What: CONSOL Energy's (NYSE: CNX) shares fell 21% in July. The decline was just a continuation of the longer term trend the natural gas driller and coal miner has seen so far this year. However, weak earnings didn't help and, frankly, confirmed investors' worst fears.
So What: Just a few years ago CONSOL was a coal miner with natural gas assets. Since selling half its coal mines to private Murray Energy in late 2013 it has a new focus, with gas as its primary asset and coal a smaller, secondary business. When the company made the shift, it looked as if natural gas was displacing coal as the fuel of choice for new power plants, so investors applauded the move. While that industry dynamic hasn't changed, being a gas company hasn't proven to be as good a business decision as hoped.
For example, the company's cost for pulling natural gas out of the ground in the second quarter was roughly $2.90 per Mcfe. That was down materially from $3.44 per Mcfe a year ago, but still higher than the average sales price it got for the gas it sold in the quarter of $2.68 per Mcfe. In other words, CONSOL is losing money on the gas its drilling. No wonder investors are less then excited about the company's prospects.
Adding to the gas business' woes, CONSOL wrote down the value of some of its gas assets by over $800 million the second quarter. Which helped change the company's bottom line from red to deep red and prompted management to announce it was "resetting the company" around cost containment efforts so it can remain cash flow positive. Basically, CONSOL is circling the wagons.
But that's not the end of CONSOL's problems. The remaining coal assets it still owns continue to struggle, too. As if one headache wasn't enough...
Now What: CONSOL continues to deal with a difficult operating environment even after switching to what it believed would be a better sector. While that may prove true over time, it doesn't change the fact that CONSOL is struggling today. Conservative investors are probably best watching this story from a distance until commodity markets improve. More aggressive investors may want to dig deeper, but don't expect the pain to stop in the next few quarters.