CNX Resources Corp (CNX) 2015 Q2 法說會逐字稿

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

Thanks, Lola, and good morning, everyone. Welcome to CONSOL Energy's second-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; Tim Dugan, our Chief Operating Officer of our E&P division; and Jimmy Brock, our Chief Operating Officer of our coal division and CEO of CNX Coal Resources.

Today we will be discussing our second-quarter results and we have posted slides to our website under the section labeled presentation to analysts. 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 previous SEC filings.

We will begin our call today with prepared remarks by Nick, Dave, and then Tim. Jim Grech and Jimmy Brock 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 thanks for joining us. Before Dave goes into the details of the quarter and then Tim Dugan covers some very exciting news in our dry Utica results, I'd like to provide some brief remarks and an update focusing on CONSOL's strategic path. And specifically, what we've accomplished so far and what we plan to accomplish over the next 18 months.

First and foremost, the management team is committed to driving our NAV per share and having that NAV per share recognized in our valuation. Over the course of the past three years, we've taken a number of strategic steps, some of which were very challenging steps, aimed at transforming the Company for the future, unlocking the hidden value of our asset base, and ultimately driving NAV per share. We'll continue to take steps including strategic ones to drive that NAV per share and, if anything, our sense of urgency on this front has amped up even more over the past quarter.

I also want to begin by making very clear that we're confident in the transformative plan we're in the process of executing, despite the short term challenges of the entire industry is contending with, and we remain confident that the strategic transformation we're undertaking will ultimately yield and unlock the true value of this 151-year-old Company.

So as part of this transformation, which continues today, with executed a number of strategic and tactical initiatives which I think are important to highlight. In addition to substantially strengthening our balance sheet and significantly reducing our legacy liabilities, which Dave is going to cover in detail in a few minutes, last year we IPO'd a portion of our joint venture Marcellus gathering systems into an MLP known as CONE Midstream Partners. This not only brought over $200 million in proceeds but the entity allows us to benefit from future monetization opportunities through additional drop-downs.

Most recently, we IPO'd a small portion of our Pennsylvania coal operations into another MLP. This transaction brought in approximately $345 million in proceeds which CONSOL used to help pay down the parent credit facility.

Now, many people asked why we decided to pursue the MLP in what's been a very challenging coal environment and the answer is simple. To start with, it's a small portion of the asset representing roughly 9% of the Pennsylvania coal operations complex. Also, as mentioned before, it did bring some cash proceeds in the door but most importantly it really represents the first and most important step in building a durable structure that will allow us to continue to execute our strategy in becoming a leader pure play E&P Company and at the same time creating a separate stand-alone best-in-class coal entity.

So we believe that the benefits of getting CNXC up and running as a stand-alone entity outweighed the yield that it went out at, which we believe will improve over time as we continue to illustrate our ability to lock in tons and provide additional visibility on future cash flows. There's now a base case today for a coal/gas split within the Company that all other options can be weighed and considered against.

Over the past couple of quarters, we've also discussed the possibility of a MetCo IPO on our can in mind Buchanan mine but due to the continued pressure on met coal pricing, we decided to put this transaction on hold and instead we are evaluating additional opportunities including the possibility of dropping Buchanan into CNXC or potentially partnering with a third-party to grow the asset through consolidation. We expect to make a decision on the strategic direction of this entity by year-end, and regardless of that decision, it doesn't change the structure that we already have in place nor hinder our ability to execute our strategy.

Tactically, CONSOL continues to execute the game plan as well. In addition to the strategic transformation that the Company is undergoing, we are also undergoing a cultural transformation. So beginning this year, we implemented zero-based budgeting. This process continues and we've seen tremendous results which we expect well into the future.

As a result of these efforts, we've seen reductions across our general and administrative costs, our direct administrative costs, and corporate miscellaneous expense line items, and Dave will give you a feel and quantify those in a couple of minutes.

So CONSOL continues to execute the strategy that we previously laid out. To more clearly state it, we pride ourselves on transparency, and we successfully executed on what we said we would do with the goal of transforming this Company in order to capture the substantial value that exists in all of these different assets.

We're fortunate to have world-class assets on both sides of the business, our best-in-class coal mines and Tier 1 E&P acreage footprints. On top of that, we've got a team to efficiently develop these assets in a manner that drives value. And due to our asset-based team, continuous improvement that we've seen over the past 18 months has been substantial. These improvements allow us the opportunity to achieve our production growth targets over the next 18 months at much lower capital levels, which results in the Company expecting to generate free cash flow beginning in the second half of 2015.

We stated before that it was our goal to be free cash flow positive and we're exceeding our initial projections on that happening. Our ability to generate free cash flow over the next 18 months will provide a significant amount of flexibility and the opportunity to grow our net asset value and play some offense.

So, what do I mean by playing offense? Our plan to be free cash flow positive that will provide us a large amount of optionality as we continue to manage through a very challenging market. We are assuming only a modest level of asset sales because asset sales are not entirely within our control. We've redoubled our efforts to monetize assets, and if we exceed and when we exceed our asset sale expectations, or if the market begins to improve earlier than predicted, we'll be in a position to repurchase either our highly undervalued shares or our highly undervalued debt or take other aggressive actions with respect to operational plans and footprint.

We are honoring our new culture of not accepting the status quo, and we're taking aggressive actions to position the Company for the road ahead. And we will continue to be aggressive, as we are now in the spot posts CNXC IPO to begin to accelerate structural changes that will position us to the world as we see it in the future.

As I said at the outset, we'll continue to make decisions that drive NAV per share. In fact, we are more committed than ever and more confident in our plans to do just that. With that, going to turn it over to Dave Khani.

Thanks, Nick, and good morning, everyone. I'd like to discuss our loss for the quarter, the improvement in controllable items, and the road to profitability and free cash flow while we are still in this weak commodity price environment.

I will also like to highlight the areas that will be helpful for you to model our Company including free cash flow, capital plans, and balance sheet. I have several slides on our website, and I'll focus on the slides that really on pages 34 through 44 and these should help provide some details.

First, let me hit some key controllable areas in the quarter. First, we made significant progress on reducing cost under our [ZBB] focus, capital intensity, legacy liabilities, and drilled and completed nearly seven of our Utica wells. All these moves will improve our rates of return and our NAV per share.

Second, we met production guidance in coal and exceeded in E&P.

Third, we met our unit cost expectations early and expect unit costs to decline even faster into 2016.

Fourth, we expect to meet our 2015 and 2016 guidance, especially on the E&P front when reducing our capital. In essence, our 2013 to 2015 capital is proving to be more productive, enabling us to dial down the next 18 months of capital to maintain our forecast. Tim will highlight this further.

Fifth, as a result of all these actions, we now expect to generate free cash flow earlier than initially planned providing more flexibility to be on the offensive.

And sixth and last, and important, as our drilling results of dramatically improved our asset sale opportunity set has significantly risen. We now have over $2 billion of assets to be monetized. Now, I cannot comment on specifics but know that we have several processes going on that should increase our free cash flow beyond our normal assumptions.

Now let's move to the quarterly results. CONSOL reported a net loss for the second quarter of $603 million or a negative $2.64 per diluted share resulting primarily from the impairment taken on our SOG wells and lower commodity prices. After excluding the cost of unusual items, the Company had adjusted net loss of $84 million or $0.37 per diluted share, adjusted EBITDA of $138 million, and adjusted cash flow from operations of $114 million.

The most significant unusual items in the quarter was the $829 million pretax impairment in the carrying value of our shallow oil and gas assets primarily due to the continuation of depressed NYMEX forwards. We expect units of production DD&A rate for this segment to decline from 2014 levels of $2.25 per Mcfe to approximately $0.35 per Mcfe as a result of the impairment.

Now, the two main items such are of our negative adjusted earnings for the quarter really were, one, our E&P fully-loaded margin shifted negative in the second quarter from depressed natural gas and liquids pricing. And second, our coal margins declined along with selling about 1 million tons of [West coal] in the quarter. We essentially took some spot tons off the market.

Also impacting the quarter were some transaction costs tied to our refinancing and some employee severance. We've already taken actions to reduce cost and capital to improve profitability that should be meaningfully benefit the third quarter and the fourth quarter.

On a per unit basis, during the quarter, CONSOL's average sales price for gas was $2.03 per Mcfe. This includes a negative per MMBtu on a differential, which is slightly greater than the lower end of our previous guidance of negative $0.45 to negative $0.65. Our Ohio Utica gas realizations really drove this discrepancy.

Now looking at costs. CONSOL has made significant strides in lowering unit cost in both sides of our business. For E&P our production cost, direct administrative and selling cost were lower than compared to the year-ago quarter as well as sequentially. Total operating costs during second quarter were $2.90 per Mcfe versus full-year 2014 costs $3.31 per Mcfe. CONSOL reduced costs by over 12% year to date, about 18 months ahead of schedule from the previously stated 10% to 15% reduction.

For coal, during the quarter, our Pennsylvania operations per unit cost improved to $44.30 per ton compared to $45.03 -- I'm sorry $45.02 per ton for the year ago period. Consider that PA operation sold 1.4 million tons in the quarter versus year ago period, and this decrease in cost illustrates the cost improvements throughout the complex. For Buchanan, total unit costs were $48.38 during the quarter which was an improvement of over the $61.14 per ton last year. As expected, though, the quarterly costs at Buchanan were higher than the previous quarter due to planned longwall moves and lower sales volumes.

Now let's look at the balance sheet. Over the past 18 months, we refinanced or raised capital of over $5 billion terming out our debt, lowering our average interest expense over $40 million, and modernizing our covenants.

In addition, we totally [refaced] our legacy liability footprint over the past three years. These liabilities have decreased by $2.7 billion resulting in annual production of $270 million of cash servicing costs. This excludes the benefit of removing the off-balance-sheet 1974 multiemployer pension plan.

At year-end, we now expect legacy liabilities and annual cash servicing costs to be $1.6 billion and approximately $120 million, respectively. We continue managing our legacy liabilities. Most recently, we accelerated the termination of retiree medical benefits for certain retirees. This action eliminated $72 million of liability from the balance sheet and results in the recovery of prior expense of $235 million in 2015. Although very difficult decisions, decisions are prudent and the change will further reduce liabilities and strengthen our balance sheet.

CONSOL remains committed to managing our balance sheet and liquidity position in what continues to be very challenging commodity price environment. As Nick stated, we used the proceeds of approximately $345 million recently to help pay down our credit facility. Our pro forma leverage is slightly elevated at 3.7 times debt-to-EBITDA. Based on the delay of the Met IPO, we now expect our debt to EBITDA to be at year-end at 3.5 times, slightly up from our initial target of 3.2 times.

We could hit our original target if we sell more coal, continue to squeeze more costs out, or have higher asset sales than forecasted. Our pro forma liquidity position is currently at $1 billion after factoring in the CNX IPO. We expect our liquidity position and leverage ratios to continue to improve into 2016.

So with all these changes, let's focus on how you should look at CONSOL moving forward. First, on natural gas we expect the basis differentials to remain under pressure in the third quarter and for the full-year 2015. We expect basis differentials to be around negative $0.95 in the third quarter and could be around negative $0.55 for the full year. We expect natural gas prices to improve in 2016 as well as improving basis. We forecast between 6 to 8 Bcf per day of pipeline build by year-end 2016 that should create excess pipeline capacity out of the basin next year.

We are already seeing flattening in Northeast gas production in the first half of the year with sharp decline in activity. Investors have stopped rewarding outspending and this along with the lower commodity prices should help govern supply growth.

For E&P unit costs, we expect an additional 10% to 15% reduction to operating costs over the next 18 months compared to the second-quarter 2015 costs.

For coal, we do not provide price guidance for the coal division but it is important to note that our PA operations coal is heavily contracted for 2015. For those who participated in the CNXC roadshow, we provided our forecast for PA thermal coal prices over the next 12 months. Our Virginia met coal operation, however, has more exposure to selling in the spot market. That is why we saw decline in average realized prices for this segment in the second quarter which correlated to the severe degradation in the BMA index for the most recent quarterly settlement.

For cost, PA operations we continue to expect full 2015 total operating costs including DD&A to be between $40 and $43 per ton but with full production levels we should see this come down again in 2016. For both Virginia operations and other operations, which is our Miller Creek, we expect full-year 2015 total operating costs including DD&A to be between $50 and $55 per ton.

All of our coal cost forecasts are all in line with last quarter and substantial improvements when looking back over the last couple of years.

For corporate and CONSOL continues to focus on driving down costs through zero-based budgeting. Due to these efforts, in addition to headcount reductions, we now expect 2015 and 2016 overhead reductions of approximately $100 million and $145 million, respectively. This is $35 million and approximately $50 million respective improvement when compared to last quarter's forecast.

Balance shift over to discuss our free cash flow goals over the next 18 months. As stated in the earnings release, we have reduced our 2015 E&P capital budget forecast to approximately $800 million, which is down from the original $1 billion that we announced in late January.

We also expect our 2016 E&P budget to be between $400 million and $500 million, and this really ties to a $3.00 and $4.00 NYMEX gas price outlook. We now expect positive free cash flow from our coal and E&P businesses. Our ability to hone capital is a direct result of the continuous improvement in our E&P activity. Tim again will provide a lot of details behind this.

We laid out the assumptions behind our free cash flow projections in our earnings release, so I will not reiterate them. However, I would like to remind everyone we have only $75 million to $125 million of non-core asset sales in our base 18 month projections, which excludes proceeds from CNX coal resources and our CONE Midstream.

As stated earlier, we have over $2 billion of monetization opportunities and a dedicated team to bring some of that value forward. Some of these opportunities are large and do in fact move the needle so there's upside to our current cash forecast.

Also, as previously announced our December 2014 press release and in anticipation of post-CNXC IPO, we anticipated reducing our quarterly dividend starting in third quarter. All these aspects taken together will put us in a tremendous free cash flow position to play off, as Nick stated earlier. While we are not happy with the quarterly outcome, we've taken strong actions to drive improvement profitability, EBITDA, and free cash flow.

More specifically, we expect operating cash flow to improve due to higher gas production and margins as well as significant improvements in employer-related liabilities and G&A. The culmination of all of our efforts, stated before, is expected to improve our second half of 2015 cash flow between $650 million and $675 million versus our first-half numbers and that is based on strip in our current contracted and hedge position.

So with that, it like to turn it over to Tim Dugan.

Thanks, Dave, and good morning, everyone. Over the last 18 months, CONSOL has evolved to a Tier 1 Appalachian-focused E&P Company. We've made great strides and the progress and improvement that we've seen across all disciplines has been significant.

Looking ahead over the next 18 months, we expect to achieve our 2015 and 2016 growth objectives of 30% and 20%, respectively, with much lower activity and capital levels while positioning ourselves for market appropriate growth in 2017. But before we get into these important topics, let's first start with some recent Dry Utica results that we are very excited about.

This past Friday, we began flowback on the Gaut 4IH, a deep dry Utica well located in Westmoreland County, Pennsylvania. The Gaut stands out over and above any of the Utica wells drilled to date because of its location and results. This is a true step-out well, which had substantial breadth to the entire Utica play.

Based on flow rate, the Gaut is the second-best Dry Utica well drilled to date with maximum flowing pressures exceeding 9,000 pounds and a 24-hour flow rate in excess of 61 million cubic feet a day. During the 24-hour flow test, the pressures never dropped below 7,500 pounds.

The Gaut has a 5,840 foot lateral that was drilled and completed for approximately $27 million. And as we've seen with our Monroe County Utica wells, there will be tremendous improvement in cost as we move forward with additional wells. But most importantly, the Gaut proves up a significant amount of dry Utica acreage and adds 15 plus years to our already impressive inventory of drillable stacked play wells. Dry Utica wells of this caliber will generate a rate of return in excess of 35% at $2.95 per Mcf realized price and will be accretive to CONSOL's growing NAV.

The recent buzz over Utica well results plays perfectly into CONSOL's portfolio which consists of a dominant acreage position in the core areas of the wet and dry Utica in Ohio, Pennsylvania, and West Virginia. EQT's record-setting well in Greene County is less than 4 miles from CNX's to GH9 well that is currently being drilled on 100% CONSOL fee acreage.

This outstanding EQT well is bracketed by CONSOL controlled acreage. Our Greene Hill field is a few miles to the south, the Nineveh field is due north and the Majorsville field is due west. Not only does CONSOL on significant footprint across Greene and southern Washington counties but almost half of this is fee acreage, which is a huge boost to rates of return.

Our existing infrastructure of well pads, rights-of-way, permanent water network, and other infrastructure uniquely positions CONSOL to quickly transition to developing this stacked play. There will be plenty more to come on the dry Utica in the coming months.

Before I go into our development plans and how we'll meet our production targets with substantially less capital, I think it's important to briefly touch on some of the areas where we have seen significant continuous improvements over the past few years.

In drilling, we've been drilling longer laterals less time than many of our peers for quite some time. Year to date, our 2015 Marcellus laterals averaged nearly 7,600 feet and take 11 days to drill, while in 2014 Marcellus laterals average 7,500 foot and took 13 days. An example of our impressive drilling performance was our MOR 30-D well. The curve and lateral, which was 10,122 feet, was drilled in seven days with one 24-hour period, garnering at CONSOL record of 6,168 feet of lateral footage.

In Monroe County, where we're drilling dry Utica wells, we have seen substantial improvements in our drilling. Our first Monroe County pad averaged 63 days per well with progressive improvement on each well. The first well on the second Monroe County pad took 30 days to drill and costs were improved by 40% over the first pad.

We've seen similar trends on our completions. In the Marcellus, costs have improved by 30% from $744 per foot in 2014 to $524 per foot year to date in 2015. This improvement was driven by aggressive negotiations with vendors along with a 35% improvement in completion cycle time throughout 2014 and 2015.

So what will the result of all these continuous improvements yield? Well, on a six-well pad, we have shaved 70 days off the cycle time from when a well is spud to when it is turned over to production. This reduction is a combination of drilling and completion efficiencies, reduced idle time between top hole and horizontal drilling and, most recently, conversion to top-down drilling.

Operational efficiencies are not the only improvements we've seen. Along with reduced cycle times and lowered costs, we're also seeing improved well results on an EUR per lateral foot basis, which will allow CONSOL to grow production in 2015 and 2016 while deploying capital and a very disciplined manner. As a result of our continuous improvements and lean manufacturing, we're able to adjust our activity and development plans over the next 18 months to meet free cash flow targets that Nick and Dave have discussed as well as meet our targeted growth projections. As part of our development plans moving forward, we plan to lay down all of our operated rigs starting in the third quarter of 2015 through 2016.

So how will we accomplish our production growth targets at such a reduced level of activity and capital? In the core of the southwest Pennsylvania Marcellus Shale, the company has a program underway to decrease line pressure and significantly debottleneck the field.

Starting in the third quarter of 2015, CONSOL will make a series of incremental midstream improvements such as looping lines, adding compression, and increasing tap capacity, which will drive additional production. These improvements will occur in incremental steps over the next 18 months. Also, CNX will exit 2015 with a moderate inventory of wells and process and a strong position for rapid growth in the second half of 2016 or 2017 when market conditions warrant.

In the Marcellus, CONSOL will carry approximately 25 operated wells that have been drilled but not completed into 2016. Of these, it's anticipated that 20 wells will be completed and placed into production during 2016.

Noble will have a large inventory of roughly 49 TD'd wells coming into 2016. Only a portion of these are on the 2016 completion and turn in line schedule leaving the remainder for 2016 additions to the plan as prices rebound making these wells high rate of return opportunity. Since these wells have significant sunk capital, the CapEx for incremental Mcfe of production should be much smaller for the next two years than has historically been required. Opportunistic inventory for 2016 lays out a solid starting point for 2017 activity.

In addition to inventory, where operational activity is taking place, we estimate there are 50 wells in our Southwest PA core that are land-ready with almost half of these expected to be permitted by year-end. In the wet Marcellus, permitting and land work continues as Noble has a goal of having at least one year's inventory available.

In the Utica, CONSOL and its JV partner both carry approximately 10 TD'd wells each into 2016. These wells will be placed into the schedule according to the normal course of business. CONSOL carries a moderate inventory of permitted wells in the JV and handful of permitted wells in Monroe County into 2016. Extensive land work has been done in Monroe County and more than 20 laterals are land ready in this concentrated footprint of 100% CONSOL acreage. In addition, work is underway and southwest PA on additional 100% CONSOL Utica laterals. The current slowdown in activity has afforded CONSOL the opportunity to carefully high grade wells and very judiciously placed the best wells onto the schedule.

So the future looks bright for CONSOL. Our continuous improvement, both operationally and from a well quality standpoint, will allow us to grow 30% of 2015 and 20% in 2016 with significantly reduced activity and capital.

I'm sure some of you are wondering about 2017. We will continue to work to increase the number of drill-ready wells from the current level of approximately 100 laterals for 2017. And our inventory of drill-ready wells, improved performance, infrastructure capacity, and top-notch team position us to grow in 2017 at any reasonable level the market dictates.

Let me emphasize our E&P team for just a second. We've recently undergone some headcount reductions in reorganization but we have come out of this with a high horsepower, world-class E&P team that will continue to execute performance at significant activity levels with a focus on growing NAV.

With that, I'll turn it back to Tyler.

Thanks, Tim. That concludes our prepared remarks. Lola, can you please open up the call up (technical difficulty)?

(Operator Instructions) Neal Dingmann, SunTrust.

I just want to ask little bit about the Gaut well. A couple of things, Tim, I guess for you or -- Tim, for you or Nick. After seeing that well, I guess your thoughts as far as development plans, or call it delineation plans, is a thought to continue up in that northeast area or work in the sort of southwest PA and kind of fill in, if you could discuss kind of the delineation plans after that success.

I think that you look at our test program over the next basically for this year as the results come in, in Q3 and Q4 across the dry Utica. Gaut was the furthest step up, as Tim indicated, so that was a very important data point for the industry because of where it's located but also for us because we got over 100,000 acres of dry Utica up in that West Moreland/Indiana County area. So for us in terms of thinking about that and what it means and what is implied value is as well as how it might fit within our development plans, that was important.

Tim also mentioned what we've got going on in Greene Hill and Greene County, southern Washington, northern Greene County next to some other industry wells that are being drilled there. That will play into our stack pay opportunity because that's where we got the most historical concentration of wells on the Marcellus side within the Company.

And then we've got Monroe County Ohio and what our joint venture partners doing in the panhandle of West Virginia. So by the end of this year, will have the data to assess what that means for activity level for reducing capital intensity to get our production targets and what that means potentially for asset monetizations if we're not going to get to a certain position in the near 20, 15 years or so.

On the specific wells that are coming on and when, Tim has got some additional information to provide there.

We should have -- in the next couple of months we will have more information on dry Utica wells as we bring some of our Monroe County, Utica wells online, and then we've got our Greene Hill well that we're currently drilling that we'll have information on by the end of the year. But as Nick said, this really provides us with a lot of optionality in our development plans.

No, that makes sense guys. And Nick, maybe I'll do just one follow-up. You guys seem to always stay ahead of the curve, you and Tim and the group, as far as takeaway and such. Could you just address that as far as FT and takeaway whether that be up more of that northeast, up in the West Moreland/Indiana area or down in the southwest PA. Are you set remainder of this year and into next year?

The Gaut results are not just extremely important because of what that means for our NAV and footprint up in West Moreland/Indiana but it's also well situated with how we're sitting on firm transportation. And I'll that Jim Grech give you a little more detail there.

Yes, Neal, as Nick said, the unused FT that we have in our portfolio sits right in the fairway of these Utica wells. So as Tim drills up these wells and we put them into production, we have existing very low-cost FT in place to move the gas. So we're in good shape.

Thank you all.

Brandon Blossman, Tudor, Pickering, Holt.

Tim, given that your well results on the Gaut and some other industry well results, any bias to moving the Utica type curves up in general?

Well, it's still early but there's certainly positive indications that in which way they are going. But we just began flowback Friday, we've got a 24-hour flow rate but we still have more data to acquire.

And that actually probably rolls into the next question. As far as debottlenecking and allowing more throughput on the gathering systems over the next 18 months, do you guys feel comfortable about what the flow profile looks like and the clients look like as you debottleneck in order to hit those production targets?

Yes, we are in the middle of north Nineveh debottlenecking that we also talked about on our CONE call and that is materially moving our production up and taking the wellhead pressures down pretty materially. And so it is going to help the wells flow closer to what they should be flowing.

Great, and then just a bookkeeping item. On the rig release, any contract termination clauses that we need to be aware of as far as one-time expenses?

No, but they are baked into -- all this is baked into our costs.

Okay, thank you, guys.

Jeremy Sussman, Clarkson.

Thanks for taking my question. I was wondering on the gas side, obviously, you guys had, were hurt by differentials this quarter but the costs were quite good. Can you sort of talk about kind of on a unit basis, I guess, how we should kind of think about the next 12 to 18 months, where you are today and how you'd like to get to where you'd like to go?

Overall, we expect unit costs on the E&P front to come down another 10% to 15% versus the second quarter of 2015. That is a function of unit costs coming down at our Marcellus, the mix shift continually to more of our lower cost Marcellus as well as Utica, and then a modest amount really will be from the impairment and taking that DD&A rate down on the small amount of the conventional SOG wells.

So that is a function of the activity set that we are doing. That is a function of the reduction of headcount, and I don't know if there's anything else, Tim, that you want to talk about?

I think of the operational side, we will employ the same lean manufacturing mindset that we employed in our drilling and completion operations to drive down our lease operating expense.

Great, and that's helpful. Just a quick follow-up. So for Buchanan, you talked about potentially partnering with a third-party to potentially consolidate the Met market before a future IPO. I guess can you just give us little bit more color, I guess, on what you're thinking here. And does this mean that it's unlikely at this point, given the markets, that you would go about us stand-alone IPO or is that still on the table?

Well, we said in the remarks that the IPO that we had planned for this year we've changed direction there because of what's going on with the global met market. So the way to think about I think Buchanan and the fall back or base case would be either a drop-down within CNXC, which has the right of first offer tied to it, or something that would involve a third-party to either, as we said, consolidate the footprint with other best-in-class assets in a fluid market, or to effectively monetize part of that asset in and of itself with someone that's interested in partnering with us longer-term.

Beyond that, we really don't want to speculate at this time and that type of the opportunity is not contemplated in the asset sales numbers that we've assumed to get to our free cash flow targets. So this would be something that would be additive to it.

Understood, thank you very much.

Megan Repine, FBR Capital Markets.

I was hoping that you guys could walk us through kind of the latest milestones, things that we should be looking at from a stacked pay development as we move into 2016?

Well, I think with the Utica results that we're seeing, Utica as we move further and further into the Utica, we'll be stepping further and further into the stacked play development. The Gaut was drilled on an existing Marcellus pad so we were able to utilize existing infrastructure. And that's really, in general, that's the plan forward with the majority of our Utica development.

And also, bigger picture, looking at it over a longer period of time, what the dry Utica does and stacked pays do, I think there's three big sort of conclusions or characteristics you would see. One would be to hit a certain level of production growth, our capital intensity should be reduced significantly. So that's because of everything from shared infrastructure to just the nature of the potential productivity in these dry Utica wells. So that will be obviously a big driver and an important one for us when you look at capital intensity to hit production growth.

Second characteristic I think you'll see is the Company will rapidly evolve. You're seeing that now where early on with the advent of the Marcellus and then Utica coming into play, many different acreage footprints, a lot of activity across a range of different counties across three states of Pennsylvania, Ohio, and West Virginia. Moving forward, I think activity level is very concentrated into three or four key plays where we've got the stacked pay opportunity and we can set off in the sub areas and set up there for years to get all of our production growth. So not just lower capital intensity but a much more concentrated activity footprint.

And then third characteristic that comes out of that is, okay, if we've got a more concentrated activity footprint that opens up significant acreage footprints beyond that for either asset monetizations or additional joint venturing, ways to bring forward, I'll call it that value, sooner instead of later.

So those are the three big picture ones I think you should look for over the long-term in stacked pays and, specifically, the dry Utica coupled with the Marcellus are going to bring to bear for us.

Very helpful, thank you. And then just on your 2016 initial E&P capital program, can you clarify what lateral length on average that contemplates relative to 2015?

It's about the same, 7,500 to 8,000 feet.

Okay great, thanks for taking my questions.

Jeffrey Campbell, Tuohy Brothers.

First question was with regard to the Gaut. Just wondering what's the cost expectation for Utica wells in Westmoreland once you get into development mode? And is it correct that $27 million on an existing pad had a lot of science spending for the Gaut well?

Yes, it did. It had quite a bit of spending, science spending. Our goal would be to get those down sub-$15 million but it's going to vary some based on depth. As we go from Monroe County over into Pennsylvania they get deeper, completions get more expensive but we expect to get them down below $15 million.

Thank you. Slide 16, it looks like the Marcellus southwest gas EUR jumped significantly quarter over quarter but also appeared to be gassier. Is this more typical of the EUR profile going forward or is this just variability of drilling locations.

No, I think that's the EUR going forward. We've seen some very positive results there in all the wells that have been brought online in that area. So I think that's -- we'll see that consistently.

Okay, great. And if I could ask just one last quick one. Can you comment on the Utica sublease that you highlighted on slide 20? Just was wondering what that was about.

Hold on, we're jumping over to it. That is a Majorsville sublease. It's an area that has both Utica and Marcellus potential and it will be built into our development plans moving forward.

Okay, great. Thank you.

Michael Dudas, Sterne Agee. Mr. Dudas?

Mike, take your mute off.

Hello. I'm sorry can you hear me now? Sorry about that, yes. First time using a phone, I guess. First question is, Dave, I think in your remarks you talked about improved basis differential. Can you maybe share the thoughts about how you see generally on the takeaway capacity and timing of such? And maybe tie that also into, maybe from Jim Grech's standpoint, are some of the customers for your gas or for your coal ramping up natural-gas-fired plant proposals or are we seeing more LNG exported coal point. Is that moving along pretty well? And I've seen you made those announcements on ethane takeaway. Just to get a sense of how quickly we can move that and get some better demand for the product.

Sure, obviously we're trying to figure out where basis will go. We think it's going to get the differential will get positive. For our free cash flow analysis, however, we kind of kept it at $0.60 differential for 2016 just to be conservative in our estimates.

I think the forward curve right now is somewhere around $0.51 but we see slowing of production growth. We see the projects of FT that we have watched coming online and we anticipate another 6 to 8 Bcf per day of takeaway capacity. And so we anticipate by the end of 2016 the basis should continue to narrow as well as seeing some local demand for natural gas in the region pick up as well. So I don't know, Jim, if you want get into more details?

Yes, Mike, you asked about both gas and NGLs, and on the gas side we are seeing increased demand from our customers, and these are mostly our historic coal customers for gas as they have gas power plants coming online. Going down into the South and Southeast off the Nexus pipeline, we're talking to multiple entities that have invested in that pipeline about selling them turn gas and that falls right in line with their projections to bring new gas generation online, thereby increasing the demand for gas. And the same thing going into the Midwest, and while we took position on the Nexus pipeline, we see gas production -- gas generation coming online thus increasing the demand for gas up into the Midwest markets where we're going to as well. So, we are seeing some good demand increase there from generation as you get out into the 2017, 2018 timeframe.

The other part of your question was about NGLs, I think propane, butane, and the takeaway from the basin. And one of the pipes that's going to have the biggest impact on the basin that we see is the Mariner East 2 pipeline, which we have that coming on late 2016 and early 2017. That's going to be 275,000 barrels a day of takeaway capacity, in addition to the Mariner 1 pipeline which comes on this October. That 275,000 barrels a day, right now in the basin, we've got about 255,000 barrels a day of production of propane and butane. So that pipe now that production of course will increase over time, that pipe with the size of it is going to have significant takeaway capacity for these NGLs out of the basin thus improving pricing there as we get out into the later 2016, 2017 timeframe.

Excellent. My follow-up for Nick, with the data you shared -- you guys have been very aggressive on your cost reductions and capital efficiency, which is duly noted in the numbers. When do you think there's a sense that you can be more aggressive on the offensive side as you mentioned in your prepared remarks? And obviously, your shares and certainly that could be a quite interesting target. But do you see other areas away from where you are that because of the stress in the market that could be enticing as well? And when do you think that becomes more of a positive impact for CONSOL going forward? Thank you.

The base case 18-month plan forward, as Dave said, use NYMEX forward strips. Use a negative $0.60 basis. Use some conservative assumptions for coal pricing, and you take all of those, roll them up, conservative asset sales, you get a free cash flow positive projection for 18 months. That's the first, I think, most critical step.

Our ability, I think, to beat that beyond an uptick in commodity price, which may very well occur, really hinge on how aggressive we can be on asset monetization. So we talked about the dry Utica, we talked about all the other sort of non-core asset monetization efforts we've got going on. We talked about some others today.

To the extent that we can turn those loose above and beyond materially what's in those numbers, the projections that we've provided, that's where we can play some offense.

Now, when you talk about offense, put this in remarks. Are there opportunities out there in the coal and E&P spaces? Yes. But I'll tell you that the biggest opportunities we see right now, without a doubt, I think they simply can't be beat, are what are shares are trading at and what our debt is trading at.

So, first things first. We've got a base case that doesn't assume a home run that gets us to free cash flow positive. We are aggressively moving to get home run above and beyond that. To the extent that we do, we've got a target rich environment right now.

Excellent, Nick, thank you.

Jorge Beristain, Deutsche Bank.

I guess my question is more for David. Just on page 6 of your PowerPoint presentation you mentioned a minimum current ratio that has to be, I guess if it goes below 1 times the covenant, the revolving credit line becomes at risk? Could you just quantify a little bit more what exactly is defined in the current ratio? And would you have any waivers in place or is there any risk of sort of slipping below the 1 times in the second half?

Yes, no, if you look out actually into 2016 into the second half and into 2016. We see that ratio actually improving not based upon our base plan with the minimum asset sales with the forward curve and with sort of current commodity prices. So no, we don't worry about that and it's a normal ratio of current assets, current liabilities, and a function that drives it will be how much is on our revolver and those other two pieces.

Great, thanks.

David Gagliano, BMO Capital Markets.

I wanted to ask a few questions just to kind of drill down a little bit on this cash flow commentary. I know there's a lot of focus there, and admitting I haven't finished going through the 65 slides so some of these questions going to be annoyingly stupid, and I apologize. But trying to get to the point.

On the CapEx for 2016, it looks -- I want to go through like kind of the uses and the sources, just the obvious moving parts here. CapEx 2016 looks like it's a total of what, $600 million or something like that?

Yes, that's ballpark yes because we said maintenance capital on our coal side is about $5 a ton and then we gave you the range on the E&P front.

And so then interest expense, a couple of hundred million bucks is kind of the run rate right now, is that reasonable for 2016?

That's reasonable.

And then cash taxes like $100 million or something like that, is that reasonable?

No, I think we will be more of a cash deferred, so will be almost 100% deferred tax.

Okay, so zero that out. And then are there any other big uses that I'm missing there?

No.

Okay. And then on the sources, we have asset sales of $100 million or midpoint of $100 million in the assumption, and then cash from the MLP component -- I don't exactly know what that would be but is it like $30 million or something like that or is that too high?

We have potential for drop-downs as well as recouping through the GP and our LP ownership. So, you should really think about it as how much leaks out in that 9% position as opposed to what comes back.

We have -- I guess you didn't participate in the CNXC roadshow, so it's hard for you to know the drop-down schedule we put out, but we talked about dropping down assets over the next four years.

Okay but are the drops included in this free cash flow?

No.

No.

Okay, so let's strip that out then so it makes it even easier. So what else do we have on the sources side other than the asset sales and EBITDA right, that's pretty much it, right?

That's pretty much it. It would be in the forward curve, our production growth, right, and our unit cost reduction and both coal and E&P. That's it.

Okay, so when I do that, it implies a floor EBITDA up like $710 million to hit your free cash flow positive number. So I guess what I'm trying to figure out, if consensus for next year is $1.1 billion, so obviously this a pretty big buffer there. So am I missing anything or is that kind of how --?

I think, David, what we need to do is maybe follow this up off-line but I'm guessing it's going to come down to assumed commodity price because we guided -- as we said, NYMEX forwards, $0.60 negative basis, relatively conservative assumptions on our coal pricing and the costs should, if anything, be better than what's projected. Production should be straight up with what everyone is expecting. So why don't we follow this up off-line and get you on point?

No, I think I've got it. I think I'm on point. I just wanted to make sure I wasn't missing anything in terms of what is incrementally new here on this free cash flow commentary. I appreciate it. Thank you.

Matt Vittorioso, Barclays.

Thanks for taking my question. Just on the back of one of your larger shareholders discussing their view that may be you should monetize your gas assets, certainly not going to ask you to comment on the probability of any kind of spin transaction of gas. But for your debtholders, as we read the documents it appears as though most of your existing debt, the existing new bonds, and the revolver would essentially a travel with the E&P holding company which suggests that the E&P assets need to be able to support the debt load in order for you to affect a spin transaction like your shareholders suggested. Could you just comment on that? Is that the correct way to sort of interpret that suggestion?

Yes, if you look at our covenants, we could effectively spin out our gas business, assuming our leverage ratio is 2.75 or lower on our E&P business, and then we would avoid having to refinance in that spin process. Otherwise you'd have breakage costs to do it. So it could be done, it just what's the cost of doing it? And you're right, the roughly $2.4 billion of public high-yield debt as well as our revolver essentially travels with our E&P business.

Okay, so, again, I mean, to hit that leverage target with all that debt traveling, a spin really needs to happen when gas can better support that capital structure. Is that a fair assumption?

Or if let's just say we end up monetizing assets to be able to repay debt and take it down below 2.75. So there's the other way.

Okay. And then one quick follow-up just with regard to your coal assets. And I know you provided some detail on the CNXC S1 and today you've updated your committed position for 2016. I think you said you had roughly 50%, maybe 54% of your volume in 2016 committed and priced at a fairly healthy level. Where should we think about some of that higher-quality Pennsylvania operations coal? I mean it's what 13,000 BTUs, it's pretty low sulfur, it's some of the better coal out there. Just for context, where does that coal trade in the spot market today. Any color you can provide there?

Matt, we don't give pricing views out but our coal prices track gas prices for the most part. And as we said on the roadshow, just as a rule of thumb, if you've got $3.00 gas, you've got about $50 coal; you've got about $4.00 gas, you've got about $60 coal (inaudible).

No, that's fair. That's helpful, thank you.

And no one else is in queue with a question. I'd like to turn it back to Mr. Lewis for any closing remarks.

All right, great. Thank you and thank you all for joining us. Lola, can you please review the replay information?

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