CNX Resources Corp (CNX) 2012 Q3 法說會逐字稿

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

Thank you, John. I would like to welcome everybody to CONSOL Energy's third quarter conference call. We have in the room today Brett Harvey, our Chairman and CEO; Nicholas Delullis, our President; Bill Lyons, our Chief Financial Officer; Bob Pusateri, our Executive President of Sales, Marketing and Transportation; as well as David Khani, our Vice President of Finance. Today, we will be discussing our third 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 on the website that I should make you aware of, as well as a table that we just posted today in Excel called "Historic Coal Results by Category Table." We have recast our data in that table today in the press release, and the Excel spreadsheet has the historic data in the same recast format.

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

Thank you very much, Dan, and good morning to everyone. As you have seen in our press release, CONSOL Energy posted weaker than normal operational and financial results. We incurred a loss of $11 million or $0.05 per diluted share for the third quarter of 2012, compared to a net income of $167 million or $0.73 per diluted share for the third quarter of 2011. Total sales revenue for the third quarter of 2012 are $1.2 billion, compared to $1.5 billion for the year ended earlier quarter.

We generated operating cash flow of $162 million and adjusted EBITDA of $210 million. The reduced profitability was due to several factors. Lower demand for both metallurgical and thermal coals cut our sales volumes and caused us to temporarily idle some facilities, the most notable of which is Buchanan, our Flagstaff low vol met mine. The lower demand for metallurgical coal had a significant impact on met coal prices. Average realized price for low vol met declined by $72 per ton, which is 35%.

On the gas side, average realized price for gas declined by $0.73 per Mcf or 15%. And finally, the incident at the Bailey preparation plant, where newly constructed conveyers that move coal from both the Bailey and Enlow Fork Mines collapsed, which caused four longwalls to be idle for three weeks and reduced the operational efficiency at these mines for several other weeks.

Now, the plant idlings from the weak steel markets will have some residual effect on our fourth quarter also. We expect our low vol Buchanan Mine to be idle until November 5, while we expect our mid vol Amonate Mine to be idle for the remainder of the year. By idling Buchanan and Amonate, we are communicating to the steel producers that we will not sell into a market that is experiencing an inventory destocking. It is financially difficult for us in the short term, but our actions will contribute to a fast rebound in demand for met coal. The temporary shutdown of Buchanan resulted in our incurring $7 million of idle mine costs in the third quarter.

The one unplanned item we announced in late July was the collapse of the two newly installed conveyer belts that moved coal from the Enlow Fork and Bailey Mines to the Bailey preparation plant. The collapse resulted in idling the longwalls at both mines for a period of about three weeks. For much of the remainder of the quarter, this complex ran at only about 60% of normal. This incident reduced our production sales and net income for the third quarter.

We estimate the net income impact this incident to be $53 million. For the quarter, Bailey and Enlow Fork Mines produced approximately one half their normal tons. And we incurred $42 million in costs for which we had no commensurate production. We're exploring avenues of recovery from both our insurance carriers and the responsibility party.

Meanwhile, from an accounting perspective, we excluded the Bailey preparation plant incident cost of $42 million and the $7 million of Buchanan cost from our coal division results table. And excluding these costs, the coal division across all of its tons had 2012 third quarter fully loaded costs of $55.84 per ton. This represents an increase of $1.46 per ton from the year earlier quarter. The increase in unit costs was volume-related. CONSOL had four additional weeks of longwall idlings in the third quarter in addition to those I already mentioned. We believe that coal costs per ton should decrease as production returns to normal levels.

In the gas division we achieved net income of $7 million. In a quarter of low gas prices we think this is a noteworthy achievement. Our improvement in gas earnings was driven by higher production and lower costs. Production growth was led by our Marcellus Shale program, where we achieved a 140% increase in production quarter over quarter after adjusting for the sale from production last year to Noble Energy and Antero Resources.

Gas costs in the 2012 third quarter were $3.38 per Mcf. This is down $0.22 per Mcf from the year earlier quarter. The improvement was led by our growing Marcellus Shale program, where unit costs and the just-ended quarter were $2.95 per Mcf. This is an improvement of $0.10 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 increased production rates per well. This, when coupled with more wells per pad, is helping us achieve what could be industry-leading results.

Overall for CONSOL we did not have any meaningful asset sales in the third quarter as we did earlier in the year. But we did receive our scheduled $328 million annual installment from Noble Energy. We will receive another $328 million installment from Noble in the third quarter of 2013. We have no borrowings against our credit facilities at September 30 of 2012, and I suspect this will also be the case at the end of 2012.

In a year of great difficulty in the coal and gas spaces, we believe our financial strength is a key differentiating factor between CONSOL Energy and many of our competitors. Brett will have more to say on this shortly, but when times are tough, as they clearly are now, CONSOL Energy will do okay. But as good times return, we believe that CONSOL Energy will do very well.

And finally, for the calendar year 2012 [is] we're on track to invest $1.5 billion in our company's future. This is consistent with our earlier projections as we continue to complete our coal and gas projects. And with that, let me turn the call over to Brett.

Thank you, Bill, and good morning to everybody. As Bill outlined, we're coming off a quarter that wasn't what you've expected and wasn't what we've expected from CONSOL Energy. If you look at the quarter, we restrained ourselves from building -- using our shareholder's money to build inventory and show some restraint in the market place. That was in effect and was working very well. Typically the third quarter is a soft quarter for us.

When we had the problem with Bailey/Enlows, it really shows that these large well-capitalized mines have high production, and when they're interrupted, it hits the bottom line pretty hard. That shows up in third quarter. The fact that we are a low-cost operator is based on these large well-capitalized mines, and the fact that when we have a problem, it shows up in the bottom line very quickly. So when I look at the third quarter, I look at it two ways. One is restraint of cap -- restraint of production to adjust the market so our shareholders don't have cash on the ground, so to speak.

And the other side of it is we have a problem, we've addressed it. We're fixing it, and we're in full operation right now, and we will get the value out of that through the process of what we need to do with those who built the belt system with Bailey. In wake markets, CONSOL does okay, but in good markets, our shareholders do really well in both division, coal and natural gas. We've proved it. In fact, in the past six quarters, CONSOL Energy has earned $882 million of net income. We're consistent, and we will be consistent in the future.

Let's go to chart number seven that we have on the website. I'm going to talk about markets at this point. Low vol demand has gone through destocking. Our customers are beginning to take to coal, although at reduced levels. This is why we will restart Buchanan at a reduced work schedule for the remainder of the year, beginning on November 5. Or during that week. This is not -- there is not yet enough demand at Buchanan to run seven days a week. Or to restart our Amonate Mine before the end of the year. When we're running it five days a week, it gives us a cost structure that has more pressure because it is all about volume. But this is low-cost mine, we think will do just fine running at that level until the demand is there.

On the high volume side, demand in Asia is also very weak. As the Chinese economy slows, we see that demand slow as well. We expect stimulus in China to help that over time, and we think that the high vol market will turn around in early 2013. On the thermal side, the demand seems to be very stable. Our high BTU coal is being distributed in the natural markets that we have, and we will look at signs of inventory build throughout the shoulder season. But right now, we think that is pretty strong and stable, and we believe we're in a good place there.

CONSOL continues to invest in the future. Let me refer you to chart number eight. In gas, we announced record well results in each of our three dry gas producing areas in the Marcellus Shale, and that is record production as we've cut capital three times this year. So that tells you the value of these assets and the strength of these assets as we build out the Marcellus. In rising gas price, our shareholders will benefit dramatically from higher volumes that we've invested in.

We also have better than expected results in the liquid rich portions of the play. And on the Utica Shale, we've had good results from a well in Noble County. With gas prices rebounding from decade lows, CONSOL's long-term production ramp will create excellent value for our shareholders as the production will reflect higher margins on gas, being a low-cost producer. In coal, CONSOL will open our new BMX Mine in early 2014.

If coal markets strengthen, our shareholders will do really well. If coal markets stay weak, the cost structure of the BMX Mine will likely displace one of our competitors' mines in the market place, and in the worst case it would displace one of our own high-cost mines. We don't believe that will happen. We think we will capture market with the BMX Mine. We will finish these coal projects, but we won't invest in further coal projects until we see market improvement. If you look at our capital structure and our [moth] capital, about 45% of the capital of our earnings per year is in moth. We choose to take the 55% difference and reinvest in these low-cost, high-valued assets for the turn in the market place, and our shareholders will see that value going forward.

By 2014, with production from BMX, higher gas prices, higher volumes and a shift toward more liquids, CONSOL could be in a position to generate more meaningful extra cash than we've been doing in the past two years. We've also been successful -- looking at chart nine -- in bringing value forward. You've seen our slide including $224 million in 2012 asset sales so far. We're working to bring more value forward to our shareholders in a soft worldwide energy market and reapply them to a growing valuable asset base for the turn in the energy markets.

In summary, I want to talk a little bit about volume and low cost. Our mines are in very, very good position right now in terms of longwall capabilities and our ability to run. Volume and low cost go together. When we pull back volume, you'll see our cost rise a little bit. That's constraint we've done to the mines purposely, to not build inventory on our side of the ledger. We would rather do that on the customer side. And we will continue to show that constraint.

As the volume increases, our productivity will show and our cost will be where they're expected. While it is too early to roll out 2013 capital budget, we continue to look at monetizing noncore assets. The hardest questions I have as CEO is how to strike the balance between investing in these great resources that our shareholders have, and look at the cash and stay within our cash flow going forward in these tough market places.

Right now, we're getting pulled from shareholders from both directions. That would be normal in this type of environment. But we're being very prudent of where we put our shareholder's cash. We'll move to the sweet spots and where we think we can create long-term shareholder value. No matter what the conditions are, macro -- the macro look at CONSOL is we are low-cost producer in both divisions, in gas and coal, and we'll create very good value in the short term as gas prices rise and as coal markets stabilize. I thank you for your time, and we'll open it up for questions now.

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

(Operator Instructions). First we'll go to the line of Shneur Gershuni with UBS. Please go ahead.

Good morning, guys.

Hi, Shneur.

Maybe I should -- I'll ask my first question just based on the last question about asset monetizations and something you're looking at. There's been a lot of value being paid for assets that can be dropped into MLPs these days. Is that something that you're thinking about when it comes to asset monetizations, or even alternatively thinking about the structure itself as well as a way to monetize some of these assets?

We are. In fact, we've looked at this as a vehicle to add value to our shareholders over time. We have an asset pay -- base inside of CONSOL that I think things that are-- we don't get value for, I think we can bring some of the value forward. We're looking at these kind of structures. Whether it is true in MLP or whether it is true in outright sale of some of the assets, depending on whether they're core or not inside the Company, we're looking at that, and we do that on a regular basis.

Great. Maybe I can follow up on gas. I understand that you -- it is too early to basically put out what your capital expectations are for next year in terms of CapEx for the business. But I was wondering if we can think about this directionally. How much is it related to contracted rig count? Is that heading down at the end of the year? Does that play into it as how we should be thinking about how the capital is going to be deployed? Do the lower day rates, for example, play into this well? I was wondering if you could at least give us a little bit of color in that respect?

The rig situation, our associated services, we would be committed or not committed to leaves us a lot of flexibility to set a pretty wide range of drilling rates for 2013, depending on where we want to go with our criteria. And our criteria remain the same, which is we'll look at the rate of return metrics that would be for everything from dry Marcellus gas areas to wet Utica areas and look at those rate of returns versus our cost of capital and the opportunity costs of other things, other uses of the cash flow, as Brett said. But the main point there is when you look at what we're contracted for and what we need to do on the gas side for 2013, there remains a lot of flexibility to come up with a pretty wide range of drilling schedules.

One final follow-up if you don't mind. The contract with Noble on the asset sales have that $4 floor in there and so forth, and the markets have definitely changed since that deal was signed and so forth. My understanding is it is not a suicide pact, and you don't necessarily have to agree to drill anything in theory. Does that give you some leverage to revisit that floor and maybe bring that down a little bit? Is that something you've thought about or a potential discussion base because your ability to not drill in theory can hold it hostage?

Well, there's two things. We're seeing great value in the drilling we're doing, and especially as gas prices are rising. And we also have a deal that over $4 that carries ours, and we think we're going to get that over time. And in terms of reevaluating, I think in both cases, as we see gas prices rising, even though the cost structure is a lot better than we thought two years ago, we think that $4 is probably a pretty good number, and we think gas prices are going to be over that, we'll get to carry it. In fact, we plan on getting that carry next year.

Great. Thank you very much. I'll jump back in the queue.

Our next question is from Lucas Pipes with Brean Capital. Please go ahead.

Good morning, gentlemen.

Good morning.

My first question is on your met coal guidance for 2013. And I wondered if you are conservative there, given the current market conditions? And when he you talk to your customers, what type of interest are you seeing both from the domestic market, Atlantic market, and then also the Pacific market?

Sure. Lucas, we believe that we can walk the market up as it improves. This is not an operational issue with our coal mines but rather a market issue. We believe in this quarter that there still is an oversupply of low vol coal in the world, and we're forecasting that while we're at the bottom now, we'll bump along, and that the second half of 2013, the demand for low vol coal will improve. And at that point in time, we have the productive capacity to be able to meet that demand.

That's helpful. Thank you. And then on the gas side, I wondered what you have learned so far from your drilling in the Utica and where you expect to deploy your resources going forward based on what you have learned?

It's been an interesting journey as we expected it would have been when we embarked on the Utica, and working in conjunction with Hess, our partner. If you look at our experience to date for 2012, we're basically going to end up drilling 12 wells total, gross basis, amongst the two partners in 2012.

And looking at what we've seen, on the cost side with the Utica, I would say not a lot of surprises there in that we knew that the vertical portion of the well was going to cost more. We knew that the completions were going to cost more because of the use of gel in the Utica when you compare it to something like the Marcellus. The horizontals, if anything, have actually been a bit easier, and we expect some cost efficiencies in that relative to the Marcellus because of the additional depth helps you.

We're doing a lot of science upfront. We agreed with that, with Hess, our partner from the get go to put the science ahead of the drill bit. So the types of things we're doing, we're taking the whole bore cores for the entire Utica zone along with a couple hundred foot above and below the Utica zone to get a good picture of what's going on there. We're doing the diagnostic fluid injection tests to get a gauge on things like reservoir pressures and other parameters. And we're also assessing whether or not -- and at what rate or what time period it makes sense to cook the wells to see how that might help things like permeability and other things associated with it. So a lot of science upfront that's driving how we're going to end up drilling and completing these.

When you look at our two wells that we've got results on to date, the test three was our first one of course. The production data weren't as good as we were hoping for our well type curve, but also our first well, and maybe more importantly, it was very analogous to what we did in Northern West Virginia on the Marcellus. We drilled this well on extreme western border of Tuscarawas County, which is the fringe area of where our consolidated footprint sits. And we saw the same thing with when we drilled our first [Alton] well in the Marcellus in Northern West Virginia, and those results have improved steadily over time.

So we're very conservative on our frac design. We were very conservative where we drilled that first well and learned quite a bit coming off of that. You compare that to our second well in Noble County, much better. That also was on the fringe of the Noble County acreage, so our expectation there is that even with the improved results in Noble County, our future Noble County wells will be even better. It has been a journey. We knew that going in. So far, so good. We're still very optimistic on Utica, and I think speaking -- or taking the risk of speaking for our partners, I think they're optimistic on it as well.

That's very helpful. Good luck, gentlemen.

Thank you.

Next, we go to Jim Rollyson with Raymond James. Please go ahead.

Good morning, guys.

Good morning.

I think one of the comments, Brett, you guys had talked about earlier was as production into next year starts to come back up to hopefully more normalized levels, your costs should come back down. Just kind of -- if you could maybe bracket that in terms of -- maybe by the time you get into the second or third quarter of next year, should we think of cost being back down to where they were in the first, second quarter of this year, or is there some other things that might linger? Just trying to think of how to model this as you progress from the market we're in today to hopefully a better market next year.

Jim, this is Bill Lyons. I think that's a fair assumption. As we said, when we take a look at the increase in cost -- quite frankly we're a little [above] $1, $1.50 -- we were very pleased with those when you consider the -- all of the issues we had in terms of reduced production levels. We feel very confident is when we return to our normal production levels, you'll see those costs decrease, because we have -- our mines are large. They're well capitalized. As a result, they have large, fixed costs. And just like when production goes up, that gives us a lot of leverage to reduce the cost, when production goes down you see the increasing cost. As Brett mentioned earlier, our mines are in very good shape operationally, and quite frankly, we're very anxious to put the pedal to the metal and see what they can produce.

From a Buchanan specific comment maybe, what's the cost outlook there just running it five days a week, ballpark?

I think when you take a look at the five day a week, I think something like $85 to $90 a ton is something we expect. Again, you've got to realize that when we went all out and had just a tremendous operational year last year at Buchanan, you saw costs in the $70, $75 range, but that's operating on a seven day a week schedule. On that lower schedule, five days a week, I think $85 to $90 is something that would be reasonable to expect.

That's helpful, Bill. Maybe switching gears, I guess first, good job of pricing thermal coal in the $60s, given the market we're in. Brett, I wonder how conversations are going with you are customers as far as heading into next year, looking at the gas markets strip holding here in the $4 plus range. Just kind of what some preliminary conversations are like for -- as you go into next year?

I can tell you this. Bob is working hard on that. I'm going to have him make a couple of comments on that.

Sure. Jim, obviously favorable natural gas price trends have enabled us to conclude several large thermal coal agreements for 2013. Since we were here on the call at the end of the second quarter, we finalized nearly 11 million tons of business for 2013 at an average price of $56, but I need to point out to you that within that 11 million tons, there is a sale of roughly 4.1 million tons of high sulfa coal containing a BTU of 12,000 and an SO2 value of 6.6 pounds.

I need to say that in a recent conversation that I had with a fuel buyer, he commented that with the recent uptick of natural gas pricing, that this was making him rethink his coal purchase strategy for 2013, so that he didn't get himself caught short as gas prices continuing to trend up. We take a look at our key market area of power plants that are east of the Mississippi river, and Jim, we estimate that for 2013, we could see as much as 40 million to 45 million ton a year additional burn on those power plants. Most of that is caused, obviously, by higher gas prices as well as improved economic conditions.

Great. And last one, Bill mentioned in the press release that you expect to end the year basically pretty much with roughly no cash. Which, for one, I suspect implies that your goal at the beginning of the year was to be cash flow neutral on what you generate versus what you spend, and obviously you've run into some issues like at Bailey/Enlow. As you think about going into next year -- and I know you haven't sat down fully on the budget -- but just generically do you think you will be cash flow neutral to cash-flow positive as you think about it?

Jim, I think a lot depends on what happens in the markets in the next year and our profitability, but let's take a look at this. I think sometimes people put too much emphasis on what the absolute cash number is, as opposed to focusing on the liquidity. We're talking about having $2.3 billion to $2.5 billion of liquidity. We can draw on that any time that we need that, and I think that's the key number. Take a look at the actual cash balances for the year.

We started out with $376 million, which was quite frankly a high number. We don't need that much to have cash on hand there. We have $200 million at the end of June. We had $231 million at the end of September. The point I'm trying to make is that we are staying within cash flow, and I think we're managing our cash and our liquidity very well. And that's enabled us to weather difficult economic times. So, again, I don't think people should get hung up with what the absolute cash balance is. I think they should focus on the total liquidity.

Yes, was not a concern on liquidity. Just more trying to figure out what -- whether you thought told be free cash flow neutral or positive next year. Thanks.

Thank you.

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

Good morning, gentlemen.

Hi, Michael.

Brett, as you look into 2013, does your gut tell you that we're on the cusp of seeing a better overall energy demand environment here and globally? Or is it maybe going to be delayed a bit further because of either political or economic or regulatory issues going into 2013?

Yes, I can tell you this. Planning is a little bit tough for 2013, because we're seeing -- we're bouncing along the bottom on the Asian markets. The domestic markets seem to be pretty stable. So we think there's upside on the domestic markets. I would say that on the met side, and you notice we don't spend a lot of capital chasing the met business, because BMX is really a mine that can go either way, and because it's heat and its value and it's low cost so it can go into thermal or met.

So the way we look at it, we think met is going to be a third and fourth quarter bounce next year. Pretty strong. We think we're going to bump along in the first quarter. We hope the second quarter looks pretty strong on the met side. The steam side I think is going to be pretty stable for us. And we'll set some prices we think at the bottom of the market, and they'll continue to grow as the economy strengthens. But we don't think the economy is going to strengthen in the United States much beyond where it's at until the second quarter to third quarter of next year.

Now relative on your thoughts on natural gas and pricing and hedging, do you characterize your very low cost, very well-run operations as a natural hedge and you're more willing -- and because of the $2.4 billion in liquidity that CONSOL controls, are you more willing to leave more upside in the markets for natural gas in for the growth phase over the next three to four years even as the strip improves here?

Well, when you look at the asset base, the diversity is powerful. You've got the diversity of the met coal, the diversity of the steam coal. You've got -- we're moving into the oil and the liquids plays. And you've got that dry gas that is very, very powerful as well. I think when you look at it going forward, we're going to grow rapidly on the gas and liquid side.

And we'll invest our capital in the sweet spots there. Like I said, we're not going to build anymore coal projects until we see a real turn there. But we do believe gas prices will strengthen. The government -- our dear government has decided gas is the winner, and we're going to produce gas for them. So I'm okay with that. Because we diversified our base and not chased met with our balance sheet.

And my final question is one -- your comments about exports and being off, I guess, in 2013 versus 2012, what you guys are thinking. Is it more just the cyclical pullback, or are there -- have we peaked out on the export side? Or is the US really going to be contributor to the global markets once we normalize into the second of the 2013 in 2014 and 2015?

I think when the markets come back we're going to be a big contributor. That -- you saw we expanded our port facilities this year. We'll be ready for higher volumes, but right now it is a market cycle. The government pushed back on what we could do domestically. We went to the international markets, and we did well with that. And when it turns, we'll come right back swinging. We're a low-cost producer. We have two railroads into all of our mines. We have two railroads going into Baltimore. And we have the ability to move this coal worldwide because of its value in terms of BTU as well as met structure.

I appreciate it. Thank you.

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

Good morning.

Hi, Andre.

A few questions for you. First on the EMP side, you have a significant amount of acreage in West Virginia. [You've got] to be pretty focused on just a few counties. How much of your acreage do you think you're going to be realistically focused on derisking over the next 12 to 18 months, and then what do you plan to do with the acreage you're not as focused on?

Northern West Virginia on the Marcellus acreage footprint was the riskiest, I'll call it, or least-identified area when we did the Dominion acquisition a couple of years back. And through the last couple of years with our exploration and delineation program, not only do we know an order of magnitude and more information about Northern West Virginia, but we're an order of magnitude more excited about it based on those results that we've seen. So the rate -- the delineation exploration phase from our perspective is pretty much completed.

Based on the results that we saw from the first well that we drilled on the Alton pad to the recent results we put out there for the third quarter on Philippi and other Alton pad -- a six well Alton 2 pad in Upshur County. And now we're moving into an arena or time period where we're looking at the rate of drilling simply being a function of gas pricing and going back to those rate of returns. So the way to think about Northern West Virginia and Marcellus, it is a function of gas price. As those gas prices climb or the futures climb because of increasing gas demand, then we ramp up drilling, and a big area of the ramp up in drilling on the dry gas side would be Northern West Virginia. It is there ready to go. The science is completed. And now it is just a question of how much and when.

Got it. And then our view is met prices should hopefully rise from fourth quarter benchmark. But if some reason they don't and they stay in this $170 to $175 range throughout next year, what should we expect you guys to do with the Buchanan volumes, given it would make money at that level, but you already chose to shut it in for part of the third and fourth quarters?

Yes, Andre, the benchmark price of $170, you're correct. CONSOL can certainly make money at that level. What concerns us is that the spot market price could drop as low as $140 to $150. As some of the US suppliers are running for -- not even cash, positive cash, that's a real concern for us. CONSOL has the right cost structure, even running at five days a week. We can sell this coal into the market place. Where we're optimistic that the demand from European steel mills will improve, certainly the second half of 2012, and we're talking to a number of mills here in the United States and looking to sell additional volumes to those mills. So we're optimistic about the demand for 2013 and beyond.

But if the prices don't move, that's just a known factor, should we expect Buchanan it be closed or will it run?

Here, let me clear that up in terms of that. When the customer is not taking coal that's under contract, we will not build inventory on our balance sheets. We close the mine. When there is a market place where customers are taking coal and there is a flat to gradual build-out, we'll take market share. The mine will run.

Thank you.

Next we'll go to Mitesh Thakkar with FBR.

Good morning, gentlemen.

Good morning.

Hi. Bob, can you talk a little bit about export market on the steam coal side? And do you think you can sell some export coal for next year? How should we think about volumes on the export side for next year?

The export thermal coal demand, Mitesh, remains strong in Europe. Electricity generation in Europe is only down less than 1% from last year. Natural gas prices are high. Key suppliers of gas in both Algeria and Russia remain a liability concern. There is -- we're very excited about the opportunities for thermal coal, and in fact that's why we elected to spend the money to increase the capacity of our Baltimore terminal. Coupled with this, we balance the demand for thermal coal here in the United States with the demand overseas for thermal coal. And we're continuing to do that. And we've had really good success here in the United States. Our mines are certainly poised to run for next year. And that's -- as the demand increases on both sides, we have the productive capacity to meet that demand.

And how should we think about year over year change the steam coal export number?

Right now with the -- with our projections, we actually show less coal being exported next year, because we believe the domestic price for our large underground coal mines will be better here in the United States. If we're wrong about that, then we'll focus our demand on the export thermal business.

Great. Just a follow-up on the gas side. How should we think about your incentive prize to mobilize additional gas rigs? I know your $3.38 gas cost [probably is] -- Marcellus costs are much lower than that, given it's kind of an average cost. How should we think about the incentive price?

This goes back to the rate of return metrics, and the way to think about the gas opportunities in very general terms would be the Utica, the Marcellus -- I'll call it wet gas area, and the Marcellus dry gas area. Which Marcellus dry gas area, of course, encompasses a pretty broad region or acreage position. Right now, with the spreads being where they are, the least attractive of those for a number of reasons is the Marcellus dry gas opportunity. And that's where you saw the reduction in drill rates and well counts over the course of 2012. I think we've reduced them about three times over the course of this calendar year.

The opposite is also true. What I mean by that is the most increase or upside would exist incrementally when gas prices rise from the dry gas Marcellus region. So the way we think about it, we're basically drilling at a rate that's aggressive on the white gas opportunity, for a range of reasons from permitting to infrastructure and everything in between, at least in the short term. And where you see the most upside incrementally, [when] gas prices [as high as they will be on] dry gas drilling fields. As an example, the Northern West Virginia field we were talking about earlier.

Great. Thank you very much.

Our next question is from David Gagliano with Barclays. Please go ahead.

Hi, Dave.

Hi, thanks for taking my question. A lot of them have been covered. I did want to just break down more on the thermal volumes that were locked in during the third quarter. Was there any -- I just want to clarify, was there any switching from the high vol crossover ton into the thermal? It looked like the guidance for 2013 you had a reduction in the high vol assumption but an increase in the thermal assumptions.

Yes, David, that is correct. We had two opportunities presented themselves to us, and we just moved the tons from one category to the next. That's the beauty of having flexibility, with being able to take our high BTU Bailey / Enlow Fork and move it either into the steam market or the high vol met market.

Okay. Good. That's helpful. Thanks. Was it about 2.5 million of that?

That's correct.

And then on the breakdown between the 7 million and the 4.1 million tons that you mentioned earlier on the average price of $56, can you just tell us what the number was -- what the price was for the 7 million tons that were more relevant in terms of the quality?

David, I don't have that.

Dave, we'll come back to you. We'll call you off-line and give you that answer. Instead of having to shuffle papers.

All right. Good. And then the last question I had, given everything that you're seeing in the market, I was wondering if you could share your views with regard to the first quarter of 2013 met settlements? Obviously benchmarks at $170. You mentioned spot at $140, $150. What's your view with regard to the benchmark price? Higher or lower do you think versus the $170 number we had in Q4.

I think in the quarter, it will be somewhere between -- I think it will come out at $170 to $180 for the [full] fiscal quarter.

Great. Thanks very much.

Next we go to Paul Forward with Stifel Nicolaus. Please go ahead.

Thanks, good morning.

Good morning, Paul.

I just want to follow up on that question on the high vol guidance for next year, where you went from previously 5.2 million tons of expected high vol shipments into 2013, and that's now at 2.7 million. Just wondering if you could give us a little sense of -- obviously the commitment levels are pretty low, only 0.3 million tons. Could that go all the way down to 0.3 million tons and move everything into the thermal markets? And if that happens, can you talk a little bit about the reduction of some availability of up to 5 million tons? How do your high vol customers look at the reduction of those volumes, and is that at all threatening, or they're just in destocking mode and not necessarily thinking about what happens to that market later in 2013?

I'll let Bob give you specifics, but if you remember, we said the first two quarters of next year would probably be pretty soft on the International markets. And that's where our transition to high vol really happens. So with our flexibility, that steam market is going to be, we think, pretty strong in the United States. So we could move back and forth quite a bit in the first two quarters, and then probably a build-up at the end -- over the last two quarters of next year. But Bob can give you some specifics now.

Yes, Paul, our Chinese customers have reentered the market to build inventories, and although the prices have increased by some 12% to 15% from July/August lows, we believe that those prices need to increase by another 15% to 20% in order to make US coals compete on a sustainable basis. We haven't seen that yet. And we're fortunate because we have -- again, we have the flexibility to move those coals into other markets. And we're pleased with what we see in the domestic markets. We have several opportunities in front of us now. We're in negotiations for [tons] of considerable volumes. And we will place the tons where they offer us the highest margin possible.

Okay, thanks, and maybe just following up on that. You talked about BMX Mine coming online early 2014 and the potential -- most likely you'll be able to place that into the market without having to sacrifice volumes elsewhere. Can you talk a little bit about the utility inventories in Northern Appalachia, and what you expect -- and what scenario you think will play out in a way that really won't force just a cannibalization of other volumes, and instead the market will actually need that coal.

Yes, keep in mind BMX production can go into the international markets. So you have to look at the entire world in terms of taking on BMX. And if that doesn't happen, it is going to be the low-cost producer the entire world of the United States market. And so if you pull, pick one or the other, BMX is going to play. What will happen is it will push out the marginal players. We do know some of our competitors in the Northern App area are running into higher costs and probably having some reserve problems over time. So we think BMX is hitting the sweet spot, not only in our own portfolio, but in the world portfolio. So I think BMX is going to do very, very well. Whether it is met, crossover, or whether it's steam, low cost.

Added to that, as Central Appalachia production continues to decline, we believe those utilities will replace that with higher BTU Northern App coal that doesn't have a chlorine issue and that has good railroad transportation. And so we're not expecting to have to cut production from our existing coal mines in order to shoehorn that production in.

Okay. Thanks, Bob. Thanks, Brett.

You bet.

Next, we go to Meredith Bandy with BMO Capital Markets. Please go ahead.

Good morning, everyone.

Hello.

So, I'm going to -- a lot of my questions have been asked. I'm going to take a stab. Forgive a poor mining analyst. These are simplistic oil and gas questions. But in the Marcellus, if you could give us any update on the -- like your 30 day IP and also the drill and complete cost?

On the drill and complete cost, let's go there first. Right now -- and again, this varies quite a bit across our Marcellus field because it is a very large field. So I'm generalizing with an average view, and the actuals will be variations off of that on the high and low end. But the drill and complete costs are going to be somewhere around -- I'll call it $6.5 million per well, and that should get us on average somewhere around 8.5 Bcf per well. So when you do the finding and development math, it should be around $0.75, give or take on our average type curve. Now the data to date -- or a lot of the data to date has beaten those type curves, but that's our average for the entire field on an assumption basis moving forward.

When you look at IP rates and how these wells are done, we do a pretty good job I think at least of the quarter by quarter operational updates, specifically [stating] the new wells in each of our Marcellus regions. If you go back to those quarterly earnings releases -- or I'm sorry, operational earnings releases, the most recent one we put out about a week ago, you'll see over the third quarter, for example, in that release, what new wells came on in Central Pennsylvania, what were those IPs at? What new wells came on in our Northern West Virginia Marcellus region, what were the IPs? What came out in Southwest PA and what came on in what I'll call the wet area that Noble, our partner, is operating? So there will be a history there throughout those operational releases to give you a feel. And generally, the trend has been longer laterals, better IPs, better economics.

Right. And then I know it is extremely early innings for Utica. Maybe if you could just talk about, like, Utica compared to the similar stage of Marcellus? Or how can we -- obviously Utica seems very exciting from everyone's initial drilling results. Yours and other producers as well. But how should we think about the Utica longer term?

The Utica is -- you're correct in thinking that it is earlier in its development than the Marcellus. A lot of similarities in the two when you compare them, and some differences as well. The drill and complete cost for Utica are going to be higher than what I just quoted for the Marcellus. And they'll be significantly higher because of the deeper depths on the vertical section of the well as well as the use of gel in the completions, which is more expensive than the slick fracs that we use in the Marcellus. But we're also expecting higher EUR.

So the way I would think about the Utica, the finding and development cost, instead of the $0.75 number we had for the Marcellus, something closer to $1.25 as an average type curve moving forward would probably be a better assumption. And as we discussed earlier in the call, a lot of data now starting to hit, not just for ourselves but for the industry overall. And you're going to see that learning curve change in terms of the rate of speed very quickly, because we're just seeing orders of magnitude, more data coming into the field than we saw as little as six months ago, let alone a year ago. And that will change everything from fracking technique to where we want to drill. That's why we try to spend a lot of time articulating what we're seeing in the Utica play.

Thank you. Thank you, Nick, that's very helpful.

We'll go to Chris Hamelin with Davenport & Company. Please go ahead.

Thank you very much. Most of the of my questions have been asked. Bob, I think you said that Chinese price offers were probably 15% to 20% below what it would take to really move US exports into China sustainably. I just was wondering kind of what's your view on what it will take to get those price offers up into that range?

Chris, I wish I knew for sure what that answer is that will get it up. I'm sure that it will be driven by production cuts. There's still a surplus of coal I think. We saw over the last 30 days there were a number of vessels that were floating from a number of companies. Those vessels have pretty much all disappeared. There's been production cuts in Indonesia. Australia has cut back. They can't sustain it when prices -- when the BMA goes below $170.

So we need to get a price for our US coals on the met side in there at numbers that are plus $200 a metric ton. So will we see $200 a metric ton next year? I think it is possible. I think we'll break the psychological barrier maybe for a quarter or two. My guess is that the average next year will be somewhere between $190 and $200. So I think that improves. Get all of this spot sales out of the market place and drive up the price for the coal that's left.

One thing that I want to make clear to people on the call is the Australian cost structure is rising rapidly. So the ability to drive it much below $200 going forward is probably less apt to be based on the rising cost structure of the major suppliers. So -- and we also see the Indonesian quality dropping that's going into China in terms of BTUs and over time. So I think our low cost position and our high BTUs will strengthen over time. Is it going to happen in 2013? I guess we can tell you more in 2013, but at this point in time, we think that's a long-term valuable market for us. And it will grow, and we're not sure when the price is going to cross, but until then we'll be taking care of the Atlantic market and the domestic market.

Okay, thanks. That's very helpful. Just as a follow-on, one of your competitors recently said that they expected seaborne met demand to be up on the order of 10% to 15% next year. And they said that they're seeing in China met coal production being shut in because delivered cost domestically in China are above current prices in the seaborne market. And obviously you all have a very good view of China, given your relationship with Xcoal. I just wanted to kind of see what your thoughts are there.

Yes, Chris, a recent conversation with members of our sales team in China indicates a much stronger metallurgical coal demand in China since the middle of September. When we looked at the numbers, we came up with an estimate of 4 million to 4.5 million tons of additional coking coal was taken into China since the first couple of weeks in September. But again, we still think that for US coals we still need to see another 15% to 20% increase in the price of those imports in order for US coals to be sustainable. The problem that we worry about is that China comes into the market place and they rebuild their stocks for four to six months. Then all of a sudden, Chris, they disappear like they did in 2010. So as we get ready for this buying spree in 2013, we can't lose sight of that possibility.

Okay. And that makes sense with your view that things don't pick up material until the back half of last -- of next year. All right, thanks very much. I appreciate the color.

Thanks.

John, we've got time for one more.

And that will be from the line of Rich Garchitorena with Credit Suisse. Please go ahead.

Great. Thank you, and thanks for taking my question.

Hi, Rich.

Good morning. Just -- all of my questions have-- most have been answered. The one question I had was, given where nat gas prices are today, what's your view given the fact you do have both nat gas and coal exposure? How much gas to coal switching we could see? You have said that you are seeing some strengthening in thermal demand. Just some thoughts on that would be great.

Again, we look at the area of where CONSOL targets its coals, and for the first nine months of 2012 over 2011 we've seen about an 80 million ton reduction in burn. And for 2013, as I said earlier, we see that increasing by 40 million tons. Not increasing to -- from a positive standpoint. So we think at $3.75 gas and above, coal-fired units become base-loaded again. They run harder at night than they have in the past. We think all of the CTs some off, and that gets replaced with coal burn, and we're very excited. Our conversations with our customers, Rich, indicate to us that with higher gas prices on the horizon we're going to see a lot more coal burn in 2013.

Great, thanks.

Okay. Well that concludes today's call. John, could you please instruct our callers on the replay information, please?

Certainly. Ladies and gentlemen, this conference is available for replay. It starts at 12.30 PM Eastern, will last until November 1 at midnight. You may access the replay at any time by dialing 800-475-6701 or 320-365-3844. The access code, 267143. Those numbers again, 800-475-6701 or 320-365-3844, access code is 267143. Mr. Zajdel, any closing comments?

No, we just thank you everybody for attending. David and I and Mr. Tyler Lewis will be around later today if anybody has any body has any questions. Thank you.

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