For years, coal companies have been one-trick ponies. That position is starting to change, though. Consol Energy (NYSE:CNX), one of the oldest coal companies in the U.S., is diversifying its energy options by getting into natural gas, and it is making all the difference for the company. Could Consol be setting a trend that others should follow? Let's take a look at why it has found success with diversification and see if other coal companies can do the same.
If you can't beat 'em, join 'em
One of the big issues for Consol is that its coal assets are mostly located in one of the less desired regions in the U.S.: Appalachia. Central Appalachian coal mines are becoming a bigger headache by the day, and competition from lower-cost operations in the Illinois Basin and Powder River Basin are cutting into Central Appalachian market share. Also, this coal region also happens to sit right above the largest unconventional shale gas bed in America, which is also taking a bite out of coal's once dominant place in the electricity market. This is especially true of Consol, between now and 2015, the company anticipates growth in thermal coal sales of only 0.4%.
With such a bleak outlook for its historical business, Consol has branched out into the natural gas game, and it is paying off. Since the company is not a skilled at natural gas producer, Consol has sold a 50% operating stake on large tracts to Noble Energy (NYSE:NBL) in the Marcellus and Hess (NYSE:HES) in the Utica. Of the 144 shale gas wells Consol plans to drill this year, 85% of them will be operated by either Noble or Hess.
If there was any indication that Consol thinks natural gas is the more lucrative investment for the future, we only need to look at the company's capital expenditure budget. Not only will this year be the first where Consol spends more on natural gas development than coal but gas development expenditures will be almost double that of coal. These benefits are starting to show. The company recently announced that its natural gas production this quarter was greater than expected, and year-over-year production is up 17%.
By moving more into natural gas, Consol has separated itself from many of its peers and is creating a diversified energy company. This could be a more critical move than many think. Rather than needing to fret about natural gas or coal having the upper hand in the domestic electricity market, Consol can play both sides of the coin and adjust its production for either of the resources accordingly.
Consol may have the largest non-coal assets in comparison to its peers, but it isn't the only one that is branching out. Alpha Natural Resources (NASDAQOTH:ANRZQ) has a 20,000-acre position in the Marcellus that it has been developing with private driller Rice Energy since 2010. This position has yet to really take off, though, and represents less than 1% of total revenue. Also, Natural Resource Partners (NYSE:NRP) recently purchased an 11% working interest in 13,500 acres in the Bakken oil play with 134 producing wells for about $38 million from Abraxas Petroleum, but no announcements have been made regarding the production it is getting from these assets.
Despite the obvious size difference between Consol's natural gas assets and those of Alpha and NRP, Consol's is doing something that makes this more lucrative: working with top producers. Both Noble and Hess are two of the top drillers in the Marcellus and Utica formations, respectively. This helps Consol in a multitude of ways. (1) Drilling is done in a more efficient manner than Consol trying to do it alone, (2) Consol gains access to Noble's and Hess' takeaway infrastructure in place as well as its relationships with others in the natural gas industry, and (3) It can take lessons learned from working with these drillers so it can drill its assets it holds on its own.
What a Fool believes
There is one thing that Consol still has in common with much of the coal industry: It is still struggling with weak coal markets. There are some signs that coal may be making a comeback, but Consol isn't waiting around for it to happen. If Alpha, Natural Resource Partners, or any other coal company wishes to venture beyond coal and make itself into a more diversified energy company, then it should probably take a page out of Consol's playbook because it is probably the most attractive way to get in the non-coal game.
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