Natural Gas Will Keep This Company Warm in the Future

By pushing coal out of the way, CONSOL Energy is opening up further investments in the Marcellus and Utica shale

Jan 7, 2014 at 9:41AM

Had you said natural has would overtake coal 13 years ago, everyone would have laughed at you. Now the shoe is on the other foot, with the U.S. Energy Information Administration predicting natural gas will overtake coal in electricity generation in America by 2040.

One example is with CONSOL Energy's (NYSE:CNX) recent divestment of some of its coal assets.

In a deal worth $3.5 billion, which includes $850 million in cash and $2.4 billion in liabilities being assumed by the buyer, CONSOL Energy is shedding five coal mines. With the additional cash, CONSOL Energy plans on growing its gas output by roughly 30% per year from now through the end of 2016.

Why gas and not coal?
As new regulations are being levied on coal, CONSOL Energy saw those five thermal coal mines as being a part of a stagnant industry. This transaction is a perfect example of how coal is being taken down by natural gas, due to a combination of historically low dry gas prices and the "War on Coal" (more taxes and regulations from Washington).

Another way to see CONSOL Energy's reasoning:
Figure

Source: U.S. Energy Information Administration

Coal used to be the dominant form of electricity generation in America, but soon will be overtaken by natural gas. As natural gas takes the crown, CONSOL Energy will have the gas output to supply a cleaner America. 

2014
The new year is upon us, and CONSOL Energy will continue to sell "non-core" assets. On top of refocusing its corporate strategy, CONSOL Energy will shed some overhead as well by reducing administrative expenses by ~$65 million a year.

While investors await the new budget, expect to hear more about how CONSOL Energy will continue to shed coal assets in favor of more Marcellus/Utica acreage.

Stacked
The exploration part of its Utica development is nearing completion, which will lead to phase two. Phase two is the development stage, which most likely will involve a ramp up in growth and the number of rigs operating in the area.

Part of phase two involves developing 10,000 acres in Monroe County, which houses both the Utica and Marcellus plays. The wet Marcellus bench is stacked about 5,000 feet above the dry Utica. 

Externalities benefiting development in this area include being next to pipelines, gas processing facilities, roads, and plenty of water. By leveraging existing infrastructure in place, CONSOL Energy will be able to save a bit of cash and put it to better use, such as completing more liquid rich wells.

Not alone
CONSOL Energy's transition to natural gas isn't a one-company job, CONSOL has teamed up with Hess Corp (NYSE:HES) to develop the Utica.

In Noble County, Ohio, Hess Corp and CONSOL Energy has had some success. Situated in the wet (liquid rich) part of the play, CONSOL Energy (as the operator) was able to bring a well online with 3,604 boe/d in production that was made up of 61% liquids.

Up north in Harrison County, Hess Corp, as the operator, brought two wells online with production rates above 2,200 boe/d that was over 50% weighted toward liquids.

This year investors should continue to see new, liquid-rich wells being brought online by both operators. There is no reason why one company should be left to develop a promising emerging shale play alone. The wells that the joint venture between Hess Corp and CONSOL Energy have participated in are seeing higher production levels and better production mixes than the wells Hess has been completing in neighboring counties by itself.

Shale is Hess Corp's new focus, especially after the $7.8 billion in divestments Hess made in 2013. While the Bakken reigns supreme on Hess Corp management's mind, the Utica JV has the potential to surprise to the upside through further investment in the region.

Where is coal?
How does coal fit into CONSOL's plan? Well other than the BMX Mine completion due in April, almost all of CONSOL Energy's growth will come from natural gas. Times are changing, and even though coal is a low cost way of producing energy, natural gas has an environmental tailwind behind it.

Foolish conclusion
Demand for thermal coal may continue to increase in developing markets, maybe even at an accelerated rate. But in America the days of King Coal are long gone. It's time to make way for its heir, natural gas.

CONSOL Energy is right to shift to natural gas. While dry gas prices remain low now even after a 200% plus rally, demand growth from domestic utilities and future LNG exports should prop prices up and reward those who invested before the return of $5-6 mmBtu prices. 

While Hess Corp's Utica acreage is only a small part of the whole company, it allows for Hess to capitalize on the continued shift natural gas and is a great long term investment.

Coal doesn't appear to be a major part of the current energy boom
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Callum Turcan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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