For 150 years, CONSOL Energy (NYSE:CNX) primarily operated as a premier coal mining company. Now, the firm is redirecting its long-term focus; it just sold five mature, profitable coal mines to Murray Energy.
A growing industry and successful strategy
With access to over 4 trillion cubic feet of clean burning natural gas reserves, CONSOL's recent deal will help fuel its expansion. For example, CONSOL will receive $850 million in cash as well as $184 in future payments from Murray; the capital will enable CONSOL to further expand its footprint in the capital-intensive exploration, development, and production of natural gas.
Less risk and headaches
In addition to immediate cash flow, CONSOL will retain royalties of future coal produced from its former mines, boosting its bottom line. Even more impressive, though, is that CONSOL is dumping $2.4 billion of liabilities off of its balance sheet; Murray is embracing CONSOL's existing liability (mostly worker pensions and other HR costs) for the five mines it is acquiring. Another great benefit is that its existing mines are non-union; the five sold were under United Mine Worker liability and contracts. Thus, with rising tension in health care and environmental legislation as well as with rising insurance costs, CONSOL is free from potential liabilities or costs. Plus, union-free coal mines are more productive.
Retained cash cows
The mines CONSOL will continue to operate are cash cows. And, CONSOL is staying relevant by focusing its remaining coal mines on the growing export market, namely China and India. So, even if coal faces harsh political or consumer obstacles in America, CONSOL can still operate the mines with less worry for the U.S. market compared to the export market.
Coal competitor Peabody Energy (NYSE:BTU) is doing to same. With Chinese coal demand forecasted to outpace America, Japan, and the European Union combined in 20 years, Peabody is positioning itself to grow abroad.
Nearly half of Peabody's revenue is generated from Australia, providing the company easier and closer access to the Asian market. Through the third quarter, it sold 1.7 million more tons of metallurgical coal compared to the same period of 2012, and it anticipates further expansion. In fact, Peabody estimates that Chinese and Indian metallurgical coal imports are growing at 40% and 12% respectively to date. So, merely by their position, Peabody and CONSOL are potentially avoiding disaster at home while expecting international expansion.
CONSOL's announcement and the events that will follow further solidify that the firm is willing and able to adjust to a changing environment. As its CEO and chairman said:
CONSOL Energy is now positioned as a growth company within a dynamic and expanding energy sector, enabling us to focus on developing opportunities in both coal and natural gas... And so today, we turn the page – always grounded by our storied legacy while pivoting toward a bright future, ripe with opportunities to begin a new legacy for our company – one that will sustain CONSOL Energy for another 150 years.
Brendan Marasco 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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