QUOTE AND NEWS
The Hindu Business Line  Mar 30  Comment 
Call of opportunityReliance Mutual Fund has launched its dividend opportunities ETF, R* Shares Dividend Opportunities Fund. The fund will invest in stocks that constitute the CNX Dividend Op...
TheStreet.com  Mar 26  Comment 
NEW YORK (TheStreet) -- UBS downgraded CONSOL Energy  to "neutral" from "buy" and set a $42 target price. The firm cited valuation as the reason for the move. The stock was down 1.92% to $40.27 at 9:43 a.m. on Wednesday. Must Read: Warren...
The Economic Times  Mar 25  Comment 
If the CNX IT can find feet after a good correction and it is trying to get sideways at lower levels, then you might see Nifty pick up more momentum in the coming days, he said.
Wall Street Journal  Mar 21  Comment 
Consol Energy named Nick DeIuliis as chief executive, succeeding J. Brett Harvey, as expected.
The Economic Times  Mar 21  Comment 
Only a few individual stocks are now moving. Once you are sideways for so many days, it is no longer about sectors. It is about stocks, he said.
The Economic Times  Mar 20  Comment 
"For the moment, we seem to hanging on but 6430-6450 levels will be crucial to see what happens and also Bank Nifty and CNX IT."
The Hindu Business Line  Mar 19  Comment 
Investors appear to be turning jittery towards the IT sector, with the TCS honchos turning cautious about the company’s prospects in Q4 of the current fiscal and the CNX IT index losing over 200 p...
The Economic Times  Mar 15  Comment 
I have been maintaining that I am not very comfortable buying into the CNX IT and it has worked out very well for us, says Sandeep Wagle.
The Economic Times  Mar 13  Comment 
CNX IT is a 'SELL' call with a target of Rs 9600 and a stop loss of Rs 10,001.
The Hindu Business Line  Mar 2  Comment 
Almost all funds in this category have beaten the CNX Mid-cap index in the five-year period




 

CONSOL Energy Inc. (NYSE:CNX) is a vertically integrated coal and natural gas producer. Its main revenues come from the sale of these two fuels to energy generators and metal producers in the Northeast United States. Primarily, CONSOL mines coal or extracts natural gas from land that it owns, processes it for sale, and then ships it to customers using its transport network.

CNX is the U.S.'s fifth largest producer of coal, the primary fuel used to produce electricity.Coal Power accounts for 49% of U.S. electricity production, and roughly 40% of world electricity.[1] CNX's Northern Appalachian coal has the advantage of burning hotter than other coal, but it also contains more sulfur - until recently a big disadvantage for CNX. However, recent environmental legislation requires coal plants to install "scrubbers" to clean sulfur out of exaust from burning coal, muting the disadvantages of Northern Appalachian coal and allowing CNX to charge higher prices.

The company has land valued at over $4 billion dollars with proven coal reserves of 4.5 billion tons, as well as a river transport system that delivered 11.1 million tons of coal.[2] CNX's production of approximately 59 million tons of coal in 2009 accounted for approximately 6% of the total tons produced in the United States.[3]

Company Overview

Business Financials

In 2009, CNX earned a total of $4.62 billion in total revenues, a slight decline from its 2008 total revenues of $4.65 billion. Despite the slight decrease in total revenues, CNX was able to increase its net income between 2008 and 2009. In 2009, CNX's net income was $567 million, a substantial increase from its 2008 net income of $442 million.[4]

Business Segments

CNX Coal

This subsidiary is the basis for CONSOL's operations. All other segments developed out of support for the primary activity of mining coal. CNX Coal operates 17 mines in the US, and all but one of these are underground mines. Because of the make up of CNX's mines, the primary method for extraction is longwall mining.[5] There are several advantages to this method, including low variable costs (allows CONSOL to change output quickly and manipulate supply/demand) and improved recovery rates (longwall gets more coal out of the same source than other methods). Once the coal has been mined and processed by CNX Coal, it is ready to be shipped to customers by CNX Services.

CNX Gas (CXG)

Once entirely owned and operated by CONSOL, this subsidiary was partially spun off in an Initial Public Offering in January of 2006. However, CONSOL (CNX, the parent company) still maintains control over the public CXG unit through its 81.5% ownership stake. CXG business model focuses on the exploration, extraction, processing, and sale of natural gas. It extracts methane gas from coal beds in the Appalachian Basin.[6]

CNX Land

The primary operation of this subsidiary is to support the coal and gas operations by developing and purchasing real estate holdings. In addition to this, CNX Land also creates value for CONSOL and its shareholders through timber extraction and sales, leasing land to other miners for royalty income (company pays CNX Land for the right to extract minerals from their land), as well as retail development and asset sales. On the retail development side, CNX Land has reclaimed land at defunct mines for malls, communities, and other projects to be constructed. In addition to the profitable operations of this unit, they strive to donate reclaimed land to various conservation groups. CNX Land currently controls 400,000 acres in the United States and Canada.

CNX Ventures

This unit seeks out joint ventures and other forms of innovation that will help support and create value for the core gas and coal operations. In 2002, CNX moved to vertically integrate their business model even further by creating a joint venture with Allegheny Energy (AYE). CONSOL owns a 50% interest in the natural gas fired facility, which will generate electricity in Southwestern Virginia.[7] This allows CONSOL to hedge against severe price movements in the spot market for natural gas; they can now convert the gas directly into electricity and seek utility income.

CNX Services

This subsidiary represents the "support" activities in bringing coal to customers. The term support here refers to all of the other necessary steps along the value chain to bring coal and gas to CONSOL's customers. CNX Services operates the Marine Terminals division, which both transports coal along inland waterways and exports it overseas. Additionally, CNX Services generates revenue by transporting the coal of other companies.[8] CNX Services also operates the Research and Development unit for CONSOL.


Key Trends and Forces

Coal Power

Coal Power is easily the cheapest power source for generating electricity. As a matter of fact, the price of a ton of coal ($60-70) is not much higher than the cost to ship it at current dry bulk rates (around $50/ton)[9]. Although its low prices makes it attractive relative to other energy sources, coal stands to grow in demand regardless of this if energy demand itself grows. One of the main drivers of this is weather. If summers are relatively hot or winters are relatively cold, it is a fair assumption that demand for coal will increase to power heating/air conditioning. The current technology for burning coal to create electricity is also the simplest of our energy sources. Another possible jump in domestic coal usage could come out of the foreign policy area. The U.S. is currently making efforts to decrease our reliance on foreign oil by shutting down oil fired plants. Coal seems to be a great political alternative since the U.S. has the world's largest coal reserves.

Price to Generate 1 Million BTU of Heat
Coal Natural Gas Oil
$3.50 $9.20 $16.67
[10]

Clean Coal

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Estimated CO2 emissions per Terrawatt of various electricity sources

Coal may be a cheapest (and most domestically available) power source, but it is my far the worst pollutant of the group. It emits the most Carbon Dioxide of any electricity source. Clean coal in the past has meant purification, filtering ash, and removing NO2 from emissions. This reduces emissions and pollutants, but still provides ample carbon emissions that can potentially increase the Global Climate Change problem. A more viable, and expensive, alternative is coal liquefaction. Liquefaction is the process of turning coal into a synthetic oil. The technology has actually been around since the early 20th century[11]. The major roadblock in the past for direct coal liquefaction has been its high break even point. For the process to be profitable in the U.S., oil prices would have to be over $33-35[12]. However, with crude oil on the threshold of $100 this seems like a favorable alternative.

Sulfur Scrubbers

Recent EPA and congressional regulations have benefited CNX. To meet new and more restrictive emissions standards, coal plants are now installing sulfur scrubbers. These scrubbers eliminate most sulfur dioxide emissions. CONSOL's Northern Appalachian coal has a high relative BTU content (it burns hotter than other coal) and requires low transportation costs because of its proximity to markets, but it is quite high in sulfur. The high sulfur content meant Consol's coal was cheaper in the past, but with the increasing amount of scrubbers in power plants, Northern App now sells on its higher BTU content and commands a premium in the spot market.

Continued Global Growth

World economic growth is at an all time high. A byproduct of this growth is a large spike in energy demand. As this increase in demand of the past few years has driven Oil Prices to record highs, so have the spot market prices for coal followed. This is mainly attributed to the growing demand for electricity. Coal demand is especially growing in Emerging Markets, where they may not have the technology or infrastructure to handle other energy sources. The obvious example here is China, where demand for natural resources is growing at incredible rates. The continued global growth will drive both coal prices and production up in the future. CONSOL has positioned itself for increased foreign demand through its subsidiary CNX Marine Terminals, which operates an exporting terminal in the Port of Baltimore.

Environmental Degradation and Regulation

Coal is one of the dirtiest forms of energy production. It's burning releases a number of pollutants that contribute to smog, acid rain, and higher instances of respiratory problems in the general populace. Furthermore, coal power releases greenhouse gases, which are causing the global warming induced global climate change. This hot-button environmental problem, aside from being a major election issue, will have massive economic, political, and social effects in the future. For this reason, many governments around the world are being pressured by their citizens to regulate greenhouse gas emissions. From mandatory emissions caps to Carbon trading markets to subsidies of alternative, clean, and Renewable energy sources, these legislative regulations are making coal a less attractive energy source by forcing companies to limit coal power production or by making coal expensive relative to other power sources. While coal producers like Consol are attempting to regain public support by developing "clean coal" technologies to reduce pollution emissions, the fact that burning coal will always release greenhouse gases keeps clean coal from being an environmentally viable form of energy, at least until carbon sequestration techniques are perfected. Overall, this trend will either lead to lower demand and, therefore, lower prices for coal or higher costs - either ways, contributing to lower profit margins.

Competition

The Coal Power industry is very competitive because of the nature of selling a commodity. It is very difficult to diversify and achieve price premiums when the end product is effectively the same across the industry (depending on the variety of coal). There are spot market prices for the various types of coal, and these prices have been steadily rising. Additionally, coal company's can secure fixed prices through long and short term contract negotiations that allow it to achieve more stable margins. This plays a major part in how CONSOL achieves their higher prices and margins. They often make the decision to cut production when they feel they can earn a higher market price.

image:Consol Market Share.PNG

Source for chart data [13], [14].

Notes

  1. Energy Information Administration
  2. CNX 10-K 2009 Item 1 Pg. 8
  3. CNX 10-K 2009 Item 1 Pg. 5
  4. CNX 10-K 2009 Item 6 Pg. 58
  5. http://consolenergy.com/main.asp?c=CNXCoal
  6. http://www.cnxgas.com/AboutCNXGas.aspx
  7. http://phx.corporate-ir.net/phoenix.zhtml?c=66439&p=irol-newsArticle&ID=534242&highlight=
  8. http://www.consolenergy.com/content.asp?c=QuickFacts
  9. http://www.iht.com/articles/2007/11/05/business/ship.php
  10. Price data from www.bloomberg.com and http://www.eia.doe.gov/cneaf/coal/page/coalnews/coalmar.html
  11. http://thefraserdomain.typepad.com/energy/2005/07/about_coal_liqu.html
  12. http://findarticles.com/p/articles/mi_m0CYH/is_15_6/ai_89924477
  13. [1]
  14. National Mining Association


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