Consol Energy’s transformation to natural gas is part of a broader shift in Appalachia
By Ryan Dezember,
On the campaign trail Donald Trump promised “coal is coming back,” and the president-elect vowed to roll back environmental regulations he blames for hamstringing miners.
But the experience of Consol Energy Inc. suggests some businesses have already made up their mind about coal. The Pittsburgh-area company, which has mined coal since Abraham Lincoln was president, has in recent years become a natural-gas producer as it has shed its mines.
Since Consol began its makeover at the start of the decade, gas has become a more dominant source of U.S. energy, and it overtook coal this year as the country’s top source of electricity. Late last year, Consol’s earnings from gas, which it extracts from some of the same Appalachian hills that it once mined, eclipsed those from coal. Executives say they view gas as the fuel of the future and that no coal renaissance would cause them to reverse course.
Consol’s transformation to natural gas is part of a broader shift in Appalachia, which is becoming the country’s primary gas-producing region.
“We feel like we’ve completed the transition,” said Timothy Dugan, a longtime gas executive whom Consol hired in early 2014 as chief operating officer.
The shift to gas hasn’t always been easy for Consol.
Its drilling fields, among the cheapest-to-drill in the country, are in a highly competitive region plagued by pipeline bottlenecks. A glut of shale gas and warm winter weather hurt gas prices and shares of many producers a year ago. Consol was the second worst performer in the S&P 500 in 2015 and lost its spot in the stock index this year. The company lost $542 million during the first nine months of 2016.
Yet analysts say its move to gas is a smart long-term strategy that is already starting to pay off. Consol’s share price has more than quadrupled from its January low of about $5, putting it among the top performers in the energy sector. It has gotten a lift from rising gas prices, which are up 56% this year, including a 39% rise since Nov. 11.
“There’s a big conversation with Trump’s win about the potential resurgence of coal,” said Sameer Panjwani, an analyst at energy investment bank Tudor, Pickering, Holt & Co. in Houston. “The truth is, gas has already made coal uneconomic.”
Consol’s surging shares have moved in contrast to those of many of its former mining rivals.
In the last 18 months, three of the country’s five biggest coal producers—Peabody Energy Corp., Arch Coal Inc. and Alpha Natural Resources Inc.—have filed for bankruptcy protection. A fourth, Murray Energy Corp., staved off bankruptcy by negotiating concessions from creditors and union workers, including at West Virginia mines it acquired three years ago from Consol.
Consol wasn’t alone in recognizing the potential of the shale beneath its mines. Alpha sold the right to drill its shale to Rice Energy Inc. But the proceeds weren’t enough to keep the coal producer from buckling under debt and low coal prices.
Rather than restructuring debt and labor deals, Consol executives pursued a more dramatic turnaround of the 152-year-old company. As they added drilling fields and boosted gas production, executives grew frustrated with what they believed was an under-appreciation of Consol’s gas business.
Prodded by shareholders, executives last year decided to separate the two businesses in hopes that they would be valued more highly by investors than they were together. Activist investor David Einhorn, who disclosed a big stake in Consol amid the transition, was among those to cheer the move.
Consol chose to jettison coal in favor of gas as the cleaner—and often cheaper—fuel gained market share among U.S. electricity generators. It created a separate company to own its more profitable mines in southwest Pennsylvania and sold the rest, even paying a rival to take two money-losing mines off its hands.
“We needed to shrink our coal footprint,” David Khani, Consol’s finance chief, said in an interview. “Instead of being a coal company with [gas] exploration and production stub, we’ll be an exploration and production company with a coal stub.”
Consol was created by the consolidation of several western Maryland mining concerns during the Civil War. It narrowly avoided bankruptcy during the Great Depression on its way to becoming one of the country’s largest coal producers.
It was well-positioned to join the shale boom when drilling techniques pioneered in Texas were used to tap the gas-bearing Marcellus Shale, which stretches beneath Appalachia where Consol owned swaths of land it mined for coal. Consol began selling gas extracted from its mines in the 1980s. In 2010, it expanded its commitment with a $3.5 billion acquisition of gas land in Pennsylvania and West Virginia.
Not everyone was confident in the move. In 2012, the U.S. Securities and Exchange Commission charged three Consol executives with insider trading after they bet against the company’s stock just before the 2010 gas-field acquisition was announced, which sent shares tumbling 10%. Each was fired and settled with the SEC, according to filings.
Despite Mr. Trump’s pledge to revive coal, many investors remain wary of the industry’s future and want Consol to speed up rather than reconsider its shift to gas.
The market may say if you can’t do it now, you can never do it,” said Lucas Pipes, an analyst at investment bank FBR & Co. “There’s certainly a degree of pressure to move forward.”
