Activist Says Consol Should Monetize its Gas Operations

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Consol's Stuck Between Cheap Coal and Even Cheaper Gas
Consol shares slid on July 20 after the company indicated it'll report a quarterly loss due to low energy prices.

Less than 12 hours after Consol Energy Inc. indicated it would report a second-quarter loss, its biggest shareholder called on the company to spin off or sell its natural gas operations.

Southeastern Asset Management Inc., Consol’s largest shareholder, said in a filing on Monday that it plans to meet with the company’s management and others about a “potential monetization” of the gas unit. The Memphis-based firm disclosed a 21.1 percent stake in the coal and gas producer, up from 19.6 percent at the end of March.

“We believe these assets alone are worth demonstrably more than the Company’s total equity capitalization today,” O. Mason Hawkins, chairman and chief executive officer of Southeastern, said in a filing with the Securities and Exchange Commission on Monday.

The letter bookended a tough day for Consol, a Canonsburg, Pennsylvania-based energy company that surprised investors earlier on Monday by saying it will report a loss for the second-quarter. Consol’s shares fell to $16.66, the lowest close since October 2004, and some of its bonds approached a level investors call “distressed.” Consol rebounded Tuesday with shares up 5.3 percent to $17.55 in New York.

Southeastern also pledged to help Consol “realize value” for assets such as its thermal and metallurgical coal, pipeline business and the Baltimore coal terminal -- as well as discuss bond and share repurchases.

Confident Strategy

Consol values “the opinions of all of our shareholders, and certainly a major shareholder such as Southeastern,” Brian Aiello, a Consol spokesman, said by e-mail. “We are confident in the strategic direction we are in the process of executing and look forward to working with Southeastern, and all of our shareholders, to continue to unlock the inherent value of Consol Energy.”

While facing record-low prices for coal from its Appalachian mines, Consol is also dealing with a slide in natural gas prices. The shares have slumped more than 50 percent this year as it seeks to scale back coal operations and expand gas production.

The pivot to gas has been complicated by the fact that coal is in the midst of the worst downturn in decades. While Consol successfully sold its five West Virginia mines for $3.25 billion in 2013, the company last month had to reduce the price of its coal units before an initial public offering of its CNX Coal Resources LP master-limited partnership. That reflected the dearth of investor interest in a shrinking industry.

Gas Challenges

The company’s gas operations face several challenges. Consol didn’t hedge against a potential fall in gas prices last year as aggressively as other producers, Evan Mann, a credit analyst at Gimme Credit Publications Inc., said in a phone interview from Livingston, New Jersey.

“Relative to other natural gas players, I thought they would outperform, but now I’m rethinking that,” Mann said.

Jeremy Sussman, a New York-based analyst with Clarksons Platou Securities Inc., described Consol’s Marcellus operations as a “massive underperformance” compared with its peers.

Another problem: there’s simply too little pipeline space for Consol to get its gas to far-flung customers who’d be willing to pay more for it.

Lowest Price

“As an Appalachian producer, they are receiving the lowest price on the map for their gas,” said Teri Viswanath, director of commodities strategy at BNP Paribas SA in New York.

Spot gas prices at the Dominion North Point pool, which includes deliveries to the Leidy compressor station in Pennsylvania, have averaged $1.45 per million British thermal units so far this year on the Intercontinental Exchange. By comparison, the benchmark Henry Hub in Louisiana, the delivery point for New York futures, averaged $2.80.

Consol’s debt has meanwhile tumbled. The company’s $1.85 billion of 5.875 percent notes due in April 2022 fell 2.5 cents to 76.5 cents on the dollar to yield 10.9 percent in New York on Monday, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. They touched 74 cents, the lowest since they started trading in December.

The extra yield investors demand to hold the debt rather than similar-maturity U.S Treasury bonds was as high as 9.8 percentage points, compared with the 10 percentage points that’s considered distressed.

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