CNX Resources Corp (CNX) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, andwelcome to CONSOL Energy's second quarter 2013 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, Dan Zajdel.

Thanks, Tony. I would like to welcome everyone to CONSOL Energy's second quarter conference call. We have in the room today Brett Harvey, our Chairman and CEO; Nicholas DeIuliis, our President; David Khani, our Chief Financial Officer; and Jim Grech, our Chief Commercial Officer.

Today, we will be discussing our second quarter results. Any forward-looking statements we make or comments about future expectations are subject to business risks, which we've laid out for you in our press release today as well as in our previous SEC filings. We also have slides on the website 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 morning I will provide an overview on the quarterly results, key highlights or themes for the quarter, and provide some line item guidance as well as some trends to help you model our Company. I will then pass it on to Brett, who will focus on the strategic plan and monetization update.

As Dave has mentioned, we have posted out an updated earnings slide deck onto our website, and I will refer to this throughout the call.

If you look at slide three, the Company reported a net loss of $0.05 per diluted share for the quarter ending June 30, 2013. This compares to a positive $0.67 per diluted share for the second quarter of last year. Last year, however, included $112 million net gain or $0.49 per diluted share from asset sales.

If we adjust our earnings per share for the quarter [to core] items that we reflected in our earnings release, we had a modest improvement of a loss of about $0.03 per share. But let me discuss several of these items and the year-over-year impacts to put it into perspective.

First, we had the Blacksville fire extinguishment and other costs of about $23 million in the second quarter. Two items not reflect in the our adjustments are loss revenues of about $25 million on about 0.5 million tons and any insurance proceeds, whichwe hope to receive in the out years.

Second, pension settlement resulted in an expense of about $5 million. In our first quarter earnings call we highlighted that we would expect to record this expense throughout 2013, but the subsequent quarters would be lower than the [$27] million expense recorded in the first quarter. Remind you that we triggered this because of a fourth quarter voluntary separation of 100 employees with 30 years of service to CONSOL.

Third, we had Marcellus Shale title defects of about $3 million in the quarter as well. As this process is finalized over the remainder of the year, we could recognize more book losses, but to put it in perspective, in total we have recorded about $12 million to date.

Fourth, income tax rate was unusually high. We posted pretax earnings of $1.8 million and recorded an income tax expense of $14.6 million. Two main reasons for this unusually high rate. One, we recognize the gain on sale and handled the tax rate discreetly because of it. Second, we calculate quarterly or interim tax for recurring earnings based on an annual expected results or forecast not just the quarter.

Moving over to slide four, year-over-year cooperations reported approximately a $2.70 decline in margin to about $10.87 per ton. This equated to about a $74 million revenue decline year-over-year, about half tied to lower sales price and the other half to sales volumes. The price decline was due to about a $26 per ton decline in low-vol met prices, and secondarily from a $2 per ton in thermal coal prices.

As margins decline, production levels become more important to cover our fixed costs. While we met our second quarter production guidance, total production year-over-year declined 700,000 tons to 13.8 million tons. The Blacksville Mine contributed 500,000 tons of this decline and our idle central app mines contributed the rest. Despite the 5% decline, our coal operating cost decreased $0.17 per ton to about $52 per ton.

Moving to slide five in gas, as we begin the acceleration of our drilling activity in gas production growth, it's important to keep our eye on margins. Despite a margin amount of new production adding in the quarter and incorporating new and higher firm transportation costs, our gas division margin expanded by $0.05 to $0.69 per Mcfe. Unit cost increased year-over-year about $0.43 per Mcf.

The increasing in cost is primarily driven by a 28% increase in firm transportation rates and processing fees. As we noted in our first quarter call, we expect margins to rise over the next several years as our mix shifts toward liquids and low-cost Marcellus. Partially offsetting this will be higher transportation rates and processing costs for these liquids.

Two other increases were from higher severance and other tax, which are partially price driven and mix driven based upon the states in which we produce them as well as higher DD&A rate. The higher DD&A rate is mainly a function of last year's negative price [revisions] and reduced drilling activity in our CBM area.

Moving over to slides six and seven, we highlight that we continue to invest in a downturn and able to maintain solid liquidity at $2.2 billion. We borrowed $173 million off our $2.5 billion revolver in the quarter, but also sitting with $72 million in cash. We expect to receive the last of the Noble installments of $328 million in the third quarter.

We had three key themes really for the quarter and all of the work that we've done. First, on monetization, we progress nicely on our goals to monetize our infrastructure assets. Brett will obviously hit this in more detail.

Second -- and we also want to remind you that we do have a noncore asset sales process in place, and we hope to monetize between $100 million and $300 million in gross proceeds. We close the $225 million West Virginia asset sale in the second quarter, and we expect to see more in the second half.

Second key theme is that domestic thermal demand remains solid. Our target utility custom base continues to take their coal, and our internal goal is to capitalize on this by improving our thermal production targets in the second half. As noted in our slide deck, the [PJM] inventory levels continue to decline and now stand at 39 days, well below the five-year average of 52 days.

Our coal inventory will also continue to decline to about 900,000, down from 2.3 million last year. In the quarter, we contracted 2.6 million tons of thermal coal in the quarter,highlighting that the steam coal market has shifted back to a more normal contracting pace.

Third key point, met coal prices are weak, as everybody should know, and while prices have been coming down, our marketing team has been able to take profitable marketed share. We continue to run our Buchanan mine at below capacity, but expect margins to continue to contract in the third quarter because of more open tonnage.

Look out at guidance and some of the changes we see. For coal, overall we have maintained our 2013 sales guidance at 56.5 million tons, which incorporates 900,000 tons of impact from downtime in the Blacksville. It was a major accomplishment for the Blacksville Mine to come online safely in over nine weeks. Also worth noting is we've raised our high-vol sales to at least 2.6 million tons from the 1.7 million tons previously forecasted.

Moving over to slide nine, we highlight that we have shifted our midpoint of our guidance for gas to 172.5 Bcf. For the past two years, we've positioned ourselves to capitalize on the Marcellus and Utica Shales. We've acquired, optimized, delineate and partnered to position us to monetize the asset base to its fullest.

We now see our gas and liquids production growth accelerating the second half to about 15% and initiated our 2014 volume growth guidance at 26% based on the midpoint. We have thousands of Marcellus locations and expect to drill about 120 wells this year, so we have a multiyear drilling program and about ability to ratchet up activity.

Hedges. We've added about 2% to 3% of our hedges out over 2013 to 2016 gas volumes. We now have about 45% of our total 2013 gas production hedged, and about half of these have basis hedges.

Looking at coal costs. We expect coal costs to be relatively flat with 2012 levels at around $52 per ton based upon our current coal production forecast.

Moving over to capital. We expect to be at the upper end of our capital range at $1.5 billion. We've added about $100 million of incremental land capital this year, including our airport land transaction we've announced previously. In addition, we expect our BMX mine capital to increase, part of which would be incurred this year. The BMX mine is on target for first quarter 2014 -- late [2013], first quarter 2014 start.

Moving over to slide 12 and a discussion of OPEB pension [and some of our] legacy liabilities. I want to highlight the potential benefits of rising interest rates on our future expense and balance sheet items for two of our long-term liabilities,pension and post-retirement healthcare.

While we focus on reducing the cash flow impacts over time, the discount rate has declined from 7.25% in 2001 to about 4% at the end of 2012, inpart causing our balance sheet obligations for all of our legacy liabilities to rise from about $2.2 billion to $4.2 billion at the end of last year. With the fed starting to pull back on its [fiscal] loosing policy, we appear to be in the early stages of an interest rate rise.

On slide 12 we highlight two of the potential impacts on rate increases, 85 base point increase and a 200 basis point increase on the discount rate. In isolation of the other moving variables, 200 basis point increase would reduce expense and balance sheet obligation by about 15% to 20% over our 2012 actual results. We update our assumptions once a year, so these impacts will be reflected in year-end 2013 balance sheet and 2014 income results.

In summary, while this weaker energy environment is proving we are not immune from lower prices, we will intense the intensity [and drive to] improve profitability in three key areas. One, our goal to improve production targets focus on coal and gas. Two, a focus on reviewing staffing levels at the mines of projection expenditures. Three, we're going to tighten our belt even more on direct and indirect administrative cost.

With that, I'll pass it over to Brett.

Thanks, David, for the detail on the quarter. There is a lot there, andI hope you all appreciate that we're busy and reacting to this marketplace.

Good morning, everyone. It's good to be with you. Let's talk about what's ahead.

From a strategic perspective, we're not sitting here waiting for higher prices. We have good low-cost assets, but that mix has to be looked at all the time. We have to manage our inventory, our overtime, and react to the marketplace that we see. Having said that, the thermal side has been pretty strong on the coal side. We expect to accelerate production on the thermal side the best we can to capture that without increasing inventory.

Our top priorities other than safety and compliance is to see that we create shareholder value by managing the success of the long-term direction of the Company. We have announced, starting in 2014, coal CapEx goes to maintenance and production levels around $300 million to $350 million annually, and that's where coal is going to be.

I call it the harvest mode. We spent a lot of capital on coal. We believe that is a place for it to be right now.

We have no interest in acquiring competitor companies in the coal business. But golden opportunities in gas and coal that add to the value of these great asset bases we have, we will consider.

We will drill liquids wells as fast as we can go as long as the liquids prices hold up, as that'san advantage for us. We'll drill the dry gas window if pricing support, otherwise we'll find a way to return value to our shareholders. We're working to monetize some of the assets that aren't receiving value in our share price, and the more we studied the assets in this great Company, the more we realize there's value there that the shareholders aren't seeing or valuing.

Now I want to provide a bit more detail on the asset monetization process. We should have an announcement in the third quarter on some of these assets. Now, remember, we don't announce the results of any of this until we're finished with it. We learned that two or three years ago when we announced sales ahead of time.

But I can tell you the process is underway. We've talked about it, andwe see a good response from the marketplace on some of the quality assets that we're looking at monetizing.

In the earnings release we also noted that we're evaluating our overall corporate structure to consider options to unlock additional value for our shareholders. This should not be a surprise to anyone, because from the day we did the Dominion deal I've said that we will always look at our asset base across the board, coal and gas, to see that we're getting value to move this great asset base forward in terms of net present value to our shareholders.

The structure issue is becoming more and more serious because the gap between the underlying value of our Company and the current enterprise value has not narrowed in our opinion. We have accomplished -- or will shortly -- several important items in the last year that enable us to be more aggressive and consider this more seriously.

In coal, we're fast approaching the completion of the BMX mine. High volume, low-cost, more optionality in coal that gives us a great position. On the gas side, we see accelerating gas production through the second half of 2013 and 2014, as we released earlier. We're spending the capital to grow this business very rapidly, and you're going to see the results in the next few quarters.

Growing liquids production within the Marcellus Shale, which are driving wider margins is well underway, and our partner who is now set in the Marcellus, Noble Energy, is engaged at drilling rapidly at the same rate that we were. And we've also have had successful exploration in the upper Devonian Shale, as we've announced.

We are also transitioning in the Utica Shale from an exploration play to a liquids-rich development play. These all give us a different look. Remember what I said in the past on other calls. From the time the recession started in late 2008 to now, this is a bigger company with more rich assets than we've ever had, and itgives us more optionality as we look at the Company going forward.

The completion of these items I mentioned gives us a better understanding of the inherent assets that we have. The management team is dedicated to create shareholder value and that everything is on the table in coal and gas. We wanted to send that signal to the marketplace, because we're searing about moving the value of these assets forward to our shareholders.

With that, let's go ahead and open it up for questions.

Operator, will you please instruct the listeners on how to dial in for questions?

(Operator Instructions). Our first question is from Lucas Pipes with Brean Capital. Please go ahead.

Good morning, gentlemen.

Hi, Lucas.

My first question is on asset sales, both core and noncore. On the core part, I think you previously mentioned both MLP and lease buyback as a potential. What way would you be leaning right now? And then secondly,on the noncore asset sales, what type of assets are you looking at?

Well, like I said earlier, we don't really announce what assets we're going to sell until we've actually completed them, but I can tell you that the process from the time we said we started until now, it's accelerated and we have had more idea than we've had in the past. On the asset sales side, that's mature and I think -- as I said earlier, I think we'll see something in the third quarter -- anannouncement on that.

When it comes to the core assets, it is more of how do we structure our Company going forward around the plans that we see for the future energy market. And we are not ready to announce anything, but we've got some pretty creative ideas. When it comes to MLP and other asset structures, we look at those, but we're not ready to point out which direction we're going.

Thank you. That's very helpful. And then in terms of evaluating the overall corporate structure, could you maybe give us a little bit of flavor around what set of parameters you're evaluating? Is it timing, or just the valuation between your different assets? How do you look at that?

Well, we look at the value of our asset base against where we see the markets, as I said earlier. We look at our 15 to 20 year plan. We've made it clear where we're going to grow, sowe look at the assets from that perspective, and we back into the right structure for that. So that's probably as much as I want to say about that as well, Lucas.

I appreciate it. And then maybe really quickly, one last question on the market. 2014 pricing looked very strong. Would you say that's pretty representative of the times you have left to price?

Lucas, on the 2014 pricing on the thermal coal in particular we have a lot of activity going on right now. I know we didn't announce any numbers -- any additional sales or not much. But by the time we get to this call for the next quarter, we think we'll have several substantial thermal coal deals put to bed, and the pricing we're seeing is what we consider to be good pricing for next year.

There seems to have been a lot of interest from the buyers in the last month in talking to us about securing -- this is domestic thermal coal that I'm talking about -- securing coal supplies for next year. There seems to be a concern for reliability of supply and wanting some of the higher BTU coals, at least for the markets that we're in. And so we've had a lot of activity but are not quite ready to announce yet the outcome of that activity, Lucas.

That's all very helpful. I really appreciate it. Good luck in everything that's coming.

Thank you.

Thank you. Our next question in queue will come from John Bridges with JPMorgan.

Thanks, Brett, everybody. First following on the thermal question, are you able to put a few extra shifts in this quarter to satisfy any shortages in Northern Appalachia?

The way we structured our long wall coal fleet in Northern Appalachia is to be in a position to take advantage of increases in demand on the thermal side, whether it's because of weather, inventory or some combination of those things. So the guidance that we gave for coal production in the third quarter is the same approach we've used historically, which is the 50th percentile case, based on how we see market and operations, et cetera.

But that fleet is poised because of the [lead days] and the development work that we've done to take advantage of upswings in market demand if and when they occur. And then it would be our plan to do so if that occurs.

Okay, great. Brett, you speak about corporate structure changing. How can that move the needle in terms of valuation?

Well, I think it moves the needle in terms of how you look at the asset base and where you spend your capital going forward. Corporate structure clearly is -- you have two very, very strong divisions of a company. One is growing very rapidly and one's going into the harvest mode, and you have to see how those fit in your 15 to 20 year plan. So we'll have more to say about that as we go forward.

And, finally, the high point of your guidance seems to be high-vol, which is holding up very well. Any comments on that?

Yes, John, the high-vol activity has picked up from the first quarter. We have higher announced sales now for the year. We've had some good interest in the high-vol down in South America and Brazil and domestically here in the United States.

And so as we said before, with the Bailey [and the coal jon], we have the [optionality] of a couple of different markets. And so we took it off of what we thought would be domestic sales and flipped it over to the high-vol sales for, again, South America and the domestic market here.

Many thanks, good luck, guys.

Thanks, John.

Thank you. Our next question in queue will come from the line of Holly Stewart with Howard Weil.

Good morning, gentlemen. Let me first start on the Marcellus side. It looks like production was down quarter over quarter for the first time. I know you talked about a ramp-up in activity in the second half of the year. Can you just kind of give us a flavor for what was going on during the quarter, and then maybe how the second half the year helps you hit your guidance?

The story with the Marcellus activity -- and right now we have five rigs running in the Marcellus field between ourselves and our joint venture partner, Noble. Two of the rigs were running on the CONSOL Energy side, three are on the Noble wet side.

That rig count, as you look through the balance of 2013, is going to increase. It is going to increase on the wet gas side, so the three rigs that Noble is running currently will go to five by year end. The fourth rig will be coming on sometime later this year, and the fifth and final will be coming on at the end of the year.

When you look at the second quarter and the production results that flowed from it, what you're seeing is a timing issue between drilling and completions, and if you look at our gas production views for the balance of 2013, you're looking at something just above 39 Bcf for the first quarter, just under 39 Bcf -- so as you said, it has been flat effectively for second quarter. But then thirdquarter our guidance is somewhere between 43 Bcf and 45 Bcf, socall it 44 Bcf.

That's a good reflection of the timing issue I spoke about between drilling and completion. That's basically the completion has being done and the [tied in] lines occurring. So the year for 2013 still stands, as Dave said, at that172.5 Bcf midpoint. Range was 170 Bcf to 175 Bcf. Then the ramp-up beyond that of course for 2014 is the 210 Bcf to 225 Bcf that we released in the operations update about a week, ten days ago.

So it sounds like the increase in rig count though is maybe a 2014 event in terms of the impact on production, and the increase in the second half of the year is just more of this timing issue between drilling and completion activity.

Yes. I think to get to the 2013 number and the increase that happens in the second half of 2013, that's the completions drilling timing synching up with the tied in lines. The 2014 story, of course, as you said, it is the additional rigs plus additional wells being tied in line from completions that are wrapping up in fourth quarter of 2013.

And right now your plans and your budget for 2014 is to keep just those two rigs running from a CONSOL standalone standpoint?

No, that'ssomething we're still working through with the 2014 drill count and the rig plan that goes behind it. Where that mix ends up ultimately is still a work in progress, but the210 Bcf to 225 Bcf is a number -- a range of production numbers we're confident in.

Okay. And then maybe my follow-up on just the liquids contribution, I know 70% of the wells you're drilling is on the liquid side. Can you give us kind of the [uplift] you're seeing right now on an Mcf basis? General liquids contribution?

Yes, Holly, we've said on our total production that we would expect about 5% overall to be liquids production for the year. And with relatively flat production first quarter and second quarter, the uplift for both the quarters has been about $0.10 per Mcfe on our overall gas realizations, and our costs for processing have increased by about $0.04 as well. So the margin expanse is about $0.06 from -- on our realizations and costs.

Perfect. Thanks, gentlemen.

You're welcome.

Thank you. Our next question in queue, that will come from the line of Paul Forward with Stifel. Please go ahead.

Thanks, good morning.

Hi, Paul.

Can I ask about -- you had $102 million from proceeds from asset sales in the quarter. Can you provide a little bit of detail on that item that went into that?

Yes. That is a combination of long wall leases we've done. Roughly about $70 million of it was the long wall lease. And then theadditional was the asset sales in West Virginia. So that comes up to the total.

Okay. Thanks. And just wanted to ask about -- you had talked about the asset sale process, including coal transportation infrastructure. I just wanted to ask you, just kind of broadly about how important as you're marketing coal, when thinking about like the barge fleet or the terminal in Baltimore, how important is it to have that housed internally? Or would there be any sort of -- if you were to sell them, with that impede the coal marketing efforts in any meaningful way?

Well, clearly, they are valuable assets, because we have the ability to move our own coal, move it away from inventory, and establish the market and get it to markets. And we have return on those assets. I think the access to them is the issue. If we have access to them and we're satisfied with [the return], we would consider a sale as long as we don't lose strategic asset -- strategic value of those assets.

So if someone wants to put it in their portfolio and willing pay us a good price, and we have our strategic piece in place, we're certainly willing to look at that. So that's a position we're in with that, Paul.

Thanks. Just maybe lastly, can you give us a sense of what kind of volumes you would expect in the second half of the year through Baltimore? I know it was very strong earlier. It might have dropped off more recently. Can you give us an update there?

Yes, Paul, we're looking for a year-long total of about 10 million tons right now through Baltimore with the current production level that we have shown in this earnings release. As Brett said earlier, we do have some capacity to increase production if the sales warrant themselves, and that would [in effect goes to] export. That would in turn increase it. We're looking at about 10 million tons for the year.

Thanks.

Thank you, Paul.

Thank you. Next in queue is Mitesh Thakkar with FBR. Please go ahead.

Good morning, gentlemen.

Good morning, Mitesh.

Just a quick follow-up on your question on oil and gas and NGL output. How should we think about the average for 2014? I know you guys gave an exit rate, but we don't have the [rig] count and what regions they're going to be in. So can you help us a little bit to there to help us on the modeling side a little?

The percentage is clearly going to go up, and because there is a lag of tying in wells from drilling wells. We can't give you the exact percentage increase, but it's a material step up. And -- but if you look at the fourth quarter, lease is a proxy. I think we gave you that exit rate. That should give you at least a zip code of where we're going to be.

Another gauge that might help is to back up even a step further and look at the well count allocation. When you look at 2012 into 2013 and how 2014 might fall out. 2012, we were about a third of our well count in the shales of Utica and Marcellus were wet.

When you look at 2013, about 70% based on our current production guidance is going to be wet. And that's the leading indicator, of course, for what the flowing production is going to look like and how that's going to change on wet versus dry gas.

Great. And just a follow-up question on the coal side. When you think about your thermal coal volumes into 2014 and 2015, including BMX and also adding to it the impact of utility regulations, maybe some planned idlings which we'll get from it, how comfortable are you in terms of whether you wait for pricing to recover for 2015 coal, or do you just start contracting right now to kind of award some of that?

Mitesh, the BMX coal -- first off, we're not marketing it separately. It is all coming under our Bailey / Enlow Fork umbrella of coals, and since it comes under that umbrella of coals, it goes to a variety of markets, whether it is the thermal, the high vol or the PCI markets.

And so as those extra or incremental tons come on, we have the option of placing them really anywhere in the world right now. Our Pittsburgh 8 coal is going to 13 different countries, and we got 54 different customers with those different product lines. So we see that incremental production coming on, and that's going to put it whichever one of the markets gives us the best returns on the coal.

What about your non-BMX coal, like your regular steam coal? Would you be aggressive on contracting it? Because it looks like you have a fair amount open as we go into the outer years, which is usually the case.

If you look at our history, we've been very aggressive in going to the plants that match our coal. We want short haul. We the plants that are high volume and scrubbed. That's been our strategy since 2003, 2004. We've been good at establishing those volumes.

And the customer likes to write longer term contracts with us based on our location. We've emphasized that. You'll see a strength in that position, and that position is one that's going to give our shareholders a long-term value and less risk over this closure of the incremental plants in the United States.

Great. Thank you.

Thank you. Our next question in queue will come from Jeremy Sussman from Clarkson. Please go ahead.

Good morning, everyone.

Hi, Jeremy.

I just want to go back to the corporate structure for a second. Just to clarify, Brett, your opening remarks, is it safe to assume that what you spoke about, potentially includes kind of splitting up the coal and gas businesses? And I guess if that's a potential option, how soon could you start to explore such a process?

Well, in terms of timing, I'm not willing to say much about timing. In terms of what we -- how we look at the assets, coal and gas, we look at all of these options all of the time. And I've said that before. That's one way of doing it. There are other ways of looking at this asset base in the marketplace we're moving [it to] forward.

I think what I'm trying to signal to our shareholders is everything's on the table. We're willing to step forward and look at all of the pieces. And we'll announce what we think is good for the shareholders when we're ready. But we are serious about it, and the process of looking at all of our asset base, like any process, creative comes out of that, and we'rein the middle of that right now.

Great, that'sreally helpful. Then just my follow-up, you didn't lock in too much tonnage for 2014 for Northern App on the thermal side , but you spoke about planning to do so or are in the process of doing so soon. I assume this is kind of the result of the market, naturally tightening and pricing, moving higher. Can you give us a little bit more color on this front and maybe where pricing was and where it's at now?

Jeremy, I do agree with you that with the inventory situation that is in the Northern Appalachian region and the PJM, that there is a tightening of the supply and demand so there is a concern out there from the buyers. And I'll comment on that for a minute, and then talk about the pricing.

In our press release, we talked about our inventory levels, and if we just take our Northern App inventory levels -- the number we gave in the release was for all of our mines and our remote storage. But if you look just at the Northern App mine inventory, at the end of the second quarter it was only 250,000 tons. And that's for ten different long walls, which can produce over 50 million tons a year, only having 250,000 tons of coal on the ground is not very much.

And then we go to our customer base in the PJM, and they're 24 -- they're 26% below their five-year average for their inventory. We also sell Pittsburgh seam coal down into the Southeast region, and looking at those inventories down there, still they're up over their five-year average by 19%.

But if you look from the first quarter to the second quarter, there's a considerable drawdown in the Southeast inventory. So they're still above their five-year average, but there's been quite a drawdown from the first quarter to the second quarter.

So you take the combination of our mine inventories are low and our custom inventories are low and coming down, and there is inertia out there now to be locking up tons for 2014. And so because of that, we're having a lot of activity, a lot of discussions with customers about deals, and these deals are taking the form of substantial tons for multiyear deals because the customers are wanting the reliability that we can offer from our long wall mines.

Now, you asked about pricing. The pricing is different depending on the markets we go to, and we're look at different pricing structures. We're still in the negotiations with these customers. So I don't want to get into it too much on the pricing other than I say -- I can say that we're seeing stronger pricing levels for next year than we are in the current market.

Great. Appreciate the color. Very helpful.

Thank you. Our next question in queue will come from the line of Michael Dudas with Sterne Capital. Please go ahead.

That'd be Sterne, Agee. Good morning, everybody.

Hi, Mike.

David, regarding your gas hedges, as the growth and output [of the Company] gets larger and the capital goes up, maybe share with us about how you're thinking about portraying them in the future, and how the percent of hedge looking out 12 months and 18 months or 24 months may look similar or different to some of your competitors on the gas side, or maybe in the East or generally across the board.

Yes, well first and foremost, we've highlighted that the liquids percentage would rise, so that's one thing that we note. We have -- on the hedging front, we have a program hedge policy where we go out through now through 2016, and we have set price levels where we put hedges in place and site set percentages of how much we want to hedge on our crew develop producing gas flow.

And it will look very similar to what we have right now as far as rough percentages. So in our press release, we give you the 2013, 2014 and 2015 numbers, and if you go in the queue, I think you'll get the 2016 numbers as well.

You'll see that number rise over time. As we bring wells online, we want to keep those percentages relatively consistent. And that gives us the ability in a portfolio approach as prices move up and down to get the average price and provide reliability and cash flow to our drilling program. And that's the whole key goal of our hedging plan.

And some point in time, if we feel like we want to be more aggressive on hedging when prices are better, we'll let you know whether we have the deviation of plan, but right now, that's the goal.

Appreciate that. Thank you, David. Maybe for Nick, look at Utica and your infrastructure, all of the 25 planned wells are going to be hooked up to pipeline this year. Is there a difference between your wells and Hess's in that region? And is there any out -- any results or anything we maybe can look for over the next few months out of that basin?

The Utica -- there is an awful lot going on there as we know because it is a little bit earlier in its development than the Marcellus . Suffice to say when you look at the drill plans on Utica for 2013 and for 2014, we feel on the midstream side and on the other logistical challenge, not just flowing the gas on the midstream, but things like water for completions and things like that, we've got a plan in place that should address the drilling program that has driven the production guidance that we provided. So we think we've got the bottlenecks identified from midstreams to other things like water and that all got reflected and rolled into the overall production guidance that we provided for the Company.

Appreciate it. My final question for Brett, you talked earlier in the response to a question about your positioning and where you're selling your thermal coal in the US. As you look at potential regulation coming out of the EPA or other changes that may go forward or may not, do you feel that CONSOL is much insulated from some of the secular changes in coal usage in the United States than anybody else in the marketplace?

I think we are because of the region and our location to the generation. If you tie the most valuable generation in the region to the asset base, they're sitting right on top of us. We do have an advantage that way.

We do know as marginal plants shut down -- and I think marginal plants, these are the plants that aren't scrubbed, that didn't spend the money on the scrubbers, that some announcements are coming out now. We pushed away from those, and we push toward the big scrub plants. The big scrub plants are actually going to run harder in this nation as you see generation get short as the swing between gas and coal goes back and forth, the big scrub plants that sit right on top of us are going to run harder. We're going take advantage of that.

Yes, I think we do. It is all about location. You've heard me talk about it before. Being at the end of the railroad is not a good place to be. But being under the power plant is a great place to be.

I appreciate that. Thank you, Brett. Thanks, everyone.

Thank you.

Our next question in queue will come from Brandon Blossman with Tudor, Pickering, Holt & Company.

Good morning, guys.

Good morning.

Let's see, shifting back to gas real quickly, some of your gas peers, Marcellus peers have been talking recently -- very recently about very material increases in ultimate recoveries out of their Marcellus wells. Is that something you're seeing, and is that going into a long-term planning process today for you guys?

We've looked at the impact of our actual well production profiles on reserves and well curves now for a number of years. I think the historical experience has been one of steady and methodical -- I'll call it scaling up the reserve estimates, based on the production data we've accrue which is, of course, good news.

When you look at where we are at today, moving forward, there are a couple of things that we're working on to try to keep that trend moving in that direction. One of them is with regard to what we're doing -- and we'vetalked a bit about this on the Upper Devonian test well we've completed and the move on the Upper Devonian in the future.

One of the biggest impacts, and even the most important impact we've found is not the specific well profile and production numbers from the Upper Devonian well, [then maybe you get] more importantly, what impact it had on the Marcellus horizontals we had below it. We drove this well purposely to sit above the Marcellus wells and laterals that we had drilled below it. And when you look at the impact that the Upper Devonian well and its fracture treatment had on those Lower Marcellus wells, it is some positive preliminary indications.

So it is those Lower Marcellus wells where we might be getting an uplift from reserves when you look, interestingly enough, at the Upper Devonian, where most people tend to look at that in a vacuum. That's one example of things that we'll be looking at moving forward.

The other example would be things like the reduced cluster spacing, and I know a lot of ourpeers have been working on that and talking about that recently as well. Jury is still out on that from our perspective.

We've looked at these in the past. We continue to drill a number of wells currently that are looking at different cluster spacings on the completion side. And we think that the potential benefit there may not be as much on the initial production rate like some others have seen, but maybe if [there] -- the impact might be on the reserve recovery and the reserve EUR per well itself.

So we're looking for potential uplift there too, but again, juryis out. More work to be done on that. There's two examples where we've got potential to keep the positive upward adjustments on EURs moving forward.

Great. Definitely interesting color there and look forward to hearing more. Shifting real quick to the met side, detail question, it looks like incremental hedging done in the second quarter for the Buchanan product was around $86 a ton. Is that a reasonable number, given where today's market is, to expect [kind of] incremental tons throughout the balance of the year, again all things being equal, assuming the market stays where it is for the incremental sales out of Buchanan?

Brandon, we don't comment on specific pricing of our sales. But in response to your question though, I would just take to the BMA index, which we're seeing at about $145 right now. And there's some spot sales that have come in a little bit underneath that.

But it seems to be holding pretty much in that range, whereas in the past quarters you would have the index come out and the spot sales would go quite a bit underneath it. So we're seeing some discipline in the market with holding in that -- the pricing holding and not undercutting at BMA pricing level.

Going forward to the third quarter, we're not seeing -- we're not anticipating much of a change in the BMA index as we go through the quarter. And maybe some modest increases as we get toward the end of the year. So we're not projecting any significant increases in the BMA pricing through the rest of the year.

Okay. That's helpful. Thank you very much.

Thank you. Our next question in queue will come from David Martin with Deutsche Bank. Please go ahead.

Good morning. Thank you. Wanted to come back to low vol, I guess, first. You haven't sold much low vol for the third quarter, the second half of the year. Can you comment on your marketing strategy or update us on your marketing strategy in China and offshore for that matter? And what are your operating objectives at Buchanan given that you're forecasting weaker shipments in the second half?

David, on the low-vol coal right now, the production levels that we have in the release, the 4 million to 4.2 million tons, there certainly isupside potential for us to produce more if the demand is there or the prices are adequate. So that's the first thing I'd like [give] in response to that, is there is some upside.

Now, for the rest of the year, using those numbers of the 4 million to 4.2 million tons, we've got approximately in total 1.2 million tons of coal that we have to price. And I would like to break that out into some different categories.

Of that 1.2 million tons at Buchanan, about 800,000 tons of it is sold already. And we have to price that to the market. And [of that 800,000 tons] about two-thirds of that is domestic and another one-third is South American.

So that means the remaining 400,000 tons, purely spot sales for us, and right now we are pursuing sales in China and Europe and additional sales to South America, and we're going between those different markets. And as I said at the beginning, that 400,000 tons of stock, that we do have upside on our production if the market is there to put more tons into the market.

Okay. Thank you. And then wanted to lastly come back to cost. This may be somewhat irrelevant in the context of the discussion about corporate structure. But in the release you note that you've begun a review of staffing levels at the Company. Can you provide some color on what you're looking at and whether there's any preliminary targets that you can give us some perspective on?

I think when you look at the cost of the major operating segments within the Company, we've got two different opportunities and challenges that are out there. On the gas side with costs, the issue there -- it is a segment undergoing growth, of course, but as that production grows, we need to start realizing economies of the scale that we're seeing for at least the field costs and the applicable overhead costs that would be subject to that.

Our plan is that we will see that. That is a function directly of production. We talked about the production ramp on some prior questions, so we get to the [170-some] Bcf production level this year and then the 210 Bcf to 225 Bcf next year. One of the key opportunities and objectives is to demonstrate we're getting the economies of scale on our unit costs [as the] Marcellus and Utica [set the fields ramp up].

When you switch over to the coal segment, a little bit of a different situation there. On the coal segment, as [Grech] said and David had spoken to, the retooling of the coal segment has basically been completed -- or will be completed year-end this year [or] early next year the BMX Mine comes on and the Enlow overland belt gets completed.

So for a number of years, we staffed up and invested hundreds of millions of dollars in capital across the long wall fleets to basically set those fleets up for long-term steady state operation and to be able to take advantage of swings in market demand that Jim Grech spoke of earlier when they occur. Now that those efforts are wrapping up and those major projects are being concluded, now the exercise is going to be one of staffing and looking at projection expenditures at the mines that basically take care of, first and foremost, of our top values of safety and compliance,and then after that, reflect a steady mode of operation for the long wall fleet as opposed to major projects or retooling.

Okay. Thank you and goodluck.

Thank you.

Thank you. Our next question in queue will come from the line of Chris Haberlin with Davenport. Please go ahead.

Hi, good morning.

Hi, Chris.

In response to a question earlier, I think you had said that you had shifted some of your thermal sales to the high-vol market. Based on my math, it looks like you booked high-vol tons at below thermal prices. Can you kind of discuss what the market environment is there for the high-vol tons?

Chris, the high-vol markets we've been pursuing right now have been in Korea, and I mentioned South America and the United States, as well. And to the statement that you had about taking a sale at lower than a thermal price, to my knowledge, we haven't done that. We're putting the sales where get the best margins and when the tons are available for us.

So if there was Bailey sales available for us right now at [attractive] prices, as Brett mentioned, we have the ability to ramp up production, and wewould take those sales. Does that answer the question that you're asking there, Chris?

Yes, it does. And then you mentioned that you expect the BMA price to kind of hold in here, maybe increase modestly towards the end of the year. Just wanted to see in your opinion what needs to happen for pricing to recover back to even, say, Q2 levels?

Chris, the -- [without] -- in the market we don't see a shortage of demands for coal in the world markets, but what we have an oversupply. And because there is an oversupply, what needs to happen is with these weak prices is production needs to come offline and have to get that supply and demand back in balance. Each market is a little bit different when you're talking the globe, but in general what is going out on in the world market is we have with decent demand for the metallurgical coals, but certainly an oversupply. And so that supply needs to come down.

And do you have any kind of ballpark figure about what the oversupply stands at today?

Chris, we've taken a look at that, and with the different qualities of coal and the different markets, that sure is a hard one to put a number on. But we've come to a number between 15 million and 20 million ton decrease in the seaborne market supply. But that's going to come with a lot of qualifiers on it. And again, as markets shift and qualities of coal shift, that can bounce around. But as a number today, we're at that 15 million to 20 million ton range.

That's fair. Thank you. And then last question, on the margins in gas, you talked about seeing a significant uplift in margins as we move into next year. I guess with the transportation charges that you took in the quarter, do you expect those to kind of continue or moderate as we go through the year? And how should we think about that margin uplift? I mean, should we see a significant step up in 2014, or is that something that should move more linearly.

It will -- part of it will be following the volume levels. We will continue to incur the firm transportation rates, because it is new capacity that we've acquired in anticipation of the ramp. There will be obviously higher liquids realizations in there as well. So it will step up with production is the way you want to think about it.

And then outside of the midstream costs, the other things we always zone in on. One, the drilling, because it starts with the drilling efficiencies and the completion efficiencies, which track DD&A. Those continue to trend favorably for us, from the drilling efficiencies and drilling costs tied to them to the completion costs. So we've either been holding the line on those or seeing reductions as efficiencies accrue. That's good.

The other thing besides midstream and drilling completions cost will be the economies of scale as the production ramp occurs for field costs we spoke about earlier. So those are the three big buckets of cost, and two of the three are trending favorably. Should continue to trend favorably as production ramps up.

The third one, as Dave said, is really tied to the market that we're seeing because of the different products we're producing now, which of course is good news. We're spending money to make more money.

Great. Thank you very much. I appreciate it.

You're welcome.

Thank you. Our next question in queue will come from the line of Curt Woodworth from Nomura. Please go ahead.

Hi, good morning. Brett, you talked about the past couple of quarters this disconnect in the public valuation of the Company relative to obviously what you guys are shooting for [yourself]. I just want to know a little bit of kind of the background in your thinking as to why that is. Obviously you've talked to a lot of investors. Do you think it is more a function of just negative sentiment on the coal business that kind of acts as an overhang to the overall valuation? Or do you think it is maybe a function that the gas business has yet to fully scale and perhaps that growth vehicle hasn't been reflected yet.

I think you've actually described a problem. The coal business is definitely out of favor, and so we see the pressure on that side. Even though we're the low-cost producer and have the highest margins in terms of what our shareholders get out of that business, it'sreally out of favor.

So we're seeing the pressure there. But we also realize, if you look back a couple of years ago, it was all about coal. And we made big money in the coal business as we develop the gas business.

But as the gas business gets bigger and bigger and bigger, it's confusing on why you invest in CONSOL. Are you investing for gas or are you investing for coal, the analyst base is really on one side or the other, so you kind of get a conglomerate discount I think at some point. And we think that we need to bring that forward and let our shareholders bask in the value of all these assets, whether it is by sale or structure, and we're working on that right now.

Okay, and this one follow-upOn the asset sale proceeds of some of the broader monetization plans of the Company, do you feel that you have good reinvestment opportunities on the gas side at reasonable valuations right now?

Yes, we certainly do. I think that if you look back to our acquisition, especially in the Dominion, and got into Marcellus in a big way, that's gotten better and better and better over time. And we have more than 5,000 places to drill right now in the Marcellus, excluding other horizons that we're exploring. So, yes, there's great places to put value into this asset base and extract value for our shareholders going forward.

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