Why Consol Energy Is an Expensive Coal Play

The headlines for Consol Energy's  (NYSE: CNX  ) recent quarterly earnings report focused on the huge ramp-up in Marcellus shale production, yet the vast majority of the company's revenue is still derived from coal. Even worse, Consol obtains more revenue from other natural gas properties outside the Marcellus shale that lack growth.

Consol Energy generated an impressive 94% production growth in the booming shale in Pennsylvania and West Virginia, but the coal operations make the stock difficult to value any higher. Even the best-run domestic coal miner, Peabody Energy (NYSE: BTU  ) , trades at a substantial discount to annual sales. In that manner, investors are placing a huge premium on Marcellus shale growth to justify a market cap of nearly $11 billion for Consol Energy with forecast annual sales for 2014 of less than $4 billion, mostly obtained from coal mining.

Limited first-quarter growth
Due to lower coal prices and legacy natural gas production, the massive growth from the Marcellus shale only produced total revenue growth over last year of roughly 15% to reach $969 million. Natural gas and related items grew revenue by $100 million, with coal sales down over $13 million.

Even with the huge Marcellus shale growth, the legacy natural gas volumes still exceed the 19.2 billion cubic feet, or Bcf, produced for the quarter from the prolific shale. The gas portion of the shale production was up 88%, or roughly 9 Bcf, with the other production areas seeing a combined decrease of 1.2 Bcf.

A good sign is that Consol is getting more liquids out of the wells to help boost revenue beyond solely production growth. For the quarter, natural gas liquids surged 300% over the prior-year period to reach 1.6 Bcfe. Oil volumes remain negligible, so the company isn't getting the real high-value commodity from new wells.

Forecasts
In order to obtain prime value, Consol Energy must convince the market it is a fast-growing, Marcellus shale-focused company. The guidance, though, is only for 30% production growth in the next couple of years. With total guidance of around 225 Bcfe for 2014 and roughly 292.5 Bcfe in 2015, it's difficult to get too excited about the current valuation.

Pure-play Marcellus shale producer Rice Energy (NYSE: RICE  ) sits at a valuation of $4.2 billion, with production growing far in excess of 100%. The company produced roughly 19 Bcfe of natural gas from the Marcellus during the first quarter, or only slightly less than the 20.7 Bcfe produced by Consol Energy.

Foolish takeaway
With Consol Energy trading at a premium of $2 billion to the combined valuation of Peabody Energy and Rice Energy, investors might find a direct investment in those two stocks more appealing. For all the growth coming from the Marcellus Shale division, Consol Energy is still primarily a coal miner. If coal prices were to normalize and production ramped back up to capacity, the current growth in natural gas might not be noticeable.

Leading global coal miner Consol has a similar valuation to relatively new natural gas start-up Rice Energy, with both trading at a tad over $4 billion. Peabody has global sales of about $7 billion and Rice won't even touch $500 million this year. If the assets of Consol Energy appeal to investors, splitting an investment in Peabody Energy and Rice Energy would provide a higher investment in the Marcellus shale's potential and diversification into the beaten-down coal sector. Buying into Consol Energy really means only buying a coal miner and legacy natural gas producer.

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