CNX Resources Corp (CNX) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to CONSOL Energy first quarter 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 would like to welcome everyone to CONSOL Energy's first-quarter conference call. We have in the room today Brett Harvey, our Chairman and CEO; Nicholas DeIuliis, our President; and David Khani our Chief Financial Officer; and Jim Grech our Chief Commercial Officer. Today we will be discussing our first 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 web site available for this call. We will begin our call with prepared remarks today by David Khani, followed by Brett Harvey. Nick and Jim will then participate in the Q&A portion of the call. With that, let me start the call with you, David.

Thank you, Dan. Good morning. This is David Khani, the Chief Financial Officer for CONSOL Energy. This morning I will provide a quick overview of the quarterly result, key highlights or themes for the quarter, and then provide some insight into our guidance as well as trends to help you model our Company. I will then pass it on to Brett who will focus on our strategic plans. As Dan mentioned we have an updated earnings slide deck that we will refer to at times throughout the earnings call. I hope you have had time to digest the earnings release and slides posted earlier this morning.

Moving over to the earnings results. If you look at slide 3, we reported recurring earnings of $0.19 per share diluted, excluding the three, infrequent unusual items and incremental title defects impact. We posted a GAAP loss of $0.01 when you include these items. Overall, coal operations ran well, our marketing and sales team exceeded our forecast, and we continue to invest in our core businesses while maintaining our strong liquidity position.

I want to discuss the pension settlement expense that was triggered in the first quarter addressed in one of our appendix slides in more detail. We accrue pension liability on our balance sheet and fund our pension every year. If we have lump sum payouts above our service and interest costs, we trigger a pension settlement charge which expense is unrecognized pension losses as well as gets re-measured every quarter as assets and liabilities. Over the past seven years, we have averaged about $40 million per annum of lump sum payouts.

This year we triggered a settlement expense in part because at the end of last year we offered a voluntary severance program to our 30-year service employees. About 100 took this package, and nearly all took lump sum payments in the first quarter. Once you trigger this pension settlement in any particular year, you are subject to expensing these impacts and every quarter throughout that year. As a result we expect to see further expense recognized in 2Q through 4Q, but based on our historical trends we would expect that these amounts would be recognized and the expense would be much more materially lower than expense in the first quarter.

Now, moving over to themes for the quarter. Our Coal Division performed very well in the quarter, and produced 14.8 million tons ore, about 900,000 above forecast. This is impressive despite our unusually high [Seven Wall moves] and having our Blacksville Mine down for almost a month in the quarter. As our Chief Commercial Officer Jim Grech had noted in the prior quarterly call, the global coal market was in a restocking mode and our marketing sales team was able to capitalize on it. In the quarter our export and domestic customers took nearly 100% of their contracted coal as well as another 400,000-tons of our inventory. Our inventory now sits at 15-year lows. The coal inventory was in our target PJM markets has been falling and now sits below the 5-year average. All of this sets the stage for better 2014 contracting period.

Second key theme, and corresponds to slide 4, our coal costs were solid at $50.69, or 7% below last year's costs. Nearly offsetting the 8% decline in prices. While our portfolio of warm wells overall ran well, Buchanan unit costs declined sharply from unit production and reduced label force and the new Horn Mountain Portal. We have implemented robust cost control measures since the fourth quarter of 2011 and will continue to find ways to maintain strong margins. Third key point and ties to slide 6 and 7. Despite the downturn in prices we have been able to invest in our core businesses while maintaining a strong liquidity at $2.4 billion.

Now, moving over to guidance and review and some of the changes that we see coming forward. At the start of 2013, we provided two shifts in our coal marketing approach. One, we reduced our met coal sales expectations to about 6.3 million tons, from about 10 million tons sold over the last prior years. And second, we provided a wider-than-normal export sales range of 5 million to 10 million tons versus 10 to 12 previously. Both of these shifts were tied to an expectation for stronger domestic thermal demand and weaker met export trends. We will continue to match supply and demand to limit the downturn in our low-cost lone wolf operations.

Overall we have maintained our 2013 sales guidance at around 56.5 million tons which incorporates our better-than-expected first quarter sales levels and also recognizes a significant downtime in the second quarter that we expect that at Blacksville for most of the quarter. We, however, have raised our low coal met sales by about 200,000 tons within this guidance.

On slide 9, we highlight that our gas and liquids production forecast remains unchanged at about a 12% growth rate, and that is based upon the midpoint of our guidance. We expect to tie in almost double the amount of wells in the second half of this year versus the first half. Most notably from our Marcellus operations. This quarter marks the first quarter in the last several years where our realizations actually posted a year-over-year increase, and this highlights the shift that we have made towards our liquids production to increase and get balanced.

For our Gas Division, looking ahead, we are expecting to see a significant margin expansion over time from two key underlying trends. Declining unit production cost, and higher realizations. We expect to see declining unit overall total unit costs at the -- as the Marcellus volumes rise. Marcellus production grew about 60% in the first quarter, versus the year-ago period. If you look at slide 10, that highlights the mix shift going on between our low cost Marcellus and our high cost conventional gas. Marcellus is expected to represent about 34% of our total gas volumes, quadrupling from the 2010 levels. If you look at slide 11, and why this matters, you will see that the graph shows that the cost differential between our Marcellus and our conventional is about $2 per Mcf. Partially offsetting this expected decline will be an increase in gas processing, firm transportation, and higher production costs coming from our wet areas.

The second driver for margin expansion is high realizations. We expect higher price realization as liquid production rises from zero production in 2012, to about 5% in 2013. But we expect a meaningful ramp in 2014 and beyond. Our first quarter price realizations were improved by about $0.10 per Mcf for liquids volumes. This margin expansion excludes the benefits of rising natural gas prices.

Hedges. In the last month we hedged another 6% more of our gas volumes for 2013, as prices went above $4. We also layered on a modest amount of hedges for 2014-2016. Moving over to coal contracting, we remain very well contracted on the thermal side and have about 2 million tons of unpriced met coal remaining for 2013, of which half is already contracted. But just not priced. I would also like to note that we have had some timing adjustments in the second quarter of met-coal deliveries and this is impacting some of the calculation you will do for incremental contracted tons.

Moving over to coal costs. We expect coal costs to remain relatively flat with 2012 levels at around $52, $53, based upon our current coal price production forecast. We will continue to manage costs. But as we noted in the last quarterly call, we face increases from adding three new lone wall leases and as well as having labor rate increases.

G&A. We posted about 13% decline in our SG&A expense in the first quarter. Driving this improvement was tight cost controls and the recent Voluntary Severance Program that we noted earlier. We expect to see a modest increase in the next few quarters. But overall, we expect to be flat year over year on our SG&A. So as you can see, we have not sit idly by waiting for commodity prices to rise. We have been very active. Now with that, I will pass it over to Brett.

Thank you, Dave. It is good to be with you again to talk about CONSOL Energy. We're in an economy where the energy industry can be segmented into low-cost survivors and marginal players. CONSOL Energy is definitely a low-cost survivor. We have a portfolio of tier one assets in both coal and gas that are directly involved in low cost production. We have the financial strength to grow both coal and gas and for example, coal will be up 8% in capacity, when BMX finishes in 2014.

And in 2013 alone, we plan to be up 15% in gas. This is without borrowing money to grow. I think that is an important thing. That is -- the margins of low cost create cash to grow the business when you have good assets. Having this portfolio means that our earnings should be more consistent over time. This also means that we should trade at a higher multiple than our peers.

Now, let's see where we are right now. Lingering cold weather has lowered coal inventories at generators and producers all in our region. I had thought we had seen an inflection point in 2014 on coal pricing but now I think we will see it in 2013. The coal market in Northern APP is very tight. We ended the quarter with our own inventories at CONSOL Energy at a 15-year low. We are seeing domestic generators take all the contracted coal tons that we sold to them. Low inventories, along with higher gas prices, should strengthen our bargaining position with generators for 2014 sales.

With gas prices now over $4, CONSOL Energy benefits in three ways. We receive higher realization on unhedged gas volumes as our volumes rise, as we grow that business. We receive the drilling carry from our partner Noble Energy, and on the Marcellus JV. And it also drives up thermal prices as utilities move back to coal, as a counter to higher gas prices. So low cost equals margin expansion in coal and gas, and in baseball vernacular I would say that is a triple for CONSOL Energy.

But we haven't been sitting here waiting for the gas prices to rise. As David mentioned we took four steps to dramatically lower our unit costs, and you see that at our low-vol Buchanan Mine. We lowered our cost to the point that it generates $47 per ton margins. And we also, as he talked about, have reduced our overhead to react where we think we are in the marketplace. Across all of our mines, we have been more efficiently coordinating and marketing our operations efforts. We are in the position that where marketing sees a market where they need more coal, we can run the long wells at a harder rate to supply the demand. Development is in a surplus position. Our operators have put us in a good position in this slow marketplace.

Jim Grech, who is here with us this morning is now selling coal overseas to a much more diverse community, and countries, and customers across the world. We have looked to expand our base because of our low-cost position to take away risk for our shareholders as the market dries in the future. We can sell coal from the Pittsburgh A team as high-vol coal to Chinese steel makers, and PGI coal to the Brazilian steel makers, or thermal coal to our domestic market. It is the same coal. Our strategy is to produce locally and sell globally. In today's world, a growing resource nationalization that is a risk advantage for our shareholders.

Now let's talk about our strategy. I inserted a detailed strategy statement in the earnings release but let me touch on a few of the high points. As I said last quarter we will finish the BMX mine in about 12 months from now. We will have finished our investments in growing the coal business. We expect our coal business to generate free-cash flow after that point. We will either invest the cash in high rate of return gas-to-liquids business and the gas business itself as gas prices rise, or we will do something shareholder friendly with the cash and bring it back to our shareholders as I've talked in the past.

We have grown this Company through a recession. We are in a position to throw off cash as we finish these capital projects. That is a unique position in the energy world. What we have is a minimal interest in acquiring any competitor coal company. We see some assets that we might pick up if they were distressed but we are not out looking for other coal companies. We continue to monetize -- look at the process of monetizing assets, core and non-core. We've talked about that. And we continue to broaden that, to see if our structure and value of our shares are being moved forward for our shareholders.

So what part of our story has the investment community not fully picked up? We have actively managed our business to be successful in good times and bad times. We will soon be in an inflection point on the coal CapEx investment side. We've taken our free cash flow and invested wisely so that the -- when the energy markets turn, we will emerge as a strong competitor in coal and gas and our production will be larger and our revenues will be much higher. So this equates into margin expansion, which is good for our shareholders. We have upside potential, if we can successfully monetize some of the assets. When we don't think we are receiving value on our share price, but let me reiterate this is not a fire sale. If we don't get good prices, they are already part of our Company, we will look at it as time goes by. With that, let's open it up for questions.

John, could you instruct the listeners to prepare for questions.

Certainly.

(Operator Instructions)

John Bridges with JP Morgan.

Congratulations on the quarter. Just want to dig into the strategy. We applaud your strategic sense. You're the only company I can think of that was trying to sell coking coal into the peak recently. But I just want to dig into this tension between shareholders who are looking at separate companies -- gas companies separate from coal companies, and obviously, the corporate managers who want more stable, and have duties to deliver more stable, bottom line. Could you talk a little bit about that, especially with respect to the possibility of having separate shale gas and coal businesses?

Sure. I think that is something that we always need to look at. We have two great divisions. First of all, we bought the opportunity from Dominion to create a huge gas company. We found there were great synergies between -- because of the footprint, we found there were great synergies between coal and gas on the same footprint geographically. That has been very successful for us. And we think that success will continue to go.

But over time they are two different industries. And we should look at that on a regular basis. I can tell you this, that our gas business is as strong as any gas business in the region and our coal business is a premiere coal business and it has been for 150 years. We have two great assets. I think it is up to us to look at it from that perspective. And over time, I think the Board and management will add value to our shareholder by looking at it that way.

Great. As a follow-up, you mentioned selling core businesses and transportation. What is the thought process behind that? Thank you.

Well, you need transportation for all of the -- to move all of these great resources; pipeline, barge lines, all of those kind of things that move energy. But you don't have to own them all if you have a structure put in place to where you have access to all of this, and you can redeploy value that is not recognized in our share price, we believe, and you redeploy that value to continue to grow your big assets.

So you could sell those in a competitive environment, or a noncompetitive environment.

That's exactly right. You sell them into an environment where you still use them but you redeploy the value of them back to what we're valued for, coal and gas.

Okay. Excellent. Congratulations. Thanks again.

David Gagliano with Barclays.

Hi, I just have two quick questions. First, on the Buchanan cost, moving forward, is there any reason to expect those -- the cost performance that we saw in the first quarter to change in the out periods?

The only thing that will cause it to change is volume. So if we can continue to sell at volume, the unit cost will stay the same, within reason, within an inflation rate. But if the volume goes up or goes down, then the unit costs will move around.

Okay. All right. Thanks. And then the second question. Actually David, you alluded to timing adjustments impacting the count for the contracted met tons. Can you expand on that a bit? Did you price specifically, did you price met in the second quarter? If so, how much? What was the quality and what was the price?

Yes, I'm going to let Jim Grech answer that question.

David, what David Khani was referring to was the timing of shipments. When we have that portfolio, we don't want anybody to just look at the incremental -- what looks like an incremental change in the portfolio, because the base portfolio of shipments gets moved to later in quarters or other shipments get moved up. The whole portfolio is moving around. So that was what David was referring to when he said timing.

But we did sell a lot of contracts for tons for the second quarter.

Yes, I'm sorry, the second part of your question was, David, to make sure I answer it. You are asking did we sell contracted tons, new low-vol sales in the second quarter? Is that --

Actually what I'm trying to get to is clarifying why your 2013 expectations for realized met prices were contracted and priced, volumes went from 115 to 107. What changed in Q2 to drop the full-year number from 115 to 107?

Overall, David, the world pricing has gone down. And we are participating in the spot market, with our Buchanan coal as an example. In the first quarter, we sent four vessels of coal to China. Buchanan coal. Which is very important to us in the China market. It is a very competitive market. So when you put that into the overall average pricing, then it would pull it down. But the coal is going to China, as we said.

We are making -- still making very good margins on the coal going to China. And strategically, it is a great move for us. Because our Buchanan coal data wasn't that well established in China, as a stand-alone product. And so with the coal back in the market from other producers, chipping coal in that market, it has opened opportunities up for us to get our coal in there and get other people comfortable with it to using our coal. And so when the market turns around in China, we have a bigger customer base to draw upon. So that would be one of the main reasons that the average price that you are referring to went down.

Okay. And let me try one more time on the forward look, on the second quarter 2013, as well as Q3 and Q4 2013. How much met coal, low vol, did you price and what was the net back price for that volume?

We don't get into the specific pricing or give out the specific pricing on the coal that we sell. The incremental coal that we are selling so far has been mainly going into the China market. So it would be the same consistent pricing that you've seen in the first quarter. We do have some shipments going to Brazil as well, which nets us back different pricing. But the majority of our incremental sales that we are doing this year out into the future that you're asking about has been into -- to China, so that would be the type of pricing that you would see.

Okay, all right. Thanks.

Richard Garchitorena with Credit Suisse.

So my first question, on the strategy going forward, I know last quarter you had a slide which showed 2013 asset sales, including the Noble installment of 455 to 640. Has that target changed at all for this year?

No, it hasn't. We're very active on our sales, timing and cash flows and when it comes, we do know the Noble payment is coming, and the rest of it is going to be whether we're satisfied with the timing and value of the sales. So it is a little bit lumpy but we still plan to do it the way we described it.

Great. And my one follow-up, you did talk about selling the coal and gas transportation infrastructure. Can you tell us, is it strictly an asset sale process you're looking at right now? Or there has been a lot of speculation around other options such as MLP? Can you elaborate on that at this point?

We're looking at all of them. And that's as much as I'm comfortable with.

We are not going to shut down either process that we have going on, and so we want to keep the flexibility to look at all options.

Okay. Thank you.

Lucas Pipes with Brean Capital.

Good morning, gentlemen. And congratulations on another great quarter. My first question is on the natural gas side. Prices have looked a little bit firmer, you have a really great position in the Marcellus shale. At what level, or current levels enough for you to maybe look to add a couple rigs?

When you look at our Marcellus performance through the last 18 months or so, and then project that out for the remainder of the year, and into '14. This year we're on tap between our ourselves and Noble to drill just over 120 wells in the Marcellus. The majority of those, call it 70%, are going to be in the wet area. So where the incremental -- and that is a pretty aggressive drill plan when you look at the logistics of everything that needs to be done to get the wells, the sites prepared, the wells drilled and tied into the line.

So the upside for additional drilling, if gas prices continue to shrink and we will be in the dry areas, where we got -- really, when you look at it our cumulative history exists. So that is the Central Pennsylvania, Greene County, Pennsylvania, and northern West Virginia areas. Right now, the plan is 121 wells between ourselves and Noble. The Utica, we're at 27 wells. That is going to be probably a pretty firm number for the Hess and CONSOL portions of that. If gas prices continue to shrink and if we want to look at or contemplate additional drilling, most likely it will be in the dry area of the Marcellus.

That's very helpful. Thank you. And my follow-up question for James on the met coal side. Just in terms of your strategy there, would you say you want -- given your cost structure, you want to capture more market share with your marketing partners? Is that the way to think about it and that's why prices are a little bit lower than where they have been?

Lucas, we've been trying to get more markets for the Buchanan coal working with X coal and developing these markets and some of the markets have better returns than others. The China market is a competitive market. We have also been expanding the use of our Buchanan coal down in Brazil with a new customer. And we have taken back some business that we lost at an old customer that we had before in Brazil. And those prices are -- have a stronger price point than we get in China.

So we're not selling coal below market anywhere to get into the market. We're pricing at market. We're just saying with our cost structure and the market prices that are out there we are able to go in and pick up some new customers.

That's fantastic given the margins for the mine, thanks again.

Thank you, Lucas.

Thank you.

Brandon Blossman with Tudor, Pickering, Holt.

Jim, just one quick follow-up on the met pricing this quarter and perhaps a little bit last quarter; obvious disconnect between spot pricing and benchmark. Can you comment both on how you see that market, the disconnect there evolving over time? For the new customers that you're bringing on in China, do you think that eventually, as they get to be comfortable with the coal, and better, longer-term customers, that you will see a move back to a relationship-based more even pricing that is a bit more than what you see on the spot market?

Brandon, on the disconnect I think your question was on the BMA, the quarterly pricing on what is going on in the spot market. And in the market that we're dealing in, a lot right now, the incremental markets, China and down in Brazil, that quarterly pricing really was just a reference point, a directional number. But the pricing is really on a vessel-by-vessel basis, depending on the situation, I will say at that point in time during that week. Off of that BMA index, the business that we're picking up right now has very little relationship to the BMA index.

The new customers that you talked about in China that we're working with on Buchanan coal, it is to -- use the word to build a relationship, that is certainly very important to us. But what we want to do is to get them used to having this coal in their blend. A lot of these customers that are getting the coal up have never burned Buchanan coal before. So getting them comfortable with it their blend and then when the market turns and their demand goes up and hopefully we can be putting more coal into this expanded customer base.

Good news for the future. And, obviously, it is at a huge benefit to have that margin to play with in this market. Just moving quickly over to the gas side. Can you remind us where we are in terms of getting the Noble carry? How much more $4 gas we need time-wise? And then how long does that last? Is it 12 months before it can unwind if gas prices go back down?

The way that the carry works in effect is 90 consecutive days above $4 on the NYMEX gets us in the carry. And then to be removed from the carry would require 90 consecutive days below $4 on the NYMEX. So if you look at the April performance for NYMEX, where we're at looks good. May on out, it looks even better. So as we said earlier, with David's comments, and Brett's comments, our view is north of $4 we're assuming we're getting back into the carry, at least at this point in time, for the second half of 2013.

And I assume it is a fairly frequent review as to whether you will increase or add a rig in the dry gas areas this year or not?

Well, that's something we work through and discuss with our partner on the Noble energy side, and we had a lot of discussion both when we rationalize the drill plan when prices were dropping, parallel to that, we had discussions regarding what the plans would be if and when gas prices strengthen. So I think we've got a general consensus on that. But right now drill plans are, as I said earlier, 120 wells --121 wells between the two of us and the majority of those will be in the wet area.

Thank you very much.

Michael Dudas with Sterne Agee.

First question for Jim. Interested in expanding on your comments, at least the prepared remarks in the press release, about Northern App's penetration in the Central App market. Can you talk about some of the dynamics there and how real that might be near and longer term?

Mike, right now we've got about 6.5 million tons of our Northern App coal going down into the southeastern markets. And we have discussions that have started already looking at more sales, or adding to those sales into 2014 and beyond. So that is the extent that we have been penetrating, which for us is substantial. 6.5 million tons of our Northern App coal going down to the southeast is a large percentage of our tons.

I appreciate that. And the economics on rail and pricing make it attractive at the margin for back to the mine?

The railroads have been rather aggressive on the pricing on the rail side to get the coal moving down into that market to backfill for the hole left by the Central App. What we do with our pricing though is not just to that particular market. Our Northern App coal in total, as Brett said earlier, we mine it locally but sell it globally. So we look at the southeast market as a potential destination for our coal, but our Northern App coal right now is going to 13 different countries. We've got 53 different customers. It goes into the high-vol coal, it goes into the PCI, it goes into the thermal coal, all of these different markets including the southeast.

So we're building a portfolio that gives us the flexibility to send the coal to the southeast if that is giving us the best net back, to keep it in the PJM market if it that is the bet net back or to look overseas in these other markets. So depending on the market and the net back and the timing, that's where we will send the coal to.

Thank you. Nick, on your drilling and lateral cost, they have been quite solid. Could you elaborate on trends going into '13, '14, as the mix shift occurs in the Marcellus with where you're tacking?

The unit costs, when you talk about Marcellus and maybe the Utica, on the Marcellus side we are pleased with the cost performance over the past two years. This quarter, the first quarter, when you look at the Marcellus unit costs, they were up when you compare it to the year prior, first quarter, but 100% plus of that increase was because of midstream items.

It was firm transportation costs that we committed to and they will be for us when our production ramps up. And it was also the additional cost with hammering the liquids portion of our production. And once now we get into the liquids portion -- the wet area -- which of course has a margin expansion and we are happy to pay that cost because we get a list in our price.

So, beyond those two items our costs were actually flat to down year on year for the first quarter. And our expectation is when you look at things like our average drill cost and our stage frac costs per stage, that we will be able to maintain that cost control with some potential for improvement when that production starts to ramp up.

On the Utica side, that is more of the learning curve, earlier in the development of course, and the primary focus initially is to get our building complete costs down to where we think they should be. They are still going to be, on the finding and development cost basis at this point in time, a bit higher than the Marcellus. But our expectation on drilling complete costs for the Utica is right now around $12 million, $12.2 million, and we hope to drive that ultimately when we get the multi-well pad down towards $10 million. Taking the experiences we've learned from the Marcellus and applying it to the Utica, with our partner, we're optimistic on that front as well.

And to follow up on your comment about firm transport, can you maybe talk about transport take-away capacity in the region, how it is helpful to the house position versus competitors? Are you seeing some of the demand for some of the products from newer customers and the investment on the infrastructure build out, et cetera?

The firm transportation in the Marcellus portion of our gas segment has not been an issue. We were, as an industry, lucky to have a lot of infrastructure already in place in that Northern West Virginia, Western Pennsylvania area. And that build out has developed incremental capacity as well. So that market has materialized to handle the production and the future production for the foreseeable future.

On the Utica and with the non-methane, the heavy hydrocarbon side, that is still a work in progress. You hear a lot of the announcements and a lot of the investments that are being made. But there is going to be a coordination that needs to occur there between the production growth ramp and the infrastructure and we are watching that very closely. We've got a plan in place to manage that for our specific drill plan.

On the demand side, the demand build continues for natural gas and for the heavy hydrocarbons and condensate. Some of that is very short term demand build in regards to things like electrical generation. And some of it is much longer term, but it is very bullish when you look at things like transportation or the chemical industry coming to this region to take, for example, ethane production. But because it is longer term and much bigger investment there is a lot more uncertainty there in terms of on what level and when that timing will occur.

Excellent thoughts. And just my final question. Brett, maybe you can elaborate more on your thoughts on the acceleration of pricing strength '13 versus '14? Is it more just the dynamics of coal producer discipline and a little colder weather? Or is there more overarching economic here, maybe abroad, given your other opportunities looking at the world there? Are things changing where maybe 6 to 12 months from now coal demand and eco fundamentals improve internationally to help drive US and international pricing?

Well, coal is still the fastest-growing energy source worldwide, even in the downturn that we're seeing on the global basis. And the fact that we've got such a diverse portfolio, as Jim said, we're moving the same coal into the steel business, into the thermal business, and into the thermal business of Europe. And we have all of these different places that put us on different continents and countries. And the domestic market, interestingly enough, as utilities shift to gas, when they come back to coal the coal supply isn't there.

And so when that coal supply is not there, that gives some leverage on well capitalized companies like CONSOL that have the ability to feed the natural markets but we have opportunities to do other things as well. So I think that is going to give opportunity on price. And so diversity of marketplace really creates a lot of opportunity for this high BTU coal.

Excellent. Thanks for your thought, gentlemen.

Curt Woodworth with Nomura.

I was wondering if you could talk about the overall thermal portfolio in terms of the Northern App and what you view the break-even sensitivity of your business versus a natural gas combined cycle plant? And also, have you looked at it on a plant by plant basis, what your exposure would be to some of the coal plants that have been slated to retire in 2014, 2015?

It is $3.50 to $4.00 on the gas price. That's a real transfer in our region. I would say that's a good solid number. And you see that transfer happen. We're seeing it happen with the utilities.

As the units start retiring in response to [Matt], in 2015, the generation demand will still be there on the coal side. And what we've done is we structured our portfolio that our customers are the larger units that have the pollution controls in place already, or are putting them in place so that 2015 and beyond, our portfolio is targeted for customers that for units that are still going to be running.

And we think those units right now have capacity factors that have a lot of upside in them. So we have designed our customer portfolio domestically to target units that will be there post-2015, and have upside in the capacity factors to consume more coal to make up for the generation that has been taken offline.

Okay. And on the asset monetization side. Is there any way you can provide revenue or EBITDA that could be associated with some of the midstream assets you're looking to produce? And in terms of the -- what you're going to do with the cash or just free cash on the underlying business, would it be fair to say you are going to look to buy back more stock given the disconnect you see right now?

Those are good questions. We won't talk about EBITDA and value until after we've made the deal. And we learned that. But there is a lot of value in these assets. I stress that we don't have to sell this stuff, either. What we're doing is trying to find value for the shareholders as soon as we can.

The second part of that question is -- what do you do with the cash? In rising gas prices, and the ability to hedge in rising gas prices, you look at reinvesting in this great asset base or you look at buying the shares back. Or some shareholder-friendly process. We will take those ideas and really work them. Because they're all shareholder-friendly. And we see all -- both of those, even dividends in a sense, are shareholder-friendly. But we will look at all of those things, and make the right decision for shareholders, to give value as quickly as we can into our share price and into the hands of our shareholders.

Okay. Thank you.

Paul Forward with Stifel.

Back to Buchanan, your production in the quarter was well above the original guidance 3 or 4 months ago. I was just wondering when you consider that China has been so much of the incremental, they have been the buyer, are you doing anything as far as shipping a higher ash product that might boost volumes or can you talk a little bit about quality at Buchanan relative to where it has historically been?

Paul we have not been shipping any higher ash products. We have been shipping our typical historical Buchanan spec because again we want to establish Buchanan as its own brand, its own identity in China, to have a clear market in as many outlets for the coal as possible. So we have been shipping our typical Buchanan spec that we ship anywhere else to any of our customers.

Great. And on the strategy commentary. It was a pretty firm statement that once you've got BMX complete that you will be at $5 to $6 per ton maintenance CapEx and then the additional cash will go over into either returning cash to shareholders or to the gas business. I was just curious. You painted a pretty supportive picture for pricing in Northern Appalachian coal over the next 6 months to 12 months, let's say. And BMX will be up and running April 2014.

Brett, I was just wondering if you could talk about if the market -- if coal markets turn, if they change in a very positive way over the next 12 months, how firm is your commitment to really not beginning projects in coal or certainly not buying assets in coal or buying other companies in coal? Coal has a way of presenting some pretty lucrative-looking projects when the market is strong. I was just wondering if you could talk about your longer-term strategy in allocating capital toward the coal business.

Well, two things. One is we have capacity. And we will bring that capacity online as the market -- we are not going to do it at low-spot prices. We don't need to practice, our capital is in the ground and we will bring it out when it's ready to go. So in the short term we have capacity to meet markets that would grow and some opportunity to get a higher pricing. And with low inventories across the northeastern part of the United States, we think there is an opportunity to do that.

Now longer term, we have 4.2 billion tons of coal. We don't need to buy anybody else's coal. We are already in the low-cost sweet spot, I think, in the eastern United States. We would look -- these things evolve over time. But right now, it is clear to me by talking to the shareholders that our coal position is strong. Why would you dilute it? We just expanded it by 8%. And it is very difficult to open a mine and have assured rates of return.

Fortunately, BMX is the lowest-cost mine in the region. Otherwise I would be worried about that mine coming into this marketplace. So I think if you look at the asset base, it is solid. If we grow, it would probably be from within. But I don't see it in the near-term future. And I think we can harvest what we have and do very well.

Okay thanks, Brett.

Meredith Bandy with BMO Capital Markets.

I will take another stab at the potential sale of core assets on the transportation side. Can you give us any idea of -- are you looking at gathering or transportation assets in gas, or are you looking at both? And just in terms of your portfolio, what is the size of the volume capacity that you have available to work with?

Well, we own the gathering and transportation of most of our gas production now. We built it out for future growth. And it is an asset that we don't believe is valued in our share price. So we're looking at ways of monetizing that to our shareholders' value. Other than that, I don't want to be specific about size and where they're at because we would announce that when we do the deals, but we do have plenty -- we're a good-size company. Nick, do you have any specific numbers on that?

Maybe one way to think about the midstream side on natural gas, just to look at one sub-segment of our gas segment, look at the Marcellus, what we're doing with Noble. This past quarter we were somewhere on a CONSOL-only basis of around 120 million cubic feet per day average flow rate. So that doesn't count our coal bed methane up in the northern tier of our coal bed methane assets with conventional gas.

That is growing of course. Noble would be about the same. So our joint infrastructure there -- think of it as 240 million cubic feet a day average in the first quarter just on Marcellus alone, which is ramping up. And then you add to that things like conventional or the legacy CBM in the Northern Appalachian portion of our segment, you get a feel for the growth trajectory on the capacity of these midstream and processing assets.

So the size is really built for your business, there is not a whole lot of third-party in it?

That's correct.

And then could you just remind us on staying with the transportation, on the coal side, where do we stand with the expansions and potential expansions on your port capacity?

Meredith, the expansion at the Baltimore terminal was completed, so that gets us up to about a 15 million ton per year through-put capacity. So that is done.

Done last year.

Done last year, yes.

Wasn't there another phase that you were looking at or no?

There was some talk about taking an expansion beyond this expansion, which would be a substantial undertaking to do that. And we had discussed that, but there really is -- there is no plans in place to grow any larger than we are right now.

Okay. Thank you very much.

Chris Haberlin with Davenport.

In the release, you noted some promising macro indicators in China that suggest the market recovery in the back half of the year. Can you just elaborate on what you're seeing there?

Yes, Chris, we focus on two. There's lots of indicators in China, but two that we have found to have a correlation that as they show some increase that subsequently we will see some increase in coal demand, is the new loan growth numbers. If you look at that, there has been a tremendous jump from February to March. 71% increase February to March. Year over year, it is about 5.7% which is also a nice increase. So it is that new loan growth number is getting back up where it was historically. And month over month, it was a huge increase, 71%.

The other one that we look at is the M2 money supply. Total cash in circulation. And the new loan growth feeds that and that also in March has risen, up to about 15.7%. So with this increase in credit historically has meant a means to fuel growth later in the year. So that is what we've been looking at, Chris.

And then staying on China, it sounds like you all have done some business, or a significant amount of business, with the Chinese over the past quarter. A lot of the trade rags have suggested that the Chinese have really been out of the spot market, since Chinese New Year. Is that consistent with what you are seeing? And if so, when do you think Chinese buyers might return to the market and how is that going to impact pricing dynamics?

Well, Chris, it is consistent in that it wasn't as strong -- the demand was not as strong as it was say in January and February but there are still some spot cargoes that are being sold. We've sold one in April. We've just actually in the last 24 hours concluded another spot cargo for May. So the demand is not as strong as it was, but it is still there.

Now, your second part of your question was when do we think we can see an upturn. The indicator, the leading indicators that we talked about I just mentioned. We're thinking that maybe it gets later to the end of the second quarter, the result of that money coming into the economy is going to lead to growth and we will start seeing an uptick in demand. That's our estimate, but there is a lot of estimates on that one. That is a tough one to call, Chris.

And just last one for me, with Northern App customer inventories below normal levels, what are you hearing from your customers about a potential return to the spot market this year? And would that represent upside to your thermal guidance?

The inventory picture, there are two sides to it Northern App. There is our inventory picture which Brett mentioned. And I would like to give you a couple numbers around that, just to give you some examples what he is talking about. Then I will talk about customer inventories. In the Northern App, in our [mousel] area, we've got 10 long walls and it has about 2 million tons of inventory capacity across all of those 10 long walls. On March 10, we only had 161,000 tons of coal on the ground. So 10 long walls, that is 50 million tons a year production, 2 million tons of inventory and we only had 161,000 tons of coal on the ground.

There was actually a point in the beginning of March in our three West Virginia rail lines, Robinson, Blacksville and Leverage, at the same time had zero inventory on the ground which is something that has never happened. So our mine inventories are as low as they have ever been and the demand, the pull from them has been very steady from our customers.

You go to the customer side of the inventory, as you mention that, the PJM inventories that we look at, the 5-year average right now is about 23 million tons and we see it to be about 18 million tons, so the inventories are below the 5-year average. And what that means for us at CONSOL, well, of our domestic thermal coal, 78% of it goes into the PJM.

So our mine inventories are low. The PJM inventories are low. That's our big customer base. You take that, and you put plus $4 gas prices, and we think the platform is there for some upward price movement. Now, we're in some shoulder months here. We see the inventories coming down. We have done a few spot sales to customers. We're getting more phone calls and discussion now. We haven't transacted a whole lot more, but we're certainly getting more interest.

Okay. Thanks very much.

Andre Benjamin with Goldman Sachs.

I know it is a little early in your drilling program, but in the Utica, I was wondering if you could maybe talk a little bit about how you're thinking about the exploration potential to prove that the play is economic, given what you do know at this point? And then how much of the production stream in the areas where you are focused are likely to be mostly oil versus NGL rich?

The Utica effort for 2013 really can be broken down into two groups. The one group is what we consider and our joint venture partner considers to be core. So when you look at the 27 wells that we have planned for this year, that is where the bulk of that activity is going to fall within. So that is areas like Noble County, or in the Hess-operated areas, counties that they are operating in, including places like Harrison.

The second group of the Utica activity has been what I will call the exploration-delineation effort outside of those already identified core areas that we just mentioned. And we reported results over the past couple of quarters on some of those wells that have been drilled and that we're testing, whether it's Tuscarawas county, or Mahoning, or Portage. And the shows there have ranged from heavy on the oil side to a combination of condensate and oils to an oil and gas mix. Just depending where in the window we are.

Same for the core area, too, when you look at somewhere like Noble County. So we're convinced at the core, we have a 27-well program to unlock value and get the returns for the shareholders on that, in conjunction with Hess. And we're getting a lot more knowledgeable on the area outside of what we currently deem core to figure out where we want to focus upon in the future, moving forward.

When you flip over to the cost side, the cost trends have been going in the right direction. If you look at capital, we had some early wells in the program, as you might expect, like the rest of the industry, that were very high on drill-and-complete costs. Those have steadily come down and come down significantly. This year we're looking at just over $12 million drill-and-complete cost per well. We hope as I said earlier to get that down close to $10 million when we start to move to the multi-well pads. That could be an analogy that we could borrow from in the Marcellus.

And that gives you, looking at some conservative well profiles. In lateral length, that give you somewhere around $1.25 finding-and-development costs. So the economics are there. We've got the bulk of our 27-well program in what is already deemed core and we've got now the data coming in from these other areas and other counties to see what else falls within that core area once we get those results.

And then on the thermal side, I apologize if I missed this. I know the Bailey coal, you like the fact that you can move it in and out of various markets both domestically and internationally. If thermal prices were to stay where they are today versus the press release, I think you indicated $100 would be where you thought you could get more active. How should we think about thermal exports year over year and maybe over the next couple of years if you don't see much improvement?

And the $100 you're referring to is the API to index -- which of course we have to net back --

Sorry about that, yes.

It would be nice if the mine price was $100.

Yes, it would.

I think we said as approaching $100, so with the net backs that we're getting and the BTU of our coal which is high BTU travels well. I think if you get to $94, $95 range, we would start having an interest in sending coal to Europe versus some of our other current alternatives that we have, being some of the high-vol markets in other countries. And so anything above $94, $95 it starts getting our interest, should we start flipping the tons over to Europe versus sending it to other markets. Dos that answer your question, Andre?

Yes, that was helpful. Thank you.

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

Caleb Dorfman with Simmons and Company.

Thanks for taking the question. First off on the high-vol market. You had some pretty encouraging commentary about the new customers actually testing the coal. When do you think we will actually start seeing them adopt it in a larger scale? And could you expand on the lower guidance levels for shipments in 2013?

On the high-vol, the testing we've had, actually some testing here domestically. We have it going on in Brazil, it is both the high-vol and the PCI coal, and we sent some samples over to India for three different potential customers in India. So the market -- we are trying to develop it. As far as when is that turning into sales, we've actually just concluded a high-vol sale post the press release, it just happened within the last 24 hours. A substantial high-vol sale to Korea, almost 700,000 tons of coal. So that is not reflected in our press release.

So this expansion of the high-vol and new customers trying it or existing customers wanting to take more, we think we're really on the -- we've been very successful to develop coal last year, and we still see room for it to grow as far as other opportunities around the world for us.

I know that you mentioned that you have a lot of opportunities for that Bailey coal. If you had to look at it right now, from a price basis, what's the most economical opportunity? And from a customer relationship basis, how do you balance that out between the domestic thermal market versus the European thermal market versus the Bailey high-vol product?

Really at this point in time all of those markets are trading I would say within a $5 a ton range. But we have been stepping that range up a little bit, with the increase, the shortage that we have and the increase in demand. So since it has been within a $5 a ton range between any of those markets we talked about, we have been flipping it. We sent some to Brazil. We have also just taken as well recently some domestic thermal sales, another 233,000-ton of domestic thermal sales. I mentioned that we sent the coal over to Korea. So again, the range is very tight. Within $5. And depending at that point in time what we have production, and what is available, and the market opportunities, we make the choice at that time.

Great. Thank you very much.

Okay. Could you instruct our callers on how to access the replay, John?

Certainly. And ladies and gentlemen, the replay starts today at 12.30 p.m. eastern. It will last until May 2 at midnight. You may access the replay at any time by dialing 800-475-6701. Or 320-365-3844. And putting in the access code 286963. Those numbers again, 800-475-6701. Or 320-365-3844. And the access code 286963. Mr. Zajdel, any closing comments?

I just want to say thank you. And Tyler and I will be around the rest of the day if you have any questions, we will be happy to take your calls. Thanks very much for listening.

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