CNX Resources Corp (CNX) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the CONSOL Energy Second 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.

Thanks, John. I'd like to welcome everybody to CONSOL Energy's Second 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 Khani, our Vice President of Finance.

Today we will be discussing our second quarter results. 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 also have slides that I should make you aware of. We will be referring off and on to our slides, which you can find on our website.

We will begin our call with prepared remarks today by Bill Lyons, followed by Brett Harvey. Nick and Bob will then participate in the Q&A portion of the call. With that, let me start the call with you, Bill.

Thank you, Dan, and good morning, everyone. As you have seen in our press release, CONSOL Energy once again posted solid operational and financial results. In a quarter where the coal and domestic natural gas industry struggled with weak spot pricing, CONSOL Energy has been successfully managing through this tough macro economic environment.

We have continued to benefit from items that we discussed on the last call. Namely, being effectively sold out in thermal coal for the year, and our significantly above market hedge position on approximately half of our gas production. One area that I believe separates us from others is our improving cost structure. In the coal segment, our all-in cost per ton fell by $2.17 in the second quarter when compared with the first quarter. These costs fell in a quarter when we had less production. Reducing unit costs in a period of lower volumes is noteworthy due to the substantial fixed cost structure of our underground mining complexes.

We have been actively managing our costs in two ways. First we have eliminated activities that do not directly impact safety, compliance or efficiency. For example, in the quarter, we lowered our G&A expense by $6 million through the completion of projects relating to corporate initiatives and by amending corporate salary benefit plans. We expect these savings to continue in future quarters.

And second, we have been working with our suppliers and service providers to deliver their commodities and services to us at a lower cost. Understanding the costs of our operations is not enough. To compete successfully in the increasingly competitive global markets, we must know the cost of the entire economic chain and actively participate in the management of that entire chain.

These supply chain initiatives have resulted in meaningful savings on items such as roof bolts and power. For example, with one major parts supplier, we have been able to gain a 3.3% discount for parts off of an annual spend of about $25 million. The key takeaway is that we are expanding our focus from costing only what goes on within the company, to focusing on costing the entire economic process. We are not simply waiting for higher sales prices to drive returns.

In the Gas segment, costs for the 2012 second quarter were $3.34 per Mcf. This was down $0.23 from the year earlier quarter. The improvement was led by our growing Marcellus shale program where unit costs in the just ended quarter were $2.61. This is an improvement of $0.65 from the year earlier quarter.

There were numerous contributors to the unit cost improvement which we will detail in the 10-Q. But the basic driver is that CONSOL is drilling longer laterals which increase production rates per well. This when coupled with the more wells per pad is helping us to achieve what could be industry-leading results. CONSOL is basically in full development mode at a time when many of our competitors are still drilling sub optimally in order to hold acreage. Our held by production position and adherence to our core values at safety, compliance and continuous improvement have driven these results.

We have also been successful in the first half of 2012 in having substantial asset sales that have contributed to our liquidity and cash flow. We have had multiple asset sales this year that have generated cash of $224 million. We have been able to sell assets at a fair price because of the quality of our assets and the fact that our strong financial position allows us to transact these deals without the pressure or the need for immediate liquidity.

It is also important to note that all these sales have been from non revenue generating assets. Rebalancing our portfolio is sound economics, especially since we can reinvest this cash into our organic coal and gas projects. These projects will yield what we believe will be industry-leading returns as the next energy upcycle unfolds. Brett will provide more detail and color but we expect to continue to monetize non-core assets over the next several years.

So let's review our overall results which are depicted on slide number four. Net income was $153 million or $0.67 per diluted share for the second quarter of 2012, compared to $77 million or $0.34 per diluted share for the second quarter of 2011. Total sales revenue for the second quarter of 2012 was $1.5 billion, or just under last year's second quarter. We generated operating cash flow of $138 million and EBITDA of $414 million.

Our liquidity position at June 30, 2012 is on slide number five. Our cash on hand is $200 million and our total liquidity is $2.6 billion. We have no long-term debt maturing until 2017 and we have no borrowings on our credit facilities.

Slide number six shows our capital. We invested $408 million of CapEx in our businesses for the quarter, which is an increase of $77 million compared to the year earlier quarter. The change was driven by $102 million increase in capital spending in the coal segment. The increase was primarily due to the ongoing development of the BMX Mine and the construction of the Northern West Virginia water treatment system.

The gas segment decreased CapEx by $25 million, primarily due to reduced coal bed methane drilling and lower gathering system expenditures. For calendar year 2012, our $1.5 billion capital budget remains flexible to market realities. With current projected commodity pricing and with the prospects of additional asset sales, we still have expectations of being cash flow neutral for 2012.

Our strategic initiatives have positioned CONSOL Energy for significant growth. Nothing has changed in our long-term outlook for CONSOL Energy. CONSOL Energy continues to be one of the premier names in the energy space, as we continue to combine safe, low cost, efficient operations with opportunistic 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 world class assets.

With that, let me turn it over to Brett.

Thank you, Bill. Good morning, everybody. We put out our production report last week and we talked about safety and we talked production, so I'm not going to go into those numbers. Let me say that our core values of safety, compliance and continuous improvement are real to us and real to our shareholders because it creates value for all of us, especially on the safety side. The 9,000 people that we have -- 9,000 plus are the real asset of the company that extract value for our shareholders. And we take these values very seriously. And so when we put those reports out and put safety first, we are very serious about that.

We have a set of slides that everybody can look at on the website. I'm going to start some of my comments at slide number 12 for those that want to look at that. We talked about energy markets at that point in time -- or on that slide. And clearly, there is a slowdown in demand for energy, not only in the United States but across the globe. And we have low cost, flexible assets that can adjust to on that, on the gas side as well as on the coal side. If you look at our cost structure on the coal side, the controls are in place. If you look at the cost structure on the gas side, the controls are in place. Let me tell you these low cost, flexible assets are very valuable to our shareholder base and can adjust very well to dampening markets that we have seen this year.

Let's talk about gas for a minute. We reduced our capital this year on gas, based on the price of gas. We have partnerships -- we got together and made prudent investments for our expansion. And as also -- when the prices drop like this, I think you have a differentiator between those who are going to advance the technology based on their position and those who are just trying to hold on to their asset base. I think that is clear at $2 gas who can win and lose that.

But I think in our case, where we can take -- because of our held by production position we can do ten well, eight well drillpads, lower our costs, move the gas to marketplace and advance technology, even at low gas prices. And as gas prices rise, we can extend our margin because we have scientifically reduced our total costs. And I think that is important that our shareholders see that.

Let's move on to coal. Coal is very interesting at this point in time because we have -- we are investing in coal as well with our BMX project and some other projects. And I will talk about those in a minute. But we are having record months, month after month at our port facilities, because we see this marketplace -- and the value of moving this coal into the world marketplace continues to be in place.

We are not building inventory at our mines. We have more capacity than what is in the marketplace right now. In fact, I can tell you that our long wall development is the best position it has been in years. We are in a good position for a turnaround in the coal business and our ability to produce more coal at lower cost. But you can see even at lower volumes -- I think our people have done a great job under Nick's leadership to lower the cost and optimize the margins for this marketplace.

We are actually in a -- let's move to slide 13 now. And I would like to talk about some of the things that I talked about when we did the Dominion deal about two and a half years ago. I said at that point in time that we were going to recess all of our assets, especially when we brought that big asset in, and look at everything that was core and non-core based on our strategy. And if you look at this slide, it really shows that we brought the value forward, as I said that we would. Now, with all of these assets it took us awhile to get some traction on this. But you can see that we have done very well. And I don't see an end to it.

I really see great assets coming online like -- let's go back three or four years when we decided Youngs Creek had some value. We partnered up with Chevron. We created a company and we added value. And clearly that sale was very good for our shareholders. Something sitting on the books that turned to $170 million that has a local value plus an 8% royalty is very valuable asset that we brought forward for our shareholders.

The Western Allegheny JV that we just (inaudible) on the Mid side creates real value for us, as well. Because these are coal seams -- in coal seams that have met qualities that have been sitting on the books and we found ways to extract those and move those forward as well.

With that let me -- let's move to number 14. On this slide number 14, I'm trying to show our shareholders and potential investors that we are expanding our Met business not by going out and buying other assets. We are going into our own asset base. We are expanding our Met business at very low cost per annual ton. I think it is important to note because when the Met business turns around and the prices start to rise again based on demand for steel, we will have very high margin tonnage coming into the marketplace. That is good for our shareholders and it is a good time to make that investment. And we will continue to do that.

So, with that, I would like to make one statement. I believe that the marketplace -- when coal prices drop, there is a shakedown of marginal players and marginal assets. That will continue to go. And I think that is a natural process. We have seen this in the cycles before. And it also emphasizes the quality of low-cost assets that have flexibility.

I would say that CONSOL has a very powerful position and A Class assets on the gas side and the coal side. And you are seeing the value of that right now. And you will continue to see the value. So when the markets are good, we'll have the highest margins. When the markets are bad, you will see us have the highest margins, even though they are squeezed some what. We will have great return on our capital going forward.

So with that, let's open it up for questions.

John, could you please instruct the callers on how to dial in for questions.

Certainly. (Operator Instructions). First on the line is David Gagliano with Barclays. Please go ahead.

Great. Thanks for taking my questions. First I was wondering if you could start out by commenting a bit more on the low vol Met market. Seems like the prices were lower than some of the indications we have seen. Wondering if you could talk about the dynamics there.

And then also somewhat related, I was wondering if you could explain a little bit more about the decision to idle Buchanan only for a week, considering the market is, as you said in the press release, oversupplied and weak. Thanks.

David, this is Bob Pusateri. David, during the quarter we shipped roughly one million tons. We told you at the end of the first quarter conference call, that we had 400,000 tons sold at a price of $185. Of that 400,000 tons, we had one major customer at a very high price delay roughly 31% of his shipments. So that was the first item that we had to deal with.

As the coal comes out of the ground -- Buchanan came back to work on May and June and it had great productivity. And we needed to sell that coal so we searched the globe looking for the best places to put our coal. At the time that the tons needed to move, we were able to pick up two vessels moving to China. China doesn't buy low vol coal from the United States. We switched it to a high vol -- or a high ash product. And we ended up shipping roughly 300 some thousand tons -- 303,000 tons at an average price for that high ash at $85. Given the cost system that we have at Buchanan, even with the taking the month of April off, we still had a very good pre-tax margin.

So that is what happened to us in the quarter. Nothing magic about it. We are scouring the globe looking for the best place to put our coals. And that is what we came up with given the fact that we had one customer all of a sudden, without warning, delay shipments.

The other side of it -- we just decided to delay Buchanan for a week. Just again it is just to match market and demand. We forecasted roughly 1.2 million tons of met sales -- low vol met sales for the third quarter. We have 800,000 tons sold, 400,000 tons into the spot market. We currently are in active negotiations with a customer today for half of that 400,000 tons. And will be, once again, scouring the globe to find a home for the additional 200,000 tons in order to hit the 1.2 million for the quarter.

Okay. My question is somewhat related there. The obvious question is why scour the globe to sell 200,000 tons? Why not just shut it in? I was wondering if you could clarify, what are you seeing in terms of low vol normal ash pricing in the Atlantic basin market right now, on a metric ton hard coking coal equivalent type of price currently?

Certainly. Right now in this quarter, it is certainly a discount to the BMA price. In Europe, that discount on a metric ton ,we have seen it as low as $15 and as high as $25. If we take those same tons and we sell them into Brazil that discount might be a little bit better, it might be $15 to $20. It is customer dependent, David. And it depends on the time that you make the deal and when ultimately the tons will get delivered to the port facility. So I really can't give you one answer that covers it all.

Okay. I'll get back in line, thanks.

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

Good morning, guys. I will start with the coal side. Cost controls were quite impressive this quarter. Is this kind of one off in nature or is this part of your larger cost reduction plan? And should we see a future trend into similar quarters? Would we take modest inflation from what we have seen right now? If you can give us your thought process over the next six to 18 months?

Our expectation is that the focus and emphasis on cost control, coal and gas side, is going to remain there for the balance of the year. There is a couple of things that are driving that. There are two biggest components of it. One is operational in nature, both coal and gas side. It is the multi-well pads on the gas side. It is not running weekends, as an example on the coal side, doing some sealing projects to lower the footprint of the coal mines, et cetera.

And the other side of it -- or other bucket is just looking at working with our suppliers and vendors and service providers as best we can to get back to back through a very difficult market to get us some relief on unit costs and service costs, things like that. Those two efforts, the operational efforts plus the working with our service providers and contractors, that probably comprises 90% of where the cost savings are going to come from.

To clarify, essentially you put these in place and that is kind of the run rate we should be thinking about, could ebb and flow a little bit, but not going to see a $5 or $6 step-up in costs in the next quarter?

We don't give cost guidance but looking at the rest of the year, we would expect to be in the same range that we have seen over the past quarter on the coal side.

One comment I would like to make on that. When you look at the year we will be at that level. Always keep in mind the third quarter has vacation in it so our cost structure tends to rise a little bit based on volume. If you look at volume over time, we expect these costs to hold.

Great. My follow-up question is actually with respect to the natural gas business. You have been achieving some technical successes with the wells as they have been coming online. Kind of wondering about two points. One was how much flexibility do you have going into 2013, in terms of rigs coming off contracts to dial up or dial down CapEx? And I was also wondering if you could share with us your thoughts with respect to percentages for liquid rich in oil in your oil and wet gas windows?

The rig issues and our ability to ramp up or down as gas prices change, that flexibility has increased I think significantly over the past 18 months. 18 months ago we were pretty much tied to the rig schedule that we had and the ability to bring additional rigs on was very challenging. That has changed. It is going to be a function of gas price. If gas prices continue to rebound like they have, we are probably going to bring on additional rigs in the Marcellus and in the Utica, at least. If gas prices languish, you basically have seen the drill rate level and rig schedule that goes with it based on our current drill plans.

With the liquids and oil versus dry gas focus, I think we have got a slide in our slide deck that lays out the drilling schedules. And at the bottom of that, we show you what the percentage is between for -- 2012 at least, what the split is between the wet oil areas, heavy or liquid gas areas versus the dry. And if you look at that it is about a 50/50 split. I think it is 55% dry gas that is projected for 2012 and about 45% for liquids.

Okay, great. Thank you very much.

We will go to Raymond Deacon with Brean Murray Carrett. Please go ahead.

Nick, I was wondering if you could elaborate what you've learned in the Utica based on your activity with your three rigs and what industry has accomplished in terms of delineating the acreage? Or is it too early?

It is early but I think it is not too early. We are right on the cusp of gaining what I would consider an order of magnitude -- more information, understanding of that basin. Right now we have two rigs, CONSOL Energy does, running in the Utica, in Noble and Portage Counties. Hess has one rig running, our partner at Belmont. We will come in at about 18 wells total between us and Hess for the year. And that initial drill plan is going to give us a tremendous amount of data. The first slug of data, so to speak, from the 18 wells is our Test Three well in [Tuscoware] County.

We were going through flowback, it was going very well through the prior quarter. But at the time we had some issues with right-of-ways and getting some permitted production facilities and pipelines in place. So we took that opportunity or that lull in time to do a shut in analysis looking at things like dissipation of water and how that might improve permeability, getting good reservoir pressure data, et cetera. So we had a free option, from our perspective, to do the science behind that. And I think that data from the Test Three well, is going to give us a tremendous amount of insight for the next half dozen or are so that then in turn give us a tremendous amount of insight across the different counties in the Ohio portion of the Utica play.

Great, thank you. And can you talk a little bit about plans to market liquids out of the Utica -- where those would go? And also any comments on -- both Range and Cabot discussed issues with permitting, gathering lines on their calls yesterday -- if you are seeing any of those issues? And any concerns on availability of water, given the drought?

The quality specifications are going to drive much of our marketing strategy, which Bob can speak to in a second here. But the quality specifications -- we should have a good feel for what the reservoirs are producing by product for both, not just the Utica but also the wet area of our Marcellus play that Noble is drilling this quarter. So this quarter we should have -- in fact on the Noble wet Marcellus side, we should have something probably within a week. And that will give us insight into what products and how much we can expect across these different footprints, which will then drive the market strategy.

Before I kick it over to Bob on the marketing side, if you are referring to gathering issues that we've heard in the industry in the Utica recently, we don't go about our land effort in that way. We don't have those issues. We separate those. It is a different challenge that you see with some of our peers than what we have. Bob?

On the marketing side -- we have a marketing and processing agreement with MarkWest to strip the liquids from the gas stream. We then benefit 100% of the selling price of those liquids and they take a processing fee that we pay them. This marketing arrangement is such that it is both -- it is short-term in nature. We have the flexibility to exit it at any time. And we are always looking for other ways to benefit by the sale of these liquids.

Got it. Thank you.

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

Good morning. Let me follow-up on the last question for Nick about water situation, because it seems like with drought and other companies in the plays are having some issues, could you maybe refresh us on how you might be different and have different access to some of the others?

The water situation for both coal and gas segments across the industries we work within is only growing by the day. And it is going to grow over time exponentially from regulation as well as from the ability to utilize water. This recent heat wave that we have seen and drought issues in Appalachia is only a short-term example and illustration of what is going to be a longer term, more common occurrence. And the entities that can look at water as a strategic logistical item, are going to be the ones that are going to benefit through the quarters and years as this thing continues to unfold across the states and federally.

Right now, the company in total handles over 36 billion gallons of water a year. We have been in the water business for decades. And increasingly, we are seeing examples across the company where we are utilizing the water assets that we hold and handle across different segments. If you look at the coal to natural gas segment, one of the synergies we see on a regular basis now is the coal segment providing water for the completion operations of the gas segment. I think to date we are somewhere around 50 million gallons. And that, of course, is going to grow as time goes on.

All of this, when you add it all up, it is going to reduce the footprint that we have on water sources beyond our 36 billion gallons that we handle. It going to be a good thing for not just ourselves but for the industry. I think water continues to be a bigger and bigger issue, and this recent drought is just the most recent illustration of that. But there is going to be more to come.

Sounds like you can get a better price for water than your low vol coal these days.

That is a cycle, Mike.

My next question is for Bob, maybe. Could you give us your views on what utility customers have seen over the past -- since the beginning of the summer? How comfortable they feel? And are you really seeing some of the production or shipments come off as quickly maybe as the industry would like, with regard to shipping to domestic utilities?

Sure. Mike, expect domestic thermal demand to increase the second half of the year -- mostly due to hotter than normal summer temperatures. We are seeing a faster drawdown of inventory in our key marketing areas. And all of this is a backdrop to a rallying natural gas price. We continue to manage our pushback tons that we got in the first six months. We continue to realize the full value of those tons is for our shareholders.

Most buyers I think, Mike, right now are -- in our primary market space are taking a wait and see attitude towards contracting for 2013. They are laser focused on the price for natural gas. And as you can see by today's natural gas drip, the average for next year is in the $3.50 an Mcf. And if you take into account our heat rates and capacity factors and transportation rates, $3.50 a ton generically equates to -- or our high Btu northern out coal equates to a price in the low 60s. So they are focused on that. So are we. As we get to the end of August, most of the contracting will begin. We'll have a better sense of it when we sit here for our third quarter call. But we are cautiously optimistic, going forward.

Relative to the question about do you see high volumes of central Ap coal that was scheduled to go to utilities going offshore? I think a lot of that has been curtailed, starting in July. I think in some cases the utilities that were funding that no longer can afford to pay the premium that was necessary to allow that to happen. I think there has been a shut-in of production relative to the amount of tons that were available to go offshore. And the market is finding its equilibrium point.

I appreciate that. Just two quick follow-ups. Bill, could you remind us on the gas side on your hedging philosophy, is it more structured regular? Or is it price dependent on how you layer them in? Or will you not layer it in at all as we move forward?

Again, our strategy has been we take a look at our total portfolio, which is both coal and gas. And then it is a matter of risk management. For the most part, we are layering in. I think that the practice has proved to be very beneficial to us. I can tell you that we are reevaluating our hedging. And we may have some changes in the future. But right now we are continuing on what we are doing in the past.

And one just final question. Brett, do you think we are closer to the bottom of this downturn cycle? Or is there a little ways to go? And is it dependent on US economic activity? Maybe if we get more confidence level in the second half going into 2013, that will spark things?

I would say we are more cautiously optimistic about steam coal. And on the met side, I'm not sure we are at the bottom. And here is why. I think when you see continuing softness on the met side, there really is a demand for steel and so the supply is outpacing the steel side. And when you see these prices that are very close or below the average costs of our incremental competitor, for better lack of terms there, it as very thin market. That means the buyers aren't buying and if they aren't buying the price continues to drop if there is no volume moving in it. I would say it is bouncing off the bottom but I don't see it turning in the next three to six months.

Thank you, gentlemen.

Our next question is from Andre Benjamin with Goldman Sachs. Please go ahead.

Good morning.

Good morning.

I was wondering if you could maybe discuss your Marcellus well results and how they are trending versus your current type curves? Maybe what steps you are taking to improve them in the various regions? And in your view what ending year end in terms of the potential to actually continue to improve the EURs and F&D costs?

If you look at Marcellus effort since we initiated that project to date, the one thing that differentiates ourselves to other drillers in the basin is that now increasingly our results are coming from multi-well pads. And that has some significant impacts across a number of things. First thing it impacts is we're truly getting some good data and insight into the overall reservoir, when you start to look at EUR estimates and things like that. When you review that with our third-party reservoir engineers, they notice that. They notice there is something different about us. It gives them a lot more confidence when looking at EURs and declines and things like that across a field or a basin. So it affects reserves.

Another thing that is happening is the multi-well pads obviously have some benefits when it comes to capital and capital per well, which coupled with EUR, is going to prove your finding and development costs and your overall economics. The multi-well pads are great. Add to that things like converting our rigs to gas-firing on the LNG gas firing facilities. Our first rig should be converted here within a week or so. You look at things like our auto track, little one run rotary steerable systems that we are employing. Those things are also reducing both operating costs and capital costs.

Add up these well results across Southwest PA and Greene County or Central PA results in Westmoreland, Indiana or our Northern West Virginia results that are coming in and what Noble is doing in Majorsville, and you couple all these improvements together, I think the trend is definitely going to be one where EURs and well type permits are confirmed or improved upon, and the development costs continue to be the rates that we saw reported the last year or two in the Marcellus, which bodes well for our current gas prices.

Thank you. On the coal side, I wanted to try to better understand the movement in costs. I know a little bit of it was discussed earlier in the call. How much was really driven by lower input costs versus the operational improvements? If we were to see say oil, steel and gas, some of the commodity input prices rebound next year, how much improvement should we expect to see reversed?

It is difficult to track that. It varies quite a bit, mine by mine, depending on the operation and where it is at in its cycle. If you look at the overall cost performance that was demonstrated this past quarter, I would say that the two largest by far are the service and commodity cost side, coupled with the operational improvements. Now, the operational improvements are going stick, so if you have a ceiling project that is completed in a coal mine that seals off a quarter of the old footprint, it no longer needs to be ventilated and patrolled and things like that, that is something that is going to be there quarter after quarter.

The commodity side and service side ebbs and flows. But you would think, and we've seen historically, most of the time when we're experiencing those pressures that is also when our revenue line is also seeing pressure upward. That is not necessarily a bad thing overall.

Thank you.

We go to Jim Rollyson with Raymond James.

Good morning, guys.

Hi, Jim.

A lot of ground covered this morning.

Yes.

Export wise, Bob, you talked about things maybe slowing down a little bit overall for the industry, kind of second half. Kind of curious where you guys stand on expectations for your own exports now for this year, given the adjustments in volumes?

Sure. For the whole calendar year, Jim, on our low vol side, we expect that -- we have about 4.4 million tons of low vol, of which -- out of that 4.4 million roughly 3.5 million of it will go export. We still believe that given the low vol combined with our mid vol and also our thermal, we will be in the range of 11 million to 12 million tons of exports for the year. We have a fairly good handle on what the third quarter is going to do for us. But the fourth quarter is wide open. We are chasing customers trying to get them to live up to their commitments. But we are fortunate. We have a very strong cost structure and it still allows us to achieve very good margins. And I believe that there are not many that can survive in this type of market correction. And CONSOL is fortunate that we have the cost structure that allows us to do that.

One point, Jim, I want to bring to you. When we talked earlier about the coal not going, that was the excess coal from the utilities that were trying to move away from their stockpiles. I think the burndown across -- especially across the East has stopped that. So when you look at that, that is the pressure that was in that international market. If you look at what we are going to move internationally, we will continue, I think, to have record production moving offshore.

Right. We definitely year-over-year 2012 will be better than what we did in 2011, even given these conditions.

Yes.

And obviously, it is early and pricing on the market is pretty weak, but have you had any discussions with your customers about possible opportunities for next year? Or is it just that pricing right now is too low to really have those discussions? Or kind of what do you see going into next year?

A couple of things, Jim. Jim, we are in kind of active negotiations currently. And so I really can't speak to that. Again, it depends on the customer, the country and the type of coal. So it varies. So I really can't give you much color on this.

All right. And last one, Brett, you guys talked about lack of visibility at this point or just most of your customers for thermal next year, you haven't really gotten to a lot of discussions. Just curious, given only a little bit over half of your 2013 projected thermal volumes are locked in, how comfortable are you can manage to sell the rest to get up to the 47 million tons?

These are natural markets for us. Two things. One is one is we know that we have long-term relationships with these and we will get to the right price. Also the ability for us to move it through our own port facilities into different markets gives us some leverage there. So when prices are falling on the utility side, they are not going to come out and negotiate until they feel like there is a turn or their inventories are sideways. I think that is just a natural thing. They have an advantage when the volume is up in their stockpiles.

I would say that will all come together, probably a little bit later than it does in a typical year. But these are natural volumes for us. And we are at a critical mass to where we will get to a deal with them or we will move it into the international markets.

Helpful. Thank you.

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

Good morning, gentlemen.

Good morning.

First just a question on the high vol side. You seem to still be moving tonnage into that firm category. And the market commentary out there right now would suggest that not a lot of that is being done. So can you just talk about that market for CNX? And then maybe Bob, what you are seeing overall in the high vol market?

Sure. Holly, we are showing for the third quarter in total that we are going to sell 900,000 tons, of which we have 700,000 tons already sold. One of the things we have done, Holly, since we last talked is that we have expanded our marketing effort overseas. We have hired additional people. We have negotiated with the vessel companies to where we have been able to delay some of our contract vessel shipments and we've been able to take advantage of spot vessel rates.

We moved our marketing effort not just along the coast, but we have also moved that marketing effort to steel mills and cokeries that are further inland. And it is starting to pay off. So we have priced the coal to a point where it makes sense for the mills to seriously look at it and we are taking advantage of every opportunity that comes our way.

Okay. And then maybe just kind of overall commentary on that market in general. I mean what you guys are seeing, in terms of pricing? And are others just having a hard time to move that product?

I think a lot of what we have done is since we started this process in late 2009 is starting to pay off for us, Holly. Believe it or not, there is some buying in China that is relationship buying. And we have taken advantage of that. And we still look at it very carefully because of letters of credit and the like. But we have been successful and we have no reason to think that we won't continue to be successful in this arena. And that is why we've expanded our marketing efforts by hiring additional people. China is a big country and so we were trying to cover it with four guys and we didn't find that to be adequate. So we expanded our workforce.

So I don't -- I think that other people will try to sell into China. But again, I think some of them don't have the cost structure to allow that to happen. They don't have the relationships. And at the end of the day, some of them just may not have the quality to be able to get the job done.

One other point on this, Holly, this is Brett speaking. On a macro sense, we are well branded into China. They know Bailey they know [Ahn Lo]. And there is enough volume that is going into China now, that has become a product word. And we have done very well at that. If you look at the last couple of years, out of North America, we are by far the highest volume going into China. So that has caught hold. And also the high quality and low cost gives us a chance, even in a softer market, to expand market share.

And Holly, also, we have been successful in being able to introduce our coals, our high vol coals into Brazil, Europe and also here in the United States. And we are -- we have had good success. And we are expecting equal to or better success for 2013.

Perfect. And then just one follow-up on Buchanan. Just a little bit confused. The 4.4 million tons out of Buchanan how much of that is the high ash product?

For the balance of the year, Holly, it will be -- most likely it will be zero, for the balance of the year. I do not have the number for the first seven months at my finger tips. I'm sure Dave and Dan can call you offline and give you that number. Going forward, it will be nothing.

Great. Thanks.

Our next question is from Mitesh Thakkar with FBR. Please go ahead.

Good morning, guys.

Hi, good morning.

Just a quick question. You have done a good job at monetizing some of the asset and bringing that value forward. Can you talk about what some of the other asset would you classify as non-core?

Well, we are always looking at it, based on what markets or what reserves we have in what region and who it fits and who it fits changing markets based on plants getting shut down, scrubbers being built and all of those kind of issues, as things change. But I can tell you this, this is an asset-rich company. And as we see these markets shift around and we see a need to deploy capital into a growing gas market or something as profitable as we think the BMX mine is going to be, one of the lowest cost mines in northern App, we will redeploy those.

We look at all of our assets like we did at Youngs Creek and other places and we mold them into a position for sale. We have more of that to come. I'm really not in a position where I want to divulge where we are looking next because that is part of our strategy. I can tell you we have a stable of very valuable things to other people that we will move it forward to our shareholders value.

Great. And just one follow-up on the steam coal side. It looks like volume in the outer years have come down a little bit. How much of that is just idling some of the mines which we discussed previously? And how much of that is just looking at the markets where they are and just thinking not to produce those coals right now?

Okay. On the steam coal side, if you look what we have done, we have actually idled mines for longer vacations. We have pulled back on tonnage. So CONSOL has capacity on the steam side that is not being realized. We are working no overtime. Working no Saturdays. We are actually in a position where we have capacity and productivity that we haven't moved into the marketplace. And so when you look at that it is -- we have just pulled back to manage inventory. And we have the ability to do that.

Great. Thank you very much. Appreciate it.

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

Thanks. Good morning.

Good morning.

Good morning, Paul.

I think Bob talked about $3.50 gas is equal to something like a low $60s price for northern Appalachia. This quarter the high vol price was $61. And first of all, I never thought I would see the high vol number come in below the average thermal price. But I was just curious, when you look at your high vol projection for 5.2 million tons of sales in 2013, and only 400,000 tons of that is committed, what is the prospect here that a significant part of that is going be rotated the back into thermal because you could potentially get a better price on it as a thermal if the market is not going to be accepting that coal at a decent price for high vol.

Well, that is the beauty of it all, Paul. We are in the money business. We follow the price. If that market is there, we clearly have low cost mines. We are moving the same capital and the same coal from market to market, based on price. If the domestic market demands that at a higher price, it will go to the domestic market. If the world market demands it, it will go to that market. That is the beauty of having the ability to move it to international markets with our own port facilities, with two rails and we will move on two rails. We are not going to hesitate to go back to the natural markets if the price is higher.

Thanks. And on the BMX project, just obviously part of the thinking on the development of BMX is that can go to the high vol, it can go to thermal markets. But you probably weren't thinking along the lines of $61 a ton on high vol when you were developing it. Just wondering on BMX, the $660 million cost of the project, is there any way that you think you might be able to economize on that? Certainly it is a multi-year process and you are not planning to delay it. But I was just wondering if there is any way to try to work that cost down to just reflect the lesser economics on the pricing side?

We can build lower capital mines for shorter lives. You see that all over the mining industry. If you have long-term high value reserves that you can run out for 25 years, you should set it up on the front end for the high volume and the productivity and the low cost structure for 25 years that you can have all the markets. It is not typical for CONSOL, especially in the Pittsburgh 8 Seam to capitalize a mine for five to 15 years. This is a 25 to 30 year life mine.

It is going to be the lowest cost structure, even with the capital you are talking about, of all Northern App Pittsburgh 8 mines. And it will displace some other mine in Northern App, and I think that's exactly the way we look at. And it will displace it for life, 25 years. I think it is important you look at it from that perspective. So we are not trying to save money on the front end. We are trying to optimize capital for maximum low cost productivity, going forward.

Great. Thank you.

The next question from Lance Ettus with Tuohy Brothers. Please go ahead.

I just had a couple of quick questions. First of all, maybe I missed it but if you gave a met coal benchmark related to your low vol sales, what that would equate to? And also I know you commented earlier in the call about other lower quality coals, how they have the flexibility and basic margins you guys are still able to get in your coal operations. But just curious if you were expecting or if you have been surprised at some of the lower quality met coals haven't taken in production more or when you expect it to happen? Thanks.

Okay. Lance. I'm going try to answer that. First, I did not give a BMA price equivalent. Roughly -- I'll just tell you this. $120 FOB mine would probably equate to roughly a number of $180 a metric ton. So I'll make that relationship for you -- give you and hopefully that helps. But you going forward there is a oversupply of metallurgical coals available today, given the demand that we are seeing out of Europe, South America and also out of China. There is no refuting that.

Now that Australia's labor issues are over, so there is an increase in coals available out of Australia. And we are all going after the same demand at this point in time. So the buyers are probably chasing the higher quality coals with the thought in mind of getting the best price that they possibly can. So when the BMA price I think is still very relevant but I'm not sure I can tell you how many tons are actually being sold at the BMA price today. So we negotiate our price on a customer by customer basis. So we have the cost structure that allows to us meet the market, if the market falls. And as I said earlier, we are still producing very good margins.

Operator, we will have time for one more call.

That will be from Brandon Blossman with Tudor, Pickering, Holt. Please go ahead.

Good morning, guys.

Hi, Brandon.

Circle back to the top of the call, just another pass at the low vol met realization question for Bob. On a go-forward basis -- it looks like the customer in Asia got a very nice product for a very nice price from their perspective. And obviously, Buchanan is in a unique position because it can still make the margin at prices like that. What is the near term go forward strategy around -- where do you say, no I'm just not going to put it in the market at that price?

Let me speak to that because I drive a lot of that when I talk to Bob about the sales side. You talked about them having a nice price for a very high quality coal. We think we have a nice margin at a very high quality coal at the bottom of the market. So there is two sides to that. And we are making $25 to $30 a ton on that price where others would be under water, cost structure wise. So that is where we are making our decision.

But we don't need to do this for practice. And we are not going to chase high volumes into the marketplace because we know we have a very valuable high quality product. If it looks like it is a spot deal we will pick up the $25 to $30. If it looks like high volumes and we are chasing the market down, then we will back the mine off. And that is exactly what my instruction is to the sales department. And that is coordinated with Nick and how they run the operations and how they get it ready. So it really is opportunistic at the bottom of the market because we can still make money but we don't want to chase volume and price down. Does that make sense to you?

Absolutely. That that's very helpful. And then kind of taking that to the [Eco] and thermal market, perhaps it as little different structure there. You guys again are in a unique position that you have flexibility on cost structure. Will you use that flexibility to put together kind of term deals that are maybe indexed, but establish a relationship with a new customer that could be long lasting?

We definitely will try -- at the bottom of the market when there is chaos we will try to expand the marketplace to our advantage, because of cost structure and high BTUs. When you are talking about steam, it is a little bit different animal. But once the high thermal valued coal hits the water, it travels a long ways. And we can pick it up -- because of our ability to move high volumes, especially out of Bailey or [Ana Lo] or that complex -- or Blacksville or some of the other mines, we can move a lot of volume very quickly if we can get the right deal over time, because we can lock in margins.

All right. Well, look forward to seeing the fruition of all of that work.

Okay. Good.

Well, that concludes our call. John, could you please talk about the replay information?

Certainly. Ladies and gentlemen, this call is available for replay, starting today at 12 pm Eastern and will last until August 2nd at midnight. You may access the replay at anytime by dialing 800-475-6701 or 320-365-3844. The access code is 254-088. That does conclude your conference for today. Thank you for your participation, you may now disconnect.