CNX Resources Corp (CNX) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to CONSOL Energy's first-quarter earnings conference call. As a reminder, today's call is being recorded. I would now like to turn the conference call over to the Vice President of Investor Relations, Mr. Tyler Lewis. Please go ahead.

Thanks, John, and good morning to everybody. Welcome to CONSOL Energy's first-quarter conference call. We have in the room today Nick DeIuliis, our President and CEO, Dave Khani, our Chief Financial Officer, Jim Grech, our Chief Commercial Officer, and Tim Dugan, our Chief Operating Officer of our E&P division. Today, we will be discussing our first-quarter results. We have posted slides to our website that we will reference throughout the call. Due to feedback that we've received from the investment community, we have made the decision to condense our quarterly slide presentation to provide a smaller subset of updated slides.

As a reminder, any forward-looking statements we make or comments about future expectations are subject to business risks which we have laid out for you in our press release today, as well as in our previous SEC filings.

As we announced on April 1, CNX Coal Resources LP, which is our proposed thermal coal MLP, filed a registration statement on Form S-1 with the Securities and Exchange Commission for an initial public offering. Because the MLP is currently in registration, the securities laws restrict our ability to discuss the MLP or the IPO. As a result, we will not be providing any information or answering any questions about the MLP or the IPO during this call. We appreciate your understanding and cooperation with these restrictions during the registration process.

As we have done in the past, we will begin our call today with prepared remarks by Nick, followed by Dave. Tim and Jim will then participate in the Q&A portion of the call. With that, let me start the call with you, Nick.

Good morning everybody. And before we turn it over to Dave who is going to cover more of the details of the quarter, I want to provide some key highlights as well as some insight on the strategic transformation that continues to unfold here at CONSOL Energy. We can start with the E&P division, which had another great quarter, with record production of 71.6 Bcf and the Marcellus Shale remains the dominant growth driver. We are seeing strong wells and continue to make big strides on efficiency improvements on both the drilling and completion sides of the equation. These accomplishments continue drive unit costs lower and lower as seen by the $0.56 per MCF drop in unit costs from a year ago. The commodity price environment continues to bring challenges that we are managing through and in the earnings release, we highlighted some of the changes regarding our development plan as well as provide some insight as to how we continue to high-grade our activity level for the year.

Specifically in the Marcellus, we are focused on our highest rate of return areas of Greene, Washington and Allegheny Counties in Pennsylvania. We have a substantial acreage position that includes the bulk of our fee acreage, which obviously corresponds to the higher NRIs, ultimately translating into better economics.

In Allegheny County, we are actively drilling wells on our 9,000 contiguous acres at the Pittsburgh International Airport property. So for those of you who are flying into Pittsburgh and hopefully coming to visit CONSOL in the near future, be sure to look out your window when you're landing. What you see are CONSOL rigs actively developing this prolific area, which we are very proud of and very excited about in terms of operational potential.

The excitement also continues for the Utica Shale, and now includes new planned dry Utica wells, two dry Utica wealth in Pennsylvania, in Greene and Westmoreland Counties, one dry Utica well at our JV partner's drilling in the Panhandle of West Virginia in Marshall County, and a handful of dry Utica wells in Monroe County, Ohio. We are drilling these wells from existing pads that highlights the best potential of our stack pay opportunity. Besides the Marshall County well, the other dry Utica wells along with the corresponding Utica Shale acreage, Pennsylvania, West Virginia and Monroe County Ohio, they are 100% owned by CONSOL and the fall outside our joint ventures. Considering that we have over 500,000 net acres across these areas, the opportunity set, it's robust and it could be a major driver on how we reduce capital intensity for targeted growth levels by utilizing stack pay, gas factory opportunity associated with the Marcellus, the dry Utica and the upper Devonian horizons. So it's not a shock that we are very excited to drill these Utica wealth and we expect results sometime throughout second half of the year for these areas.

As we've stated previously, our 15 development plans have been fluid due to the commodity price environment. We have adapted to the environment by substantially decreasing our capital budget for the year down to $920 million, which is 30% lower than last year's. The high-graded drill plan that we have in place and the reduced level of capital intensity due to continuous improvement and the scale that capital that we are putting to work may produce rate of returns to create NAV per share in our prices.

And speaking of returns and activity levels, we analyze key performance metrics every month and we meet with our joint venture partners every month to discuss these along with changes to our joint development plans to optimize our results.

As most of you might know, we did not come to an agreement in December of last year with Noble Energy, our Marcellus joint venture partner, on a 2015 capital budget. This was simply the result of the rapid deterioration in commodity prices that occurred in December when the budget is typically set as each party works to determine the right level of capital expenditures in this environment. I can tell you today that we and Noble Energy are aligned and we are working well together. Our teams have worked together over the past three months to develop a joint working plan for 2015 that drives returns up and capital down. And operationally, our teams are hitting their stride. We are seeing strong results coming from both CONSOL's operated area and Noble's operated area. So the process is collaborative, it's methodical, and we feel good about where we are today with our capital budget.

To so to summarize on the E&P side, that division continues to set a high bar on all facets of the operations, spanning from safety to production. Tim Dugan and his team continue to impress. The pace of change hasn't slowed down. The organizational transformation of establishing asset teams, centralizing operations, encouraging new ideas and even calculated risks, they've all come a long way. Tim Dugan and team strive for nothing short of excellence on a daily basis and they started 2015 by firing on all cylinders.

I want to shift over and talk about the coal segment. The Pennsylvania operations met their production guidance for the quarter, but despite operational success with the northern Appalachian thermal market, still weakened from historical levels with the main driver being low natural gas prices, which is probably no new news to those out there. Despite the market weakness, however, I think it's important to provide some insight on how we think about the northern App thermal market and why we remain very optimistic due to our marketing strategy and other strategic advantages that our Pennsylvania operations enjoy.

Our thermal coal marketing strategy is built for the realities of today and tomorrow, not the history of yesterday. The world has changed, and those who continue to believe that the coal market playbook of yesterday's era equates to success today, they have a fundamental misunderstanding of the dynamics that are driving the transformation of the industry. Make no mistake about it, today, bigger is not better, and the coal generation strategies of yesterday are not the same ones that can be overlaid today on markets that have drastically changed. The thermal coal market now more than ever is a surgical and regional play with the southeast quadrant of the United States proving to be the battleground for northern App, central App and Illinois Basin. We've done our homework for years now and CONSOL has identified and embraced these market changes and as a result, we developed our strategy by concentrating our footprint, high grading our portfolio, and aligning ourselves that power plants will be around for many years to come. The commencement of this strategy began back in 2010 with the Dominion acquisition to help reshape CONSOL by launching us into the Marcellus and Utica Shales, and it contributed what we are today, a leading Appalachian E&P company with Tier 1 coal assets.

We saw the energy landscape changing in the wake of the shale revolution, and we have adopted and adapted accordingly on both the coal and gas sides of our business. The prominence of shale gas growth and increasing gas demand over the years has reduced coal's market share, but coal is not going away. It is going to continue to be a foundational fuel for decades to come.

All that being said, the industry has clearly changed and it's change permanently. There are going to be big winners and losers. As the implications of the change take effect, CONSOL is going to continue to benefit by strategically partnering with must-run power plants that will survive and run even harder as they make up capacity that is scheduled to come off-line. CONSOL is going to be a clear winner.

We have a number of tactical advantages that really speaks to and informs the strategy in our view. Our Pennsylvania operations consist of mines with some of the highest quality coal in the world, product that matches up with customer requirements in a post mass carbon constrained world. We produce that coal at a very low cost. Our state-of-the-art prep plant and coal rail transportation network from the Pennsylvania complex is second to none and provides reliable access to those must-run plants. In short, our customers know we can deliver a high-quality product and do it safely, compliantly, and reliably and on a consistent basis.

Customers also know that we've got a strong balance sheet and also have the optionality to provide a range of fuels for generation, whether it be coal, natural gas or both. So that customer concept that we rolled out of our analyst day last year, it's a reality today across a range of transactions and partners.

You add to that the fact that our wholly-owned Baltimore terminal provides easy access for our PA operations coal to international markets, both as an insurance policy when the domestic markets are challenging and also provides us as an opportunity to crank up that core capacity to take advantage of seaborne markets when appropriate, you can see why this is unquestionably the premier coal complex in the world.

To illustrate and help show the success that we are seeing with this strategy, in the first quarter, we continue to lock up long-duration contracts with strategic partners with Pennsylvania operation's thermal coal. And for 2017 and 2018 combined, we average approximately 40% sold. We are positioned as the preferred supplier for the must-run plants in the Northeast and we are equally well-positioned because of the quality of our coal and transportation advantages in the battleground markets in the southeast. So stay tuned as we continue to execute our thermal marketing strategy.

On the met side, Virginia operations had a great quarter, particularly when you look at the all-in unit costs for the first quarter of $42.31 per ton and cash costs of $35.22 per ton. We know that there are headwinds in the industry for met, but we also know we have a heck of a growth story organically as well as a great platform for M&A. In fact, with the current weakness we see in the global met market today, what does that indicate to us? A needed inevitable fallout on the supply side is closer than ever. In turn, that means the rebound in the market is also closer and that there are plenty of opportunities, there are going to be plenty of opportunities for asset acquisitions as things settle out.

So strategically big picture is we execute operationally. We continue to pursue our strategic objectives. Dave is going to talk more about the refinancing we completed in the first quarter.

Our thermal coal MLP remains on track a midyear 2015 IPO. To reiterate our objectives with the coal MLP IPO, the primary objective remains to create a new platform, transparent pure-play sum of the parts valuation by retaining control of the strategic asset. Initial valuation and proceeds raised, they certainly matter but they are secondary considerations.

On the met side, we continue to expect the MetCo IPO to occur around the early fourth quarter of 2015 and like the thermal MLP, liquidity is not the primary driver for CONSOL, but establishing a transparent platform of the clear sum of the parts valuation, that is the primary driver.

I want to spend a minute talking about culture. Clearly, there's a lot going on at CONSOL on both sides of the business, and we are working hard to unlock value. Our decision-making process is driven by the long-term health of the Company and increasing NAV per share. In addition to the structural changes with upcoming IPOs as well as the operational changes that we see, we're going to continue to see within the E&P division there still, in addition to these things, a lot happening across the CONSOL culture. Our 150-year legacy provides us with a lot of benefits, but as much as that legacy is instructive in terms of how we've navigated the cyclical nature of the energy business in the past, make no mistake about it, we won't be bound by the past. So, the culture is one that, frankly, has embraced change and acknowledges the shifting nature of the energy business. Lean, mean, and focused, that's the name of the game today.

And in keeping with our core value of continuous improvement, the Company has implemented zero-based budgeting across our team. We are embracing zero-based budgeting not as a reaction to respond to low commodity prices, but more as a proactive cultural measure as we reinvent the Company. We've already seen successes in the short time that zero-based budget has been up and running. And over the past two months, we've reduced approximately $65 million of administrative and overhead costs and nearly $85 million of service costs related to the Company's E&P program when you compare that to 2014. These cost savings, they've got a meaningful impact on our EBITDA and we are excited to continue making progress in this area. You should expect even more value creation for 2016 as we continue to push this philosophy deeper into all of our activities across the Company.

The zero-based approach is very consistent with our filter of driving NAV per share. It's a useful tool in our drive to strategically reinvent CONSOL Energy and it's something the team is getting more and more excited about as time marches on.

So, in closing, at least for my section, despite challenging markets, we are successfully managing through these cycles. The pace of change at CONSOL continues to accelerate. There's a lot of exciting things to look forward to this year, including the upcoming IPOs, updates and progress on our thermal coal marketing strategy, our Utica results, and also seeing what zero-based budgeting will bring to the table.

It's been a very active couple of years as we strategically reposition the Company and continue to build a structure and a culture which is going to be durable for the long-term. And we won't shy away from challenging the status quo in positioning the Company for continued success.

So with that, I am going to turn it over to Dave Khani.

Thank you, Nick, and good morning everyone. Today, I will provide an overview of our first-quarter results, details on our cost-cutting efforts, key forecasting items, and how we continue to manage the business through a challenging energy environment. The Company presentation is posted to our website and some of my comments will tie to Slides 3 through 7 and 35 through 45.

Before jumping into the details, let me hit the key points for the quarter. One, we expect about $200 million of expense improvements to our operating, administrative, and nonrecurring forecast. Second, we've trimmed another $80 million of capital in the quarter, now expect after-tax returns to be over 15% based upon the strip. Third, reduced service deflation by over 20% and now ahead of plan. Fourth, we refinanced and lowered our interest expense by another $37 million while terming out some of our debt and modernizing our covenants. Fifth, we acquired 20,000 contiguous acres of Utica and Upper Devonian rights. Sixth, we've repurchased over 2 million shares. Seventh, we locked up some additional coal sales under multi-year contracts. And eight, we've worked towards our two coal transactions with the filing of the CNX Coal Resources S-1 registration statement.

So now look at net income and EBITDA, which is Slide 3. CONSOL's net income for the first quarter of 2015 was $79 million, or $0.34 per diluted share. After excluding cost of one-time items, our adjusted net income was about $85 million or $0.37 per diluted share and adjusted EBITDA totaled $266 million.

During the quarter the Company's effective tax rate was a negative 48%, which differed from the federal statutory rate of a positive 35% on ordinary income. The Company received a tax benefit largely driven by a depletion deduction related to CONSOL's coal and E&P operations. Due to the depletion deduction, we anticipate a negative tax rate for the year based upon this depletion of benefits, but our annual tax rate will move around quarter to quarter based upon our changes in forecasted pretax income and asset sales.

Now let's talk about our two main operating divisions, coal and E&P. Coal, for the first quarter of 2015, CONSOL's active operations generated $191 million in cash from operations before capital expenditures. In our PA operations, first-quarter per unit costs were $42.73 per ton, up $2.44 per ton versus the first quarter of last year. The increasing costs were due to continued difficult geological conditions in our complex, lower recover rates and lower tonnage at our Enlow and Harvey mines. We expect the first half of 2015 costs to be higher than the second half of 2015. However, we expect the overall 2015 total PA unit costs to continue to trend down about $2 to $3 below the average for 2014.

For the Virginia operations, Nick highlighted that our Buchanan operations were successful at reducing costs and were extremely productive. Total cost for the mine averaged $42.31 or a 36% decline over the first-quarter 2014 levels. We expect Virginia operations to average between $50 and $55 per year for 2015.

Besides the last several years of spending on capital projects to reduce costs, we've trimmed an additional $15 million this quarter for the year of additional costs from some of our key initiatives to help drive unit costs, such as contractor benchmarkings, decline in raw material costs and increased lifecycle management.

To put our overall cost controls in perspective over the last three years into 2015, we expect PA operations unit costs to decline by about $5 per ton, Virginia operations by $12 per ton, and our Mill Creek operations by over $10 per ton. And that's from 2013 average to 2015.

So now let's shift over to our E&P operations. During the first quarter, CONSOL's E&P division had net income of $30.9 million and cash flow provided from operating activities of $177.8 million. Despite increases in production, total first-quarter sales revenue decreased by about $12 million when compared to the year-earlier quarter due to depressed commodity prices. Liquids production represented about 11% of our total E&P production volumes for the quarter and should trend between 10% to 15% through 2016.

Now let's look at E&P realizations. In the first quarter, total per unit sales prices declined to $3.56 per Mcfe compared to $5.52 per Mcfe in the first quarter of 2014. For the quarter, we experienced a positive basis, realized $0.48 hedging gain, and had a $0.04 uplift from liquids in the quarter.

Despite liquids pricing weakening, we are still making a positive margin on our liquids production. On our last call, we expected first-quarter 2015 basis to be flat to a negative $0.20. We finished the quarter with a $0.05 positive basis over Henry Hub, highlighting that our marketing team did a wonderful job optimizing excess FP in our sales book. For the second quarter, we expect the basis to be between a negative $0.45 and $0.65 per Mcfe off the Henry Hub.

Now let's look at unit costs. During the quarter, unit costs decline $0.58 per Mcfe with Marcellus and Utica Shale all-in costs coming in at $2.62 and $2.48 per Mcfe respectively, which helped offset declining realizations.

Marcellus operating costs are declining fast with total costs down about 18% year-over-year and 7% sequentially. Marcellus cash cost decline 8% year-over-year and 2% sequentially. Also important to note is that our Marcellus DD&A rate has trended down to $0.95 per Mcfe from $1.36, reflecting our efforts to lower capital intensity from improving cycle times and the completion techniques.

Across the E&P division, we expect total operating unit costs to decline 10% to 15% into 2016, faster than previously forecasted. Despite these total cost declines, the first-quarter margin still declined to $0.51 from $1.89 as a result of lower realizations.

Now let's move over to Slide 7 on cash flow reconciliation. When looking at the first quarter, we outspent our operating cash flow by about $77 million and also used an incremental $95 million to purchase Utica-Upper Devonian acreage, buy back stock and complete our debt refinancing. Our goal is to keep our debt levels relatively flat for 2015, and we should begin to see the benefits of our cost savings and capital (technical difficulty) efforts kick in in second quarter 2015 and should get better as time progresses. Also, we expect non-core asset sales to start to hit some point in the second quarter/third quarter and believe there is some upside to our forecast in 2015 for monetizations.

Now let's move over to Slide 37. On the corporate side, as Nick mentioned, we have implemented a zero-based budgeting effort and are seeing a lot of success highlighted here on this slide. As the slide highlights the 2014 income statement, it pulls out what we believe is our administrative and operating type expenses, overhead expenses. Typically, they flow through three line items on the income statement -- general and administrative, direct admin and selling, and other corporate expenses. We pulled these three line items together to highlight where we see the reductions over the next two years. These reductions are a combination of many things to include zero-based budgeting and headcount reductions to name a few. Over the past two months, we have forecasted these expenses to decline by about $65 million in 2015 and expect to decline to $90 million in 2016.

We have also reduced our coal and E&P operating expenses by about $80 million and expect nonrecurring items to decline an additional $40 million in 2015 and $70 million in 2016. Many of these nonrecurring or unusual items are tied to restructuring of our debt, legacy liabilities and new capital structures.

Now, moving over to Slide 38 on service costs, over the past three months, our supply chain team in cooperation with our operating team has been hard at work at partnering with the service companies to lower unit pricing while maintaining productivity. We've reduced service pricing by approximately $85 million based on our lower 2015 activity levels, representing over 20% service deflation in 2015 versus 2014. This eclipses our initial 15% expectations. This will also translate into a 20% reduction in our total well costs and improves our capital or productivity flexibility for 2016.

Moving over to capital expenditures on Slide 39, this slide highlights that our 2015 versus 2014 E&P capital is down about 30% year-over-year, reflecting our high-graded activities, much of this capital really tied to production coming online in 2016 so the delicate balance is spending in a weak current environment and looking out to 2016 commodity prices and expected improving unit costs. The only area where we are actually increasing spending year-over-year is tied to drilling six dry Utica operated wells, which Nick highlighted in Monroe, Westmoreland and Greene counties. Based on our high-grades development drilling, upgraded cycle times and reduced service deflation, our returns for this program should generate a 15% after-tax rate of return based on a $2.69 realized price. That's $2.49 for our Marcellus program and $2.90 for our Utica program. The 2016 and five-year natural gas strip is about $3.05 and $3.40 respectively. If you net out a conservative $0.45 basis differential looking out over this time period, you can see why we continue to allocate capital to these key areas. Also, we are still in the infancy stage of drilling our dry Utica wells, so these returns should improve meaningfully over time.

Also, I want to remind you that our coal capital has declined about 45% to about $220 million, reflecting lower maintenance capital spending.

So if you move over to Slides 42 and 43 and look at our capital structure here, Slides 42 and 43 provides highlights and pro forma view of the refinancing we published last month. We tendered for 8.25% senior notes, unsecured notes, due 2020 and 2021. We issued $500 million of eight-year senior unsecured notes with an effective yield of 8.25% and used $761 million on our revolving credit facility for the remaining balance. This accomplished a few important points for us. One is these transactions reduced our annual interest expense by about $37 million, created flexibility to allocate debt to our new coal entities, helped modernize our covenant package and it termed out a portion of our debt by an additional three years. We expect to use the proceeds from our asset sales and transactions to repay our credit facilities. To protect our liquidity, we have also incorporated a $600 million term loan commitment in place as a backstop to the upcoming coal MLP transaction.

Now finally, let's talk about our capital allocation and buyback program. Our immediate goal is to keep our leverage ratio flat with 2014 levels and, therefore, we maintain a cautious view on capital spending as well as stock buybacks. We have a two-year, $250 million stock buyback authorization in place and begin to dip our toe in and buy stock as well as moderate our capital spending.

This 150-year-old company has accumulated a lot of costs, as Nick has mentioned, in many different areas and our three-year journey to rein these costs in has just begun. Over the past two years, we have removed over $500 million of annual fixed costs between all areas of corporate, operating, and balance sheet liabilities. Our teams are laser focused to improve upon this figure. This backstop creates an opportunity to widen margins as commodity prices advance and improve on our financial flexibility. We will take advantage of this to further contract our hedge so we can capitalize more when the discounts in our NAV widen and be able to repurchase shares when we feel more comfortable with our operating cash flow.

So, in summary, things remain very busy at CONSOL, as Nick has mentioned, and we have a long list of catalysts to drive the stock, as we highlighted on Slide 45. We are proactively making steps to manage through this cycle, and we believe we will exit this downcycle even stronger.

With that, we are opening it up for questions.

(Operator Instructions). Jeremy Sussman, Clarkson Capital.

Yes, hello, good morning. One thing I noticed in the release was you guys mentioned the Baltimore terminal volumes, 3.5 million tons. I don't think I've seen the actual tonnage broken out before. I guess any reason for this, and is the something, maybe I'm getting ahead of myself, but down the road that could fit into maybe an MLP structure?

On the tonnages -- this is Jim Grech -- we broke that out because the terminal we thought had such an outstanding quarter in the first quarter. The 3.5 million tons for them in the first quarter was actually a record throughput for the terminal and it also reflects what we have been doing with our coal in the first quarter and the amount of export sales that we've been entering into in the first quarter.

And on the location or placement of the terminal longer-term, as we discussed before, that's something we're going to assess once these other platforms are up and running on the thermal MLP and ECO structure, see what makes the most sense for CONSOL Energy after those are established as pure-plays and get those out later this year.

Understood. Thank you. Just as a quick follow-up, David, you mentioned we should start to see some asset sales. One area you guys highlighted in your analyst day last year was the Illinois Basin. I know you've done something last year, but I still think you have about 550 million tons or so of reserves left if my math is correct. Is this an area -- it seems like overall activity is kind of heating up in this area. Should we be keeping an eye on this one?

I think the answer is yes. I think the Illinois Basin is an area that I think we will continue to monetize over time and as mine plans continue to get closer and closer to our reserves, increases the value of what we think is worth selling.

Great. Thanks guys very much.

Joe Allman, JPMorgan.

Thank you. Hi everybody. Could you give us an update on the RCS and SSL and any other completion design changes, and also give us an update on your refracking program?

Sure. We continue -- our completions continue to evolve and we've gone, I think as I stated last quarter, our completions are really going, we're moving more to regional completions, looking at some of the area specifics area by area, looking at various stage lengths, top-end loading. And we continue to work through those changes and test different areas. So, we are moving in the right direction. We are seeing the results, and just it all falls in line with our capital efficiency and improved results.

And then on the refracking program, could you update us on that?

The refracking, again, that is something that just fits into our portfolio, and as we go through and assess rates of return and prioritize all of our activity, the workovers are looked at same as our drilling of our new wells. One of the big factors there is the logistics. Timing, usually when you go into a workover well, you've got to shut in existing production, so we are looking, actually looking at some techniques that would minimize the shut-in time of existing production when we go in to do recompletions. So that is actively being -- continually being reviewed and is part of our portfolio that we will continue to look at.

Great. That's helpful. And then on the finance side, David, what are the goals for the balance sheets? And can you talk about any finance plans or any other plans besides the two IPOs you're planning this year?

Yes. Our goal would be to try to keep our debt levels flat. I think we still have just a little bit of work to go to do, but we do have the non-core asset sales, we do have coal structures and associated debt that would go with it. We have some more cost savings to work through. And we will always obviously look at the capital spending levels to see if we need to modulate if commodity prices change because we are all going to be about rate of return driven. So our goal really is to try to keep our debt levels flat and keep our leverage ratios flat.

All right. Very helpful. Thank you.

Lucas Pipes, Brean Capital.

Good morning everyone. My first question is for Jim. Jim, on the coal side, average firm prices for both 2015 and 2016 are obviously still pretty strong, about $61. But when I look at what was incrementally sold kind of back of the envelope, my math would suggest prices in the $40s. Could you maybe let me know if there are some tons that moved around, shifted around that would explain these low prices?

Yes Lucas. First off, thanks for asking the question because this seems to be one that historically causes confusion when we look at incremental pricing. And I just want to state clearly that, when pricing is looked at incrementally, it gives the wrong pricing signals. And I'll explain out why.

The portfolio, when we give the forecast for future quarters or years, we look at it holistically, so we look on a total portfolio basis. So not only are those incremental tons in there, but if there's any changes to the existing contract -- and our existing contracts can have some minor changes in them based on market conditions. We have netbacks, things tied to power, gas prices and so on, which can affect the base existing contracts up or down. So the mistakes occur when we take all of the changes from the existing base and put all those changes on just incremental tons, and it adds to a skewing of the incremental prices either up or down. So Lucas, I think that's what's happening with the calculation that you were doing.

I understand. And in light of that, could you maybe give us a flavor on how you see the current coal markets in the northern App playing out for both 2015 and 2016?

For 2015 right now, we see the current markets since the beginning of the year as being -- and I'll call it the spot markets -- as being relatively weak and it's led to us taking advantage of the assets we have and the strength we have to go to the export market. And we see that weakness continuing here through the second quarter, summer, and as we get to later in the year, there is some potential for some change. We have some indications of some spot coal, and we've made some small sales a little further out in a year. But the weakness that we've seen through the first quarter we expect to continue through the second quarter, and with some potential for some changes we get to later in the year are going to be highly dependent on weather and gas prices.

And when we look to 2016 and beyond, we have a very positive I'll call it a bullish outlook for the ability to contract coal. We have that perspective because we don't look at the coal market in total. We look at the segment of the coal markets we are and northern App coal markets.

And we think that when people look at the northern Appalachia coal markets, there's too big of a generalization that is done with the northern App coal markets. When you take a look at northern App, there's 19 long wells in the northern App coal market. Seven of them are river loadout mines. You have one of them is a metallurgical coal mine. Two of them have very short reserve life left. So that leaves you nine mines to be on the rail contract. Four those nine CONSOL mines we think are very heavily contracted. So you come out of those 19, you come left with the five CONSOL mines, long walls, rail loadout. And so we look at the market, the market side of that, and we look at cap production declining significantly. We think cat production could go as low as 80 million tons this year. And of that 80 million, 30 million is going to be met, so we are leaving about 50 million for the thermal So when you take what's left in the northern App market, longwall market, out into future years for contracting, you look at the reductions in the cap market which creates opportunities for the northern App coal that isn't contracted, we see a very good environment for term contracting for our northern App mines.

I appreciate that. That's very helpful and thank you for that clarification. To switch over onto the gas side, Nick, could you maybe give us an update on your Utica activity and what we should be looking forward to for the second half of this year?

Sure. I'll give you maybe the overview and I'll kick it over to Tim for additional detail. But Utica, we've really got two things going on there currently. One is the I'll call it the already established areas in wet and dry within our joint venture with Hess in Ohio which has, as Dave mentioned, the proven rate of returns at current price decks and we feel that program drives NAV per share as it currently sits. And there's all kinds of continuous improvement and reducing capital intensity efforts that Tim's team lean manufacturing is bringing to bear there along with our JV partner Hess.

The other side of Utica is really the story that's developing which is what we've got with what we'll call the dry footprint in West Virginia and Pennsylvania. That's upwards of 0.5 million acres. That doesn't fall within either of the JVs. And the issue there that we look towards and how we are thinking about this is results come in on that drilling program through the year.

How do we think of the dry Utica as an opportunity to reduce, significantly reduce, the capital intensity because of stack pays to hit a certain production target? So for example, this year, we want to do a 30% production growth and next year 20% is our current production guidance range. The simple story, we think the dry Utica is that the results come in as we are hoping. How does that reduce capital intensity to hit those specific production growth targets? And that can be a meaningful impact on liquidity, on NAV per share, on returns and other opportunities that we talked about with regard to the operating cash flow. That's sort of the big picture for the Utica. And then Tim can maybe speak to what we are doing with the lean manufacturing continuous improvement side of things.

And with the initial wells that we've drilled, that we are drilling in Pennsylvania, the deep dry Utica, those -- we are really taking a very conservative approach to those because we are in a data acquisition mode trying to understand what we have so that we can build a development program around those. And then over in Monroe County, Ohio, we've got a four-well pad that we'll be completing in the second/third quarter. We should have some production results, dry Utica production results, by late third quarter/early fourth quarter. So that will really help us in putting together our plan that Nick talked about and looking at how we develop our stack pay and how the Utica plays a role in that. But it's progressing nicely.

Excellent. Good luck with everything and thanks for all that color.

Neal Dingmann, SunTrust.

Good morning guys. Say, Nick, maybe the first question for you. You broke out the 85,000 net fee acres, that nice contiguous position in southwest PA. Thoughts on that doing anything with that anytime soon, or just maybe any comments you could give about that position.

I think we do have thoughts on that, but I would also say that, when you look at 2015, we've got a pretty stacked foreclosure to accomplish between what's going on with these coal platforms and coming off the refinancing and making sure we've got the dry Utica gauging that and what it means for us longer-term. So I think that will be more of a 2016 and beyond opportunity set, and it's another potential location or lever to pull. But what it looks like and whether or not we are excited about it at this point is probably premature, so something I think to think about for 2016 and beyond.

Sure. Nick, have you or Dave quantified the revenue attributable to this?

We have not given that out, and I would just say that we have studied the whole mineral concept, and so when we have a little bit of breathing room, we will be able to maybe talk about it later in the year or early next year as Nick mentioned.

That makes sense. Okay. And then just on the dry Utica gas, I know -- I guess sort of two questions around this. What are you guys assuming for well costs these days around the dry gas and what are you thinking as you sort of develop that area, and then just kind of generally how you think -- I know there's other areas -- I know Perm-Eagle Ford have talked about well costs coming down 20% or 30%. So I guess my question is sort of twofold. How have costs changed so far on those existing Utica wells that you've been drilling in those existing areas? And then what are you all thinking about sort of cost-wise on the dry gas going forward?

I think, like I said, the first wells we drilled in Pennsylvania and even the Monroe County, Ohio we've really been focusing on data acquisition, so we've been drilling pilot holes. We've been taking cores. We've been doing testing. So those costs are higher. And we're also -- we have taken a very conservative approach with those wells to make sure we don't have issues when we are acquiring the data. So we've got to evaluate our casing programs. We've probably run some of our casing streams maybe deeper than what is needed.

Our completions, we are taking a very conservative approach there. We will use ceramic and resin coated proppants, which are a little higher cost. So our initial well costs are going to be higher across the dry Utica. And then as we get results in, we will start working those costs down, but I would expect we will see costs in the -- we would expect our development costs to be in the $10 million to $12 million range.

Got it, got it. Okay. And then just lastly, over on the coal side, I know you guys talked about the contract. Is it kind of your goal to continue to have the maximum amount contracted? I know it seems like this quarter, or just at least on this release, you talked about a significant amount. And I know you guys already hit this once, just that you're able to -- additionally, you're able to contract for 2016 as well as 2017 and 2018. Is that something you will continue to do? And does that change I guess once MLPs happen? I'm just kind of curious on the coal side. Are you trying to lock as much of that up as possible?

We are going to be contracting out the out years 2016 2017 and 2018. And regardless of the situation we are at with the MLP that you talked about, we think there's a real opportunity for us with the contracting, and Nick referred to it in his comments. And maybe give you a little color on how we are looking at it.

I refer to Slide 33 in the package that we have there. And the way we look at the markets is with the mass compliance deadline coming on here, there's going to be about 50 million tons of coal generation that's going to be coming off-line. And what we're doing here at CONSOL with our contracting out into later years, that generation is coming off-line but the electrical load is still there and there is still opportunity for coal to serve that electrical load. And so the plants that we are targeting for our term contracting, Neal, have the excess generation capacity and the capability to pick up a significant part of that 50 million tons of generation that's coming off-line. We think as much as half if not more could be taken up by coal in plants that we are targeting to do business with to eat into that portion of the market. So, we think there's a very good contracting opportunity out there that aligns well with our strategy, aligning with the must-run power plants, and so we are going to keep trying to secure as much of that load under contract as we can.

So that's -- on that slide on the right there, that's what that is suggesting, is that, even after retirements, there is still significant a amount? Is that what that is suggesting?

What that is suggesting is at the power plants that we are working with, that they have excess generation capacity available, and so as these other power plants shut down, we can increase the generation capacity at these existing plants, which in turns mean they consume more coal. And those are the ones that we are entering into these arrangements with.

Thanks a lot.

When you look at that too, really the three takeaways of that slide, Jim is right, that's an important slide. The one takeaway, the first one is that coal markets are changing permanently. That's the retirement schedule. The second takeaway is that, under our old strategy of CONSOL that we would deploy when we had a different portfolio, we would've been minimally impacted by the retirements, which of course would've been good news. But the third takeaway I think is the most important, which is, under the new sales strategy that we put in place because of the current portfolio with the Pennsylvania operations, not only are going to be not impacted, we're going to benefit as the new dynamics take place with these plants that survive and we link up with them on multi-year, multi-term arrangements.

Perfect. Thanks Nick and Jim. I appreciate it.

Neil Mehta, Goldman Sachs.

Good morning guys. Can you give us some initial thoughts on E&P spending and cash flow trends in 2016, recognizing that formal numbers aren't out there yet, just directionally, assuming a 20% production type of growth?

This is Dave. Our 2015 spending really is going to drive the 2016 production numbers, and so as I tried to talk to a little bit that the capital efficiency that we are getting is helping give us a little bit more flexibility either to potentially ratchet back capital or grow production faster than that 20%. So we are running a little bit ahead of what we were originally thinking.

I think it's a little too premature here to talk about 2016 overall capital. It will be a little bit of a function of what we think the commodity price will be for 2017 because all of that capital in 2016 gets spent really drives the 2017 commodity price.

And obviously we have JV partners we need to talk to as well as really we need to see what the Utica brings to bear, because that can really be such a game-changer for us. That could push out pad development and we could come back and really start to drill on existing pads. And we have a bunch of them to go on top of the Utica well here in there. So it would be very premature for us to give you an answer right now.

That's very fair. In terms of one of the places you're spending capital that we are particularly interested in is the Marcellus resource economics here in southern West Virginia, both the dry gas and the wet gas areas. Can you just expand on that a little bit?

Yes. In the pullback in the commodity, we really pulled back on the dry West Virginia acreage right now, and we focus more, as Nick mentioned, on the core areas that have been developed and where we have a high NRI. And so we've kind of pushed out our West Virginia development.

The wet side, though, is proving to improve. And our JV partners are drilling better and better wells. We are seeing wells beating the type curves. And so that is an area we see good rates of return.

Okay. And last question from me. Dips in the quarter a little bit better than expected. Can you talk about where specifically you were able to contract through to get some of that beat?

Are you talking on service --

On the gas side, the basis differential from the first quarter? The realized price was a little bit better. Just thoughts in terms of where.

What happened there is if you look at where we are selling our gas, about 3/5 of it is in very favorable pricing markets within the TECO pool. We're down in East Tennessee, Transco Zone 5 M3. And so the basis in that quarter for the first quarter was very good and very favorable to us versus the other 40% of our gas which we sell into Dominion South pool and the M2 market which had some more negative basis. But you put that all together in a portfolio and we averaged out a positive basis for the first quarter.

Now, the second quarter, as David said in his comments, won't be a duplicate of the first quarter. The basis in the shoulder months is going to weaken significantly. And as David said in his remarks, through the rest of the year, we have this $0.45 to $0.65 range, negative range, that we think we're going to be in. But the reason for the first quarter was we were able to put our gas in some markets with some very favorable bases.

Make sense. Thank you very much guys.

Megan Repine, FBR Capital Markets.

Good morning guys. My first question is just on the 100% owned Utica acreage. We talked about cost expectations. I was just curious how we should think about lateral lengths on the initial wells, and then how that might change as kind of we move into more development mode.

Lateral lengths, when you get into the dry Utica, the 100% owned acreage, we've got -- those are deeper wells than what we've drilled in the past. And lateral lengths there will really probably -- not probably, they will be dictated by hydraulic horsepower and completions, what rates we can pump at to actually break the rock down. So we probably won't see as long a lateral length in the dry Utica as we see in the Marcellus. In some areas, we may be limited to 6,500 or 7,000 feet. The deeper we go, the shorter they will be.

Okay, great. Thanks. And then my second question, it looks like the lateral length on the southwest Marcellus gap and the surrounding core in the Utica were a little bit shorter this quarter. Any particular reason for that, and then how should we think about those for the remainder of 2015?

I think we continue to put together laterals that -- and optimize them based on their acreage position where we can. I think -- I don't have the exact number in front of me, but they may be slightly lower. But I think our overall average will be fairly consistent with what we did last year.

Okay, great. Thanks for taking my questions.

Michael Dudas, Sterne Agee.

The first question is for David. As you think about your program hedging due to lower gas prices, given the fact you're going to be raising capital and doing some other things -- did some great things on the balance sheet, allow you to kind of hold off from that or is it still go to more program? Can you go through that and remind us a little bit about that?

We have two types of hedging. We have a program hedge which has a certain price threshold that, when we eclipse it, our goal is to get closer to 50% of our production for the next year locked up. We also have an active hedging program which is a higher threshold which could take us up to as high as maybe 80% or so. And so our goal would be to try to get up to that 50%. But again, it has to eclipse a certain price threshold, and that threshold will move down a little bit over time because of our costs coming down as well. So we are trying to protect the margin and protect a certain amount of cash flow and rates of return.

I appreciate that. My next question for Jim. As you're marketing the coal, you continue to market to the similar customer on the gas side. Is that having both helping, do you get better terms or conditions on one versus the other? And I assume that's going to continue even with the restructuring of the ownership of the coal assets.

Yes, the stack customer concept, as Nick referred to in his comments, what we're finding is, because of our long-term historic relationships with customers on the coal side, they are also the same customers that are turning out to be large gas customers with us as well. So they are looking to us and we are entering into -- we're in discussions for term agreements with the same customers on gas as we are coal. So it served as a great entree for all the same reasons that we are trusted on the coal side, the reliability, the environmental compliance. All those things that bring value on the coal are bringing value on the gas.

And as we noted in the earnings release, we did enter into the first of its kind that we have ever done contract with one of our customers that has the optionality to go between coal and gas on a monthly basis. And it's not large quantities of coal or gas yet. It's a learning experience for both us and the customer. We are in negotiations with another customer to do a similar contract. So again, it does bring value to us having these different commodities to go to these customers that are both coal and gas customers, and now we are taking it to the next step of our evolution where we have these contracts where we can jump between the commodities. So, yes, it's been very beneficial.

No question, I'm glad you clarified that for me in the release. And my final question for Nick, could you just explain a little bit more about the relationship on the Noble joint venture? You say you're working on 2015 budgeting already. You're almost to May now. Is this something that's more dynamic or is there big differentials relative to what happened in December? Just to get a sense of how things are going to flow from what you put out in your slides.

The historical summary of what happened at the end of last year was the whole industry, the whole world, was upside-down because of everything changing so quickly on commodity prices. And timing, as you got pinched at year-end, two different companies, two different entities trying to get capital budgets lined up, etc., created some inconsistencies in the short-term. If you look at where we are at today, I would say I think it's fair to say we are 95% agreement on capital levels for 2015 activities. So there might be a well or a pad here or there on either side that still needs to be worked out and optimized but in the big scheme of things I think we both have our marching orders on each side of the JV to go get done what we want to get done for 2015.

And again, as we said, we talk regularly with both our JV partners across a whole range of different disciplines and management, etc., to make sure we are making the most of the opportunities within these JV because they're huge drivers of NAV for ourselves, for Hess and for Noble.

Well done gentlemen. Thank you very much.

Holly Stewart, Howard Weil.

Thanks for squeezing me in. Maybe a couple really for Jim. Jim, can you talk about the pricing first of those contracts for the 2017/2018 for coal?

We don't get into specific pricing getting that far out, but I will say the contracts that we are entering into with our customers should end up in prices indicative of the markets out in that timeframe. What I mean by that is these aren't traditional contracts where we just set up price and then we see who is right or who is wrong with the price out a few years out. We have contracts we are entering into that are netback priced that are based off of power markets. We look at gas markets. We have collars on them, market reopeners. And we use all these different types of contract terms so that when we get out to 2017 and 2018, us and the customer I'll say are in lockstep in a win-win situation. We are both at market and we are in it together versus one having guessed right and one having guessed wrong on what the prices are going to be.

Sure. Okay, great. And then maybe just the follow-up on the gas side, it looks like the numbers for the FT and FS positions are roughly the same, but then within the slide presentation, you mentioned a new agreement with, what is it, Mountaineer Express Pipeline? I was just trying to reconcile what the ultimate firm transportation agreements are going forward.

In the text, there are references of us getting up to the 1.7, 1.8 Bcfe a year. I think it's 1.7 at an average price of $0.33. That would have the Mountaineer in those numbers, Holly, into that average -- into those total volumes and into that average price.

Okay, great.

You'll find it in the tables, in the text section of the earnings release.

Got it, okay. And then my final one would be just on condensate realizations, anything to highlight from the first quarter, and then just how maybe we should be thinking about condensate realizations going forward.

The condensate realizations in terms of CONSOL, we are producing what's more of a light condensate versus a heavier condensate. And the challenge that we have up in the Basin there is do other producers that have this light condensate getting adequate refining capacity. And so we are at that maximum in the Basin. There's no more refining capacity up here that can handle the light condensate, so we are having to barge it down to the Gulf, and so that cuts into the netback price that we have. And of course, there's other parts of the country, Holly, that have condensate going down to the Gulf as well. So that's what's challenging our revenue side on the condensate is just oversupply in this region and the lack of refining capacity. So we think that volatility, Holly, is going to probably continue in through 2016, maybe get us into 2017 before we start seeing some stability, more refining capacity, more demand side. So, that's how we are looking at the condensate market.

Great. Thanks guys.

I'll turn it back to the presenters for any closing comments.

With that, that concludes the call. John, if you could please instruct our callers on how to access the replay information.

Certainly. Ladies and gentlemen, this conference is available for replay. It starts today at 12:30 p.m. Eastern, will last until May 5 at midnight. You may access the replay at any time by dialing 800-475-6701 or 320-365-3844. The access code is 353100. Those numbers again, 800-475-6701, or 320-365-3844, with the access code 353100.

That does conclude your conference for today. Thank you for your participation. You may now disconnect.