CONSOL Energy (NYSE: CNX ) and Rhino Resource Partners (NYSE: RNO ) are two coal players in the midst of big changes. CONSOL's first quarter results will be the first since it sold off about half of its coal business. Rhino, meanwhile, is still in the process of selling its gas assets.
Gas company or coal miner?
When CONSOL sold off about half of its coal business to Murray Energy in late 2013 for $3.5 billion, it marked a major corporate shift. Before the sale, CONSOL was a coal miner expanding into natural gas. After the sale, CONSOL became a gas driller with a collection of well-positioned coal assets.
Since the sale was consummated in the fourth quarter, the first quarter will be the first time investors see "clean" numbers. That new baseline, in fact, will be the most important information provided. And if the company's preliminary drilling results are any indication, CONSOL is on solid ground.
For example, overall gas production advanced nearly 25% year over year in the first quarter. That was driven by a near doubling of CONSOL's production out of the Marcellus Shale region. On the coal side, the company noted strong domestic thermal demand but weak met coal demand out of Asia. Overall, however, "CONSOL Energy is raising its annual coal production guidance range from 30.1 million-32.1 million tons to 31 million-33 million tons."
Part of the coal guidance raise is because of a new mine coming online. However, another key issue to watch is the performance of the company's remaining mines. The operations CONSOL sold to Murray were older and less efficient. So, the first quarter will provide an important view into how well CONSOL's mines are positioned to compete in a still difficult coal market.
All in all, CONSOL is still spending heavily on growth projects (mostly on the gas side). As such, earnings will probably be weak. But that's building a foundation for future growth—use the first quarter to check on that foundation.
Getting out of gas
While CONSOL is shifting out of coal, Rhino Resource Partners just inked a deal to go the opposite way. It's selling all of its gas assets for $185 million. Compared to the sale at CONSOL that's chump change, however it's big news for Rhino.
According to Dave Zatezalo, head of Rhino's General Partner, "This [sale] allows us to eliminate the company's debt and will give us tremendous financial flexibility." And, "In an environment where many coal producers are burdened with high debt levels, this will give us great flexibility to opportunistically expand our operations and increase our cash flow."
The deal isn't scheduled to close for a bit, so the first quarter will still include gas assets and, thus, won't be truly indicative of Rhino's post-sale makeup. However, being debt free is a good thing in a market where competitors like James River Coal have careened into bankruptcy and big names like Arch Coal (NYSE: ACI ) are selling assets to boost liquidity despite having over $1.1 billion in cash on the balance sheet.
That said, coal revenues fell by a third year over year in the fourth quarter at Rhino. So it isn't exactly a standout performer in the coal industry. And despite an uptick in the U.S. thermal market, coal results in the first quarter aren't likely to be all that impressive. With Rhino on the verge of being debt free, however, this shouldn't be too concerning.
It will be more important to watch the development of the company's Pennyrile Mine in the Illinois Basin. It's expected to come online in the second half. This well situated mine already has a customer and could shift Rhino back into growth mode right when the domestic thermal coal market looks to be bottoming.
Change is good
Look for solid underlying performance at CONSOL even though growth spending will probably lead to red ink. This quarter is particularly important because it provides a baseline for the future. Rhino, meanwhile, is in the middle of a corporate shift that offers a lot of promise, despite the still weak coal market. Keep an eye on the gas sale's progress and on the development of its new mine.
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