume of vessels at good prices, and now we're being able to take advantage of those.

And we have, as you saw, we have 1.7 million tons forecasted to go into the export thermal market, and that essentially is all new business for us. And we had to respond and respond quickly when we started to get as much push-back from our utility customers as we did in the first quarter.

Thank you very much.

Thank you, Jim.

Shneur Gershuni, UBS. Please go ahead.

Hi, good morning, everyone. My first question, and maybe this is directed at Bob, but I was wondering if we can sort of elaborate a little bit on the met contracting? You kind of implied $185 price. Can you give us some flavor with respect to when this was done?

Was it around the time of the distress cargo, before the recent uptick, and the height of the tension out there, or was this done a little bit later? And secondly, if you can also comment about whether you're at a high ash section in Buchanan that's forcing some discounting as well, too.

Sure. First, I will tell you in the quarter, in the first quarter, we had about one million tons of firm sales at about $189, and we reflected that in our release in January. With the exception of about 40,000 tons of this, all of those tons will be shipped in 2012. The balance was moved out from quarter one into later parts of the year. Unfortunately, we were still uncovered, and so we sold about 116,000 tons of this coal at basically lower prices.

And it accounts for, Shneur, about a $20 change in sales price. We will receive all of the value that we displayed in January later in the year, except for 40,000 tons. In addition to the 20,000 -- $20 per ton change in price, there was also an accounting adjustment for a change in inventory, which is roughly about $10 a ton. So, we had to adjust the inventory value down from -- we were forecasting about $180 some dollars, and we adjusted it down to around $142.

So, that makes up the difference between the $189 that you saw at the end of the first quarter, and the $157, I think, that we showed you in this release. A couple of things that I think I need to say, is that the $206 metric ton which was set by Tech, the US coals trade, the US low-vol coals trade to a discount of that benchmark price. As you well know, there is about 65 million tons of sea-born met coal that trades on a quarterly basis.

And I would say only about less than 20% of that 65 million tons actually trades at the posted BMA price. For the US coals, there is a difference in the coal properties, mainly in terms of CSR and wall pressure, and that accounts for what the discount is. So, if you've got 206, our metric price is somewhere about the $185 number, adjusted for quality, and that is where we see the market, the spot market, today for the second quarter.

We brought Buchanan back on the fact that five weeks ago, we started this -- we actually started to see liquidity in the market. We saw an uptick in prices, an uptick in demand, and while we're not crazy about some of the prices in the second quarter, the good thing is, Shneur, they're only there for the second quarter. And we have 1.2 million to 1.6 million tons to price in the second half of the year, and we will take advantage of that everywhere we can.

Given the effect that you feel that there is enough demand out there to restart Buchanan, do you think that that discount starts to tighten, as steel makers start to scramble if their inventories are too low and utilization rates continue to move up?

It very well could be. We're hoping that we see an increase in demand in the United States. As you know, the car manufacturing in the United States is almost at record levels, so we're hoping to sell additional tons domestically. We're waiting for Brazil to get their act together with respect to their currency.

Europe is a whole 'nother story, we could talk for the next half hour alone on just where we see Europe. But again, the market is a little cloudy, but believe me, it is a heck of a lot better than it was two months ago.

Great, and then one final question, for I guess for either for Brett or Nick, I was wondering if you could talk about export capacity. Last year you talked about a Phase I and then a Phase II expansion. You had green-lighted Phase I. I was wondering if you could talk about Phase II, especially BMX should start producing some tons fairly soon. Where you see your export capacity settling out once BMX comes online?

Right, you see we're expanding this year, we talked about that, and we are going to get all of the squeak out of what we are doing this year. And then we're looking at expansion beyond that at Baltimore, we're also looking with Xcoal, we've got some tons tied up across the bay with the CSX terminal. We're looking at how we optimize CONSOL Energy's position in all of this. And if you look at the total tons in export, we've got a little over 20% of all of the export tons tied up in our portfolio.

We've never lost any tons in terms of what we can move out of CONSOL, and we're trying to match our capital spending with our ability to move it through what we've already capitalized. So, we will be getting to you forward on the next move, but we're going to optimize what we've already done. And Bob has something to say about that, as well.

Shneur, I want to tell you, between Baltimore and the Chesapeake Bay terminal, there is roughly 24 million tons of throughput capacity in both of those terminals. CONSOL and its partner Xcoal controls about 18 million to 19 million of that 24 million. So, as Brett said, we are currently not restricted in our ability to be able to get volumes of coal offshore.

As the utility market longer term settles out with respect to some of the care and the Mac rules, and these units get shuddered in, we know that our emerging market is China and India, and we are ready to serve, make no doubt, we are ready to serve that market. We have the tools to do it, we have the cost structure to do it.

One other thought, we are actively planning to move this coal offshore as the markets expand. So, don't think we're only restricted to what we talked about, we've got plans to do other things. But we're not ready to talk about them yet.

Great. Thank you very much, guys.

Mitesh Thakkar, FBR Capital Markets. Please go ahead.

Good morning, gentlemen. My first question is for Bob. Bob, when we think about met coal pricing and the discount to the benchmark based on CSR and other properties which you just mentioned, can you just give us some color, how should we think about it going forward? Because to the best of my knowledge, we haven't heard this from Buchanan in the past.

I think it is an easy answer, Mitesh, it is when supply outstrips demand. When the buyers have the luxury of being able to choose the higher value coals, when those are available and they're available at reasonable prices, they're always going to choose the higher quality coals. It is only when demand outstrips supply that they will look at buying whatever coals are available to them, and buy them at the comparable prices.

You know, we expect that the BMA price for the next calendar quarter, July through September, to be in the range of say $220 to $225. And with that, we still believe that there will be more supply than demand, I mean it will almost be in balance, but it won't be. So, the US coals will still trade at a slight discount to that BMA price.

Whether it is $15 or $20, we just don't know yet. It depends on the timing, the timing of the purchase, the timing of the delivery. But all in all, CONSOL's Buchanan mine, with its cost structure, still returns a very strong margin.

Absolutely.

With those kinds of numbers.

And so is it fair to say that going forward, as we see the prices tighten up, the discount will shrink, but there will be some amount of discount. Or is it just a function of -- just a function of difference in quality, or is it a function of oversupply?

Without a doubt, Mitesh, as the demand increases the discounts certainly will shrink. We saw that in the first half of 2011, we saw weaker prices the second half. We think just the reverse is going to happen in 2012, where the prices were weak in the first half, and they will strengthen in the second half. So, we're hoping, as I said, spot prices in May alone are up $8 to $10, from the settlement of 2006, and we're going to continue to take advantage of that.

Both eastern railroads have come to the table. They've offered discounts to get both thermal and metallurgical coal to move in the second quarter. And we are hopeful that we will see those same types of discounts in the third and fourth quarter as well.

Okay, great. And just one question on the CapEx side. When you look at your total cash flow for the year, based on what you're guiding us in terms of contracting, how should we think about CapEx? Is there a likelihood that there could be some amount of additional capital spending, or about the cash flow generated?

Well we're always looking at our capital. Philosophically, we try to stay within our cash flow unless we see some very very high value opportunities. Right now we're trying to stay within our cash flow to keep the balance sheet strong. As we look at our cash flows quarter-to-quarter, you will see our CapEx adjust, and we always adjust to the highest rate of return projects.

So, I think that is an evolving thing. You are going to continue to see us do that. And right now, as Nick said in his piece, he is looking at capital all the time, coal versus gas, and you will see that evolve. And if the markets get tight, we will tighten it up. If they start to expand, we will develop these assets to meet the new market.

Okay, great. Thank you very much, I appreciate it.

Lucas pipes, Brean Murray, Carret. Please go ahead.

Good morning, gentlemen. Just a quick follow-up question on the met coal contract for Buchanan. When you reported the fourth quarter results, you had roughly 1.9 million tons contracted for 2012, at $180, $187 roughly. I think now we stand at 2.2 million tons at roughly $174, so it is just about a 300,000 ton increase in contracted volumes.

The contracted price declined pretty significantly, but I think you mentioned earlier that what wasn't shipped in the first quarter, that value we should see in the remainder of the year. So maybe if you could walk us through the different drivers there. I would really appreciate it.

Lucas, there is primarily one driver. There was an out of period adjustment, that -- for roughly 300,000 tons. That was, I believe, it was a quality adjustment that actually drove the price down, and you're seeing the effect of that quality adjustment in the numbers. And you did it on an implied pricing basis, and that is the problem. There's some in and outs, it is not an actual sale that actually drove that price down.

Great. As a quick follow-up, to stay on Buchanan, and when you -- now that you are going to restart Buchanan next week, when you take a step back and try to assess the situation, and the impact it had on the market, would you say it was a successful move all together?

Yes, I would say it is. We weren't trying to leave money on the table, we were trying to hold value for our shareholders. And by stopping the longwall and keeping the mine on hot idle, so to speak, we sent a signal to the -- that there are certain prices at which we want to get for this high value product, and we will bring it out of the ground when we had see the rising markets.

If you're pushing into an illiquid marketplace a very high value product and you build the inventory on the ground on your ledger of that inventory, all you do is extend the problem. And so we decided to protect the value for our shareholders, and I think that was very successful.

Thank you. And really quickly, what do you think are the implications for the costs for the remainder of the year? Now that you add 20 days ahead, essentially, with the continuous miners.

I think it will go right back to what we said we would do cost-wise for the mine for the year. And the other thing I think is interesting, if you look at the cost structure for the first quarter, with that mine idle, in the time it was idle, our cost structure is still lower than the marginal costs for our competition in the United States.

So with the longwall not running, you can see how effective at low cost we are with this longwall mine. So you will see our cost structure drop and I think we're in good shape there.

Lucas, this is Bill Lyons. As Brett said, idling the longwall Buchanan had a very significant impact on the costs, and if you look at our release, I think our costs at Buchanan were about $92 a ton. If we -- the impact of that long wall was like $17 a ton for the quarter. So, we would be down somewhere around $76 a ton, without the longwall idling. And as we increase our volumes, I think you can see that those costs will remain the same or go down.

Thank you very much, gentlemen.

David Lipschitz, CLSA. Please go ahead.

Two questions. One of your competitors to the south basically has been saying that they're getting benchmarks. So, why do they get benchmarks and you don't?

I think I know what you're talking about, David, and that was for a mid-vol coal that came from Canada, it was not their Alabama coal.

Okay. And my second question is, just in terms of you just said that the difference in pricing, and I'm assuming I'm reading correctly from the press release that it was a quality adjustment that you sold at $119, $120. What was wrong with the quality that you had to get such a lower pricing than normal?

We created a high ash market -- I'm sorry, we created a high ash product to sell into the Asian market. And that was the difference. We're putting a couple hundred tons of refuse material in every 10,000 ton train.

To help you understand this, the Buchanan prep plant can go anywhere from 5% ash to 9% ash, based on how we move it, what the freight rates are, what they want on the other side, how it can be blended with their own products, and so there was an adjustment. That's what he is talking about.

So, in the first quarter, there was $10 inventory, and what was quality?

There was $10 was -- yes, was the inventory adjustment. The rest of it was -- we moved roughly about 116,000 tons came out of the quarter, of which 40,000 of that was force majeured. We replaced that 116,000 with roughly 220,000 tons at lower prices. Those lower prices against the $189 that was in there, David, caused about a $20 per ton change in the price for the quarter.

That $20 plus the $10 inventory adjustment gives you the $30, or the difference between $189 and $157, thereabouts.

So just to be clear, Bob, there was no quality adjustment that we took in the first quarter. It was simply the tons went out at a different price than the replacement tons that came back in.

But the quality of some of the coal that was shipped in the quarter was high ash, versus our normal low ash product, therefore, resulting in a lower price.

Okay. I'm sorry, I'm sorry to go through this all, but my final question is, if we're still in an oversupply situation, why are we bringing it back? Is the price just good enough now, has the price moved enough in the last seven weeks that you're now comfortable with bringing it back online? Why bring it back?

Well, we're bringing it back because it is a low cost mine that's a high value. We see the liquidity in the market, we see the buyers are out there, we see the price rising. And we're going to -- and we're selling it quarter-by-quarter. We're back in the game with a low cost, high value product, just as we should be, plus, if we are going to pick up those deferred tons, we have to mine them.

And I'm sorry to keep it going but one more final question. In terms of -- is this discount thing going to continue because you're doing the higher ash product, or is that -- even if supply and demand getting better in the balance, or was there always go to be a discount there?

I think you're confusing the discount. That is at our option, we can put any quality from 5% to 9% out there we want, based on a return and value of the total delivered product. So that is really our call.

Okay, thanks.

John Bridges, JPMorgan. Please go ahead.

Good morning, Brett, everybody. Congratulations on getting organized with your customers again.

It has been a different market.

I just want to ask a bit of a general question. I'm just wondering where these $55, $57 tons are coming from in the spot market, and how long it is going to continue, because if it does, it is going to put downward pressure on contracts for next year, isn't it?

I think for us, John, we is have plans to continue this for the balance of the year. As we said in the release, we have 1.7 million tons of coal booked for the second quarter. We're hopeful that we can duplicate that in the second half of the year. So, our export volumes are continuing to grow. They like the fact that our coals are low in ash, and they are high BTU, they travel extremely well.

We've booked the vessel freights in order to allow this to happen. We have the capacity through CONSOL's terminal and others, and so we're going to -- we're really going to take advantage of this. We have broken into India for the first time in the first quarter. We've handled all of the credit issues that we stumbled over last year, we got through those. So John, we're excited about this now frontier for CONSOL, and we're going to grow this Business.

The Domestic business, I think it will shake itself out. We are fortunate, you know, our Domestic thermal coal is sold to scrub units, they're large units. We made that consideration a couple of years ago, to target those units, and right now it is paying for us. And yes, some of them may not be running around the clock because of gas or because of just pure lack of demand, but all of that changes. And we're excited about it, and we're going to continue to grow our Business.

Okay. And as a follow-up, with freight costs apparently beginning to move up, I hear you've got the ships to do it, but what about other exporters who are perhaps using the export marks with a safety valve. Do you see an issue with the apparent pickup in freight costs?

There is no question, as bunker fuel continues to go up, you will see export rates, shipping rates continue to rise. You will see numbers, John, in probably in the area of $39 to $42, $40 a ton, for a Capesize vessel. You might be able to find a spot vessel here and there, depending on where it is returning from, that maybe lower prices.

But Panamax vessels, those numbers are in the $44 to $46. We believe that we got ahead of the curve, based on the fact that we were selling high-vol met coal into Asia. We believed at the time we saw -- we thought we knew what was coming, so we went out and contracted a couple dozen of these vessels for the balance of the year. So, CONSOL is sitting in a really good position at this point in time.

I would not want to be a producer of the size of CONSOL and have to go into the market today and try and get vessel freight at reasonable amounts when you look at 2011.

Is that going to close the door on some of these low-priced exports?

I think it is going to make it very difficult, I really do.

Excellent. Well done, guys, good luck.

Brandon Blossman, Tudor, Pickering, Holt. Please go ahead.

Good morning, guys. Just to follow up on the thermal export story, a nice bright spot there, what is the posture of the rails right now, in terms of thermal exports?

I tell you what, Brandon, we were pleasantly surprised. Both Eastern railroads came to the party. They understood, as their domestic shipments started to drop off, they saw back as late as December, when the weather was not permitting for a build in inventory, they saw their loaded cars start to drop off.

So, I think the railroads have done a fine job in helping the US suppliers get their coals off the coast, I really do. We're hopeful that we will see a similar response in the second half of the year, but right now we are satisfied with what they've done.

Good news. And that will obviously be an interesting dynamic to watch on a go-forward basis. Shifting gears, CapEx, how much flexibility, both on the coal and the gas side, do you have to ramp down a '12 versus '13. Are you kind of fixed on '12 or do you have some flexibility downward?

We've got flexibility both directions. If the market tightens, we've got flexibility to bring some project that have been deferred or delayed on. If the market weakens further, we've got the flexibility to make capital reductions or deferrals out of '12 into subsequent years.

And as we said earlier that is something that is front and center with our team, to try to get another look. This would be the third look basically this year because things are changing that quick, with 2012, to see where that new capital comes out, not just in total, but across our coal and gas projects.

And I assume those conversations include your JV partners on the gas side?

Yes.

Thanks, guys.

Brian Gamble, Simmons & Company. Please go ahead.

Good morning, guys. We can start on the high-vol if we could. Bob, maybe you could talk about what sort of reception that product is getting. Obviously the prices have come down, it seems like there have been some pretty significant renegotiations that have gone on. Maybe you can talk about what has happened so far and what do you anticipate moving forward? Are these prices that we're seeing now stable, or do you think there is continued degradation of prices into that particular market?

Sure, Brian. Well, we continue to put our high-vol coal into Asia, South and Central America. During the quarter, Brian, we were pleasantly surprised that we were still getting a lot of inquiries with respect to shipping this product. We have two Capesize vessels, 240,000 tons, those are metric tons, going into China, going to one customer alone, for the balance of the year, which is really good. We finally have been able to get some term.

Now we're going to negotiate the price on a quarterly basis, but we believe that we're at the bottom and that things are on the uptick, and we're going to take advantage of that. They wanted us, for instance, Brandon, this particular customer, wanted us to sign up for a six-month hitch before they gave us the tons, and we elected not to do that. So, we agreed to a price for the second quarter, and we will continue to ratchet our price up for the third and fourth quarter. So all that is very good.

We see our high-vol coal continuing to strengthen over there, we're finding more customers that are inquiring about our coal, we're sending more samples. People are coming to the ports and asking for 55-gallon drums of this material. It is being used more and more in blends over there. The percentages are going up, and we believe that as the years go on, we've come a long way when we started this in the beginning of 2010, and we've come a long way, and so we're looking to perhaps put upwards of 4 million tons or more into the market this year alone.

All right, thanks for the color. And then on the -- switching gears, on the gas side, maybe kind of a two-fold question. One, it looks like some hedges were layered in for both '13 and '14, minimum volumes and I'm talking a price of $3.45 for '13 and $3.71 for '14. Maybe you could talk about that absolute level, and then what that means for your expectation for actual operating costs.

They were great during the quarter and below those rates, should we expect that to continue at that rate, or perhaps decline as gas prices stay low?

Yes, first, I will say this. We have in place a hedge program that allows us to look out for '13, '14 and '15. We've set ourselves a floor internally, and when the gas market goes above that floor, we go into the market and we take a hedge. And so it is programmed. We try to do this on a monthly basis as we continue to look at the price, and we have been successful with it. We've seen -- we started in 2011. 2012 was our first year as a program hedge, and we've seen that it is -- that has really helped us.

On the cost side, the general view on the gas segment is that there is going to two sources of cost savings or further cost synergies. One will be just the outright rate from the service providers and on the consumables. We think that exists for more potential on the gas segment than the coal segment right now, but we think the really big opportunity to further get a handle on costs and drive them continually downward on the gas segment is what I will call the continuous improvement efforts that we're seeing across our operations. Most of that coming out of the Marcellus, because that's where most of our drilling occurs.

And some examples of things that we're doing there. We're doing everything from converting our rig fleet from just straight up diesel to diesel/natural gas/coal firing. There are obviously some big cost advantages to that. The way we're building curves, with some of our auto tracking totals, is giving us longer laterals effectively.

You look at things like micro-seismic and reservoir studies, and individual well reserves, and we're getting a big leg up on that to get more EUR per foot out of the wells that we're drilling. And then we're also moving what I will call for a lack of a better term, from well specific simulation design to stage specific, frac stage specific. And not looking at the well in total, but looking at what that individual stage might be calling for, in terms of the design and execution of that completion.

So still upbeat about getting aggressive on cost controls, that is going to be driven by the Marcellus, because that's where the bulk of our drilling is occurring. And that prior guidance we gave on unit costs for Marcellus all in, I don't think that has changed at all, and stay tuned to see if we can do better.

Great. And then finally just a clarification, Bob, the 5 million tons that you walked through earlier from a deferral basis, 2 million is pushed out, the 1.4 million in force majeure situation, and then the 1.1 million in contract. What portion of that, how do you bucket that out when you look at the guidance for the year? The 2 million I'm already assuming has already been pulled out of there. The 1.4 million and 1.1 million, maybe you can talk about what is in the tons for this year, where those tons are from a guidance standpoint.

For the most part, the tons that have been pushed out to 2013 and 2014, most of that, Brian, has already been reflected in our numbers. We still have ongoing negotiations, and we haven't papered it all in order to catch up to our -- in our system. So, I would say of the 2 million move to '13 and '14, the majority of that is already reflected in our firm position for those years.

The shipments that I said that I think some of our customers will catch up on, the 500,000 tons or so, that is already in the numbers. It's the force majeure tons, we're still taking exception of to some of those force majeure letters, and right now those values are nowhere. We've just removed them from our forecast, waiting to see the results of our dispute with them, with respect to whether or not they have legitimate force majeures.

Great. Thanks Bob.

Okay, John, I think we will have time for one more question.

Dave Katz, JPMorgan. Please go ahead.

Hi, I was just curious, with the thermal cost guidance -- or thermal coal guidance for 2Q 2012, the lower end of the range is below the firm number. Does that reflect the deferrals you were talking about?

Yes, Dave, it does.

Okay. And then secondly, it looks like you didn't provide 2013 natural gas guidance, and that you had provided that in the past. Is there any particular reason for that?

Dave, are you talking about production guidance or pricing guidance?

Yes, I am, production.

We have in our gas division guidance table -- we issued for our ops release, two weeks ago, we had $190 to $210, which was a reaffirmation of earlier guidance.

Okay, that's not in the release today, next to the $157 to $159, so one shouldn't read anything into that?

No, I wouldn't read anything into that.

Okay, thank you.

All right, John, we're finished with this part of the call. Could you please instruct our callers on the replay information?

Certainly. And ladies and gentlemen, this conference is available for replay. Is starts today at 12.30 PM eastern, it will last until May 10 at midnight.

(Operator Instructions)

And Mr. Zajdel, any closing comments?

No, I just want to say that David, Connie and I will be around for the rest of the afternoon to answer any further questions and thanks everyone for attending the call.

Ladies and gentlemen, that does conclude your conference. Thank you for your participation. You may now disconnect.