Natural Gas Brings Growth for CONSOL Energy Inc

CONSOL Energy's (NYSE: CNX  ) decision to sell half of its coal assets at the end of 2013 continues to pay off. The company recently smashed first-quarter earnings expectations thanks to good performance from its natural gas assets. Will CONSOL Energy's focus on natural gas production bring more upside to its shares this year?

Natural gas remains the growth driver
CONSOL Energy's first-quarter performance was very solid. The company got $336 million of operational cash flow, up from $268 million in the first quarter of 2013. Importantly, the increase in cash flow came despite the sale of half of the coal business. However, one can't count on such performance in the coming quarter.

The harsh winter caused a big spike in natural gas prices. Importantly, CONSOL Energy was exceptional in timing its sales. This led to an average natural gas sales price of as much as $5.52. It is highly unlikely that such pricing could be obtained in the second quarter of this year.

Meanwhile, CONSOL Energy reiterates its 30% annual production growth target, with all that growth coming from its Marcellus and Utica assets. This is an impressive number. In comparison, Chesapeake Energy (NYSE: CHK  ) targets 2%-4% production growth this year, while Range Resources (NYSE: RRC  ) expects a 20%-25% production growth.

No growth expected from the coal segment unless pricing improves
Despite the coal asset sale, CONSOL Energy remains significantly exposed to coal markets. The company produces both thermal and met coal, with thermal coal accounting for 82% of forecasted tons sold in 2014. Currently, domestic markets are in better shape than seaborne markets for coal. On the thermal coal side, CONSOL Energy expects to deliver 94% of its thermal coal production domestically. The demand for thermal coal was strong during the winter, and this seems likely to continue.

On the met coal side, things are not looking as good. CONSOL Energy expects to ship 81% of its met coal production overseas, meaning the company is exposed to the softest pricing. In order to prevent burning cash, the company is cutting its met coal production this year. Going forward, coal assets are unlikely to provide growth unless there's a serious change in coal pricing. As a result, CONSOL Energy is reluctant to spend more than necessary on its coal segment and is cutting capital spending from $459 million in 2013 to $390 million in 2014.

Bottom line
CONSOL Energy's results and growth prospects look solid. After rising 16% year to date, CONSOL Energy trades at more than 26 times its future earnings. Still, the company is valued cheaper by forward P/E than Range Resources, which trades at 36 times future earnings while expecting less production growth.

That said, it looks like CONSOL Energy might have more room to grow should it deliver expected results. The company's balance sheet remains in good shape, and CONSOL Energy expects to retain current debt levels. What's more, the company expects to make several non-core asset sales, which will further strengthen its cash position.

All in all, CONSOL Energy's business continues to grow. While the company's shares may look pricey for some investors, there might be more upside left.

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