CONSOL ENERGY INC (CNX) Earnings Report: Q4 2014 …s.t.st/media/xtranscript/2015/Q1/13030304.pdf · Of the total, we had record Marcellus Shale production of 111.7 Bcf in 2014. That

CompanyName:ConsolEnergyIncCompanyTicker:CNXSector:BasicMaterials

Industry:EnergyEventDescription:Q4 2014 EarningsCall

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CONSOLENERGYINC(CNX)EarningsReport:Q42014ConferenceCallTranscriptThefollowingCONSOLENERGYINCconferencecalltookplaceonJanuary30,2015,10:00AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

TylerLewis;CONSOLEnergy;DirectorofIRNicholasDeIuliis;CONSOLEnergy;President&CEODavidKhani;CONSOLEnergy;CFOJamesGrech;CONSOLEnergy;ChiefCommercialOfficerTimothyDugan;CONSOLEnergy;COOofE&P

OtherPart icipants

NealDingmann;SunTrustRobinsonHumphrey;AnalystMiteshThakkar;FBRCapitalMarkets;AnalystJosephAllman;JPMorgan;AnalystCalebDorfman;Simmons&CompanyInternational;AnalystJeffreyCampbell;TuohyBrothers;AnalystLucasPipes;BreanCapital;AnalystBrandonBlossman;Tudor,Pickering,Holt;AnalystDavidGagliano;BarclaysCapital;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator:

Ladiesandgentlemen,thankyouforstandingby,andwelcometoCONSOLEnergy'sFourthQuarterEarningsconferencecall.Asareminder,today'scallisbeingrecorded.

IwouldnowliketoturntheconferencecallovertotheDirectorofInvestorRelations,TylerLewis.Pleasegoahead.

TylerLewis (DirectorofIR):

Thanks,John.Goodmorning,everyone,andwelcometoCONSOLEnergy'sfourthquarterconferencecall.

WehaveintheroomtodayNickDeIuliis,ourPresidentandCEO;DaveKhani,ourChiefFinancialOfficer;JimGrech,ourChiefCommercialOfficer;andTimDugan,ourChiefOperatingOfficerofourE&Pdivision.Timisalittleundertheweathertoday,sowealsohaveintheroomLarryCavallo,ourVicePresidentofExplorationandDevelopment,tohelpTimduringQ&A,ifneeded.

Today,we'llbediscussingourfourthquarterresults.Anyforward-lookingstatementswemakeorcommentsaboutfutureexpectationsaresubjecttobusinessrisks,whichwehavelaidoutforyouinourpressreleasetodayaswellasinpreviousSECfilings.Wealsohaveslidesavailableonthewebsiteforthiscall.

WewillbeginourcalltodaywithpreparedremarksbyNick,followedbyDave.TimandJimwillthenparticipateintheQ&Aportionofthecall.Withthat,letmestartthecallwithyou,Nick.




NicholasDeIuliis (President&CEO):

Thanks,Tyler.AndbeforeweturnitovertoDave,whoisgoingtogoovermoreofthedetails,I'dliketofirstprovidesomeofthehighlightsforboththequarterendandfortheyear.AndwecanstartoverontheE&Pdivision.

TheCompanypostedrecordproductionlevelsof70.5Bcfforthequarter.Andaswehighlightedinthepast,thegrowthengineofCONSOLhasbeentheMarcellusShale,andit'seasytoseehowtheimpactthissegmenthashadontheoverallgrowthoftheCompany.Ifyoulookatthequarter--Marcellusproductionvolumeswere88%higherthanthe2013fourthquarter.

Thegrowthhasbeenremarkable,tosaytheleast.AndastheMarcellusbecomesabiggerpartoftheproductionmix,it'sgotalotofimplicationsacrosstheentireE&Pdivision,duetolowcosts,which,inturn,contributetohigherratesofreturn.Andyouputontopofthatthefactthatthemajorityofouracreageisheldbyproductionandthatwe'vegotthehighnetrevenueinterests,especiallycomparedtopeersacrosstheindustry,youcanseewhyeveninalowercommoditypriceenvironment,we'reabletomakegoodreturnsandingoodprofits.

InadditiontotheMarcellus,theUticaShalesegment--itcontinuestoexceedourexpectations,aswell.Lastquarter,wediscussedandwehighlightedtherapidgrowthandhowweraisedour2014productionguidance,asaresult.Andyoulookatittoday--theUticaShalecontinuesandcontinuedtosurpassexpectationswherewehadrecordproductioninthequarterof7.1Bcf,whichwasupfrom0.5Bcfinthe2013fourthquarter.ThatresultedintheUticaexceedingourannual2014productionguidance.

InadditiontothegrowthintheUtica,we'reseeingevenmoreimpressiveresultsonunitcosts.Inthefourthquarter,totalall-inUticaunitcostswere$2.24inMcf.That'sadramaticimprovementcomparedtothepreviousyear'squarter.AndthehigherUticavolumes,alongwiththelowergatherandtransportationcosts--thosecontributedtothelowerallin-unitcostresults.

Wespentalotoftimetalkingaboutstackedpaypotentialacrosstheacreageandtheabilitytodevelopmultipleformationsfromthesamepad.ThisisaconceptthatweinitiallytestedbackinJuneof2013withourfirstUpperDevonianwell,whichwasontheNB39pad.ThiswellwasdevelopedonanexistingMarcelluspad,andwesawsomeveryimpressiveresults,notonlyfromtheUpperDevonianwell,butasyourecallorremember,alsofromtwounderlyingMarcelluswells.

ThenbelowtheUpperDevonianandMarcellus,there,ofcourse,isthedryUtica.Duringthequarter,we'venotonlystarteddrillingfourdryUticawallsandoneMarcelluswellfromthesamepadinour100%-ownedacreageinMonroeCounty,Ohio.Butwe'vealsostarteddrillingtwodryUticawellsinPennsylvania--oneofthemwillbeinGreeneCountyandoneinWestmorelandCounty.

ThesedryUticawellsaregoingtobedrilledoffofexistingMarcelluspads.Andasdifferentareasandformations,suchasthedryUtica,continuetobedelineatedanddevelopedacrossPennsylvaniaandWestVirginia,that'sgoingtoopenupentirelynewfrontiersforCONSOL.We'vegotjustover470,000netacresacrossPennsylvaniaandWestVirginiathatareprospectivefordryUtica,whicharenotpartorsubjecttoeitherjointventure,whereweown100%ofit.

Sothesestackedpayopportunities,especiallywhenyoustarttoconsiderdryUtica--they'reexpectedtomeaningfullyimproveouroptionsforproductiongrowth.They'reexpectedtoreduceourcapitalintensityfortargetedproductionlevels,andthey'regoingtomovetheneedleonourNAVpershare.

AndtheopportunityforthesetypesofE&Pcontinuousimprovementprojects--they'renotjustrelegatedtotheUtica,Marcellus,andUpperDevonianhorizons.WhenyoulooktoourVirginiacoalbedmethanefields,we'rebecomingincreasinglyexcitedaboutthepotentialtofindadvancecompletiondesignsacrossthe




multiplecoalscenes.

We'realsoexcitedabouttechnologythatwe'rebeingabletousetoimprovelegacyfieldproductionlevelsanddeclinerates.Andwe'reexitedaboutouralreadycapitalizedmidstreaminfrastructurethathasbothroominthepipesandpricebasisadvantagesrelativetoNorthernAppalachia.

SotheopportunitiessetinVirginia,aspartofthetotalproductionportfolio--thatcanbeusedtohelpreduceunitcosts,increasesegmentmargins,andreducecapitalintensity.Staytunedin2015toseehowthatpotentialunfolds,aswell.

SoalotofexcitingthingsontheE&PhorizonforCONSOLEnergy.Makingalltheseexcitingthingstocometofruition--ittakesastrongteam.Andin2014,it'shardtodenythemassivetransformationthatwesawintheE&Pdivisionthatwasdrivenbysuchateam.

Tostartwith,webroughtonTimDuganasourChiefOperatingOfficer.Tim'sindustryexperiencehasbeeninvaluable,andwithhisleadership,wechangedandadvancedthefoundationtheoftheE&Pdivisionbycentralizingleadershipunderoneroofandbycompletelyrestructuringthedepartmentbyorganizingthemintoassetteams.

Theprogress,therateofchange,thesuccessthatourE&Pdivisionhasseenthroughouttheyearhasbeenimpressive.Andin2014,wesawrecordproductionof235.7Bcf,whichiswellabovethe30%growthtargetfortheyear.Ofthetotal,wehadrecordMarcellusShaleproductionof111.7Bcfin2014.Thatwasover90%--specifically,93%--higherthan2013.

Thatteammomentumisonlygoingtocontinuetogrow.OurE&Pdivisionhasagoalofreducingdrillingandcompletioncostsby15%byyear-end2015.Whenyoulookatwherewe'reattoday,we'realreadyseeingthatobjectivecomingtofruition,whilepreservingthe30%productiongrowthinboth2015and2016.Also,doingallofthatwithaveryefficient2015capitalspendof$1billioninE&P.We'llhavealittlemoretosayonthe2015capitalinaminute.

Butbeforewedothat,let'sshiftovertocoal.Whenyoulookatthecoalsegment,ourPennsylvaniaoperationhadanotheroutstandingquarter,bynotonlymeetingproductionguidanceandfinishingthequarterat8milliontons,butbyalsohavingtotalall-inunitcostsof$42.61aton.Theselowcostshelpedgenerateahealthymargin,resultinginjustunder$160millionofcashflowbeforecapitalexpenditures.

Ourmarketingeffortscontinuedtomakemoreprogress.Andduringthequarter,wecontractedforanadditional1.4milliontonsin2015.Thatbringsustoabout80%contractedfortheyear.

Theteamcontinuestolockintermsaleswithwhatweconsidertobemust-runpowerplantsformulti-yearduration.Thisisreallygoodnews,whenyouputthatintocontextofthethermalcoalMLPthatisunderway.Davewillprovideanupdateonthat.

Onthemetallurgicalside,themarketcontinuestobechallenging,butthereisgoodnews.OurVirginiaoperations,ourBuchananmine,sawremarkablylowunitcostsonceagain,thistime,forthefourthquarter.

Theminehasundergoneefficiencyprojectswhileoperatingonareducedschedule,andwethinkthatthesecostlevelsatBuchananaresustainableinthefirstquarterof2015.Andthey'repotentiallygoingtobesustainablethroughouttheentireyear,butthatwillbedependentuponthemarketandsalesvolumesthatwecansecure.

Asaresultofthecoststructure,ourVirginiaoperations,again,managedtomakeahealthymarginandlevelofcashflow.Therearen'ttoomanyUSmetaloperators,ifany,thatcansaythesame.

Andthat,inandofitself,isabigreasonwhywe'repursuingaMetCoIPOthisyear.It'sanassetthatnotonly




makesmoneyinaverychallengingnetmarket,ithasthepotentialtomakeasignificantamountofmoneywhenthemarketturns.There'snothingouttherelikeit.

In2014,wefinishedupourgrowthcapitalassociatedwiththecoaldivisionwhenwecompletedtheHarveymine.It'sbeenupandrunningsincethispastMarch.Andnow,thatgrowthcapitaliscomplete,andweseetheseminesrunningonmaintenanceandproductioncapital,movingforward.

Now,inadditiontoE&PandthermalandmetwithintheCompany,weoftentalkaboutourothersegment.Andoneofthebenefitsofbeinga150-year-oldcompanyishavingasuiteofassetswherewemightconsidernon-coretoourcurrentoperationsbutthatmostcertainlyhavevaluetoothers.Thissegmentcontinuestobeanimportantpartofthestory,andit'sbeenabigpositiveforCONSOL.

Lastquarter,wereiteratedourconfidenceinhittingthe$1billionmarkinproceedsoverafive-yearperiod.Wewereaheadthen,andwe'reevenmoreaheadnow.

Inthefourthquarter,theothersegmenthadremarkablesuccess,andtheCompanysawcashproceedsfromassetsalesof$270million.Themajorityoftheproceedswerefromseveralnon-coreassetsales,mainlythermalsupplyCompanyanduncapitalizedcoalreservesintheIllinoisBasintotwostrategicbuyers.

TheseproceedshelpedtheCompanyinanumberofways,butaboveallthings,itprovidesoptionalityandliquiditythatourpeersdon'thave.Anditconcentrate'smanagement'sfocustowhatweconsidertobethetrulycoreactivitiesofAppalachianshalesinthermalandmetlongwallmine.Welookforwardtocontinuingourformalprocessformonetizingtheseassetsthroughout2015andexpectthemomentumtocontinue.

Now,youknowthat,asmanagement,weareNAVpersharedriven.Andwedothatwhenassessingwheretoallocateoperatingcashflowsandhowtouseliquidity.Intoday'spriceenvironment,we'vegotthecompetingandattractiveoptionsofgrowingE&Pproductioninprolificfields,liketheMarcellusandUtica,aswellasreducingoursharecountatlevelsthatweconsidertobebargainprices.

For2015,we'vegottwoobjectivesacrossthesetwocashflowdeploymentopportunities.Firstobjective--wewanttogrowourE&Psegmentproduction30%forboth2015aswellas2016,whichbuildsonthesuccessinthisareathatwesawlastyear.

Growingtheproductionbaseinthismanner,itdriveseconomytoscale,itimprovesfinancialmetrics,anditlaunchesustocriticalmassforE&Pasastandalonesegment.Inshort,itincreasesNAVpershare.

Andweexpecttohit30%growthtargetsforboth2015and2016.Weplantoaccomplishthiswitha2015capitalbudgetofabout$1.2billionintotal,or$1billionforE&Pwhenexcludingcoal.Thathighlevelofcapitalefficiencyandthatlowlevelofcapitalintensityforthegrowthtargetsareexactlywhatweexpecttosee,asaresultofLEANmanufacturingandcontinuousimprovementtakehold.

Secondobjective--weneedtoprogressfromtalkingaboutandthinkingaboutsharecountreductiontoactuallyreducingthecount.LastDecember,CONSOLannounceda$250millionsharerepurchaseprogram.Thisisadefinitiveandmaterialstarttoaverycompellingcomponentofourstrategicgameplanoverthecomingyears.

Simplyput,welookandviewsharecountreductionasagreatrateofreturninvestmentandastrongNAVpersharedriver.As2015unfolds,we'regoingtobeveryawareandverycognizantofpricing,ofmargins,returns,spending,andhowwebalanceCapExforproductiongrowthwiththeopportunitytotakeinoursharesatdiscountedpricesinthecomingyears.

We'reutilizingaverysimplebutverypowerfultoolwiththatbigNAVpershareequationinthesky.Aslongasweletitnavigateourdecisionmaking,wefeelwewilloptimizecashflowallocationfortheshareholders.




Now,onthelastquarter'searningscall,weprovidedsomeviewsonchangestotheE&Pindustrythatwewereseeing.Weknewthenitwasgoingtogettough,especiallyfortheproducerswhoareover-leveredwithbothlong-termdebtandhigh-costlongdurationtransportationagreements.We'vebeenpreparingforthesechallenges,andwe'velivedthroughthevolatilityofcommoditycyclesbefore.

Andwe'llbeabletocapitalizeonthedownturn.Thesetypesofdownturnscreateopportunitiesforustocontinuetodifferentiateourselvesfromourpeers.That'sthepowerofbeingalow-costproducerwithtieroneassets,focusedandpreparedasamanagementteam,andhavingastrongliquidityposition.

Notwithstandingthechallengingenvironment,CONSOLwillaggressivelypursueitsgoalsandobjectivesfor2015.ThesegoalscontinuetocreateagreaterleveloftransparencytotheIPOsofapeerplayThermalCoalMLPatMetCo,bygrowingourE&Psegmentby30%,andbytakingadvantageofwhereoursharesarecurrentlytradingatbyreducingsharecount.

Withthat,I'mgoingtoturnitovertoDave.Andhe'sgoingtoprovideadditionalthoughtsonthequarterandthecomingyear.

DavidKhani(CFO):

Thankyou,Nick.Goodmorning,everyone.Today,Iwillprovideanoverviewofthefourthquarterresultsandprovideanupdateofaccomplishmentsandkeymetrics,aswellashowwe'regoingtomanagethroughthisenergyenvironmentandsustaintheprogram.Similartothepastquarters,wehavepostedacomprehensiveslidedecktoourwebsite,andmypreparedcommentswillmainlytietoslideson10through15and137through162,whichcanbefoundonthefinancesection.

Beforelaunchingintothedetailsofthequarterandtheoutlook,letmetouchonsomekeyhousekeepingitems.Wehaveupdatedourdisclosureofourbusinesssegmentstorealigntowardshowwemanageeachunit.

Forcoal,wehavethreesegments.WehavePennsylvania,wehaveVirginia,andwithwehaveotheroperations.ForourE&Pdivision,wehaveMarcellus,Utica,CBMandother.

Inaboutaweek,wewillreleaseour10-K,whichwillprovidegreaterdetailofthesesegments,downtothepre-taxlineitems.Ourgoal,again,istoprovidetransparencyandhelpyoubetterenableyoutomodelourCompany.

Second,wearegoingoffofhedgeaccounting.Andthatwillletthegainsandlossesthathavehitourhedgepositionflowthroughourincomestatement.

Now,forthebottomline--netincomeandEBITDA.CONSOLreportednetincomeforthefourthquarterof2014of$74million,or$0.32.Afterexcludingtheone-timeitems,ouradjustednetincomewas$58millionand$0.25perdilutedshare.AndouradjustedEBITDAwas$262million.

Let'slookatsomeoftheoperatingdetailsandexpectedprojections.SinceNickhashighlightedourproduction,I' lljustfocusonsomeoftheotheritems.

OurE&Poperationsreallydidpoststrongresultsandwillenableustodriveouroperatingcostsandcapitalintensitydown.Duringthefourthquarter,ourE&Pdivisionhadnetincomeofabout$36.5millionandcashflowfromoperationsofabout$555.7million.Ourrealizationsdeclinedby$0.36perMcfeto$3.90perMcfeinthefourthquarter.Includedinthistotalaveragerealizationswasahedginggainofa$0.39andaliquidsupliftofabout$0.20.

Liquidsproductionrepresentedabout12%ofourproductionand17%ofourE&Prevenues.Ourexpectationsforliquidsproductionremainconsistentwithprevious-statedguidanceofbetween10%and15%




ofourtotalproductionbytheendof2016.

Wehadforecastedthat4Qbasiswouldbebetweennegativea$0.80and$1.10andcameinabout$0.87.Weexpectthefirstquarterbasistobeflattomaybenegative$0.20,asourmarketingteamhasshiftedawayourvolumesfromourmorenegativeDevinionsalepooltoamorepositivebasisareas,aswehaveexcessFTandhavetheabilitytodoso.

Lookingatunitcosts.Youknow,eventhoughourrealizationshavedeclined,ourunitcostsalsodeclined,aswell,andoffsettokeepourmarginsflatat$0.71.Ourall-inMarcellusandUticaShalecostscameinat$2.83and$2.24,respectively.

Wecontinuetomakeprogressoncostefficiencies,aswe'vehighlightedbeforeatanalystday,asweincreasestagesperday,daysmovingrigs,andwearemakinggoodprogress.Duringthequarter,forinstance,wehaveachieved11RCSSSLstageswithina24-hourperiod.Atthestartof2014,wewereaveragingonlyfour.Thesetypesofefficiencyimprovementsandmetricsaddupinabigwayandhelpusgetustowardsthe15%reductionthatNickhadmentionedbeforeinourkeytargets.

OurgoalremainstotakeourE&Punitcostsdownby5%to10%annually,overthenextthreeyears.Andweareontracktomeetthesegoals.

Now,let'slookatcoal.Duringthefourthquarter,coal'sactivecoaloperationsgenerated$187millionfromcashflowofoperationsbeforecapitalexpenditures.Fortheyear,thistotaled$729million,whichwasactuallylightofour$800milliontarget,duetomostlylowercoalrealizationsandearlyequipmentissuesatourHarveymineandmorethanhalfayearoftoughgeologyatourEnlowForkmine.

Despitethat,ourcostswereactuallyexcellentinthequarter.OurEnlowForkcostscameinat$38.24and,inaddition,ourBuchanancostshadanotherstellarquarterat$53.96.Lookingatthesecosts,despitethefactwe'resittinginaweakpricingenvironmentformetcoal,wecanactuallymakerealmargins,goodmargins,againbecauseoftheircoststructure.

Sothisenergyenvironmentiscreatinganotherdowndraftincommodityprices.AndIwantedtohighlighteightkeypointsthatshouldhelpyou--giveyouconfidencethatwecankeepourprogramintact.

First,overthelasttwoyears,wehavebeendiligentonourheadcountandadministrativeexpenses.Wehadatargetofreducingexpensesby$65millionin2014,andwehaveeclipsedthatat$70million.

Second,wehavedramaticallyimprovedourbalancesheetbyreducingleverage,long-termliabilities,andenvironmentalcosts.Ourdebt-to-EBITDAissittingat3.2times--veryclosetothetargetwherewehadsaidayearago.Andwedohavesomemore,andwebelieveifwecontinuetotakemorecostsoutoftheseareas,wewillbeabletokeepourleverageratiosrelativeintact.

Third,wecontinuetoexecuteonnon-coreassetsalesprogram,asNickhasmentioned.Andwetook$270millionofcashproceeds,puttingusslightlyaheadofour$1billiontarget.

Fourth,weremainon-targetorourmid-yearIPOforThermalCoalMLPandalatethirdquarter,fourthquarterIPOofMetCo.Fifth,wehaveavoidedexpensivetransactionsinoilandmetcoalandstucktoourkeycoreareas.Ourfocuswillremainonbolsteringourcoalarea.

Six,creatingpredictabilityinavolatilemarket.Thisisachievedbyheedingourproductiontargets,lockinginourrevenueswheretheymakesense,andreducingourunitcostsacrossbothE&Pandcoal.

Seven,we'reloweringourcapitalintensity.OneofthekeywayswecanimproveourcapitalintensityisbymanagingourdeclineratesandbenefitingfromourHBPacreage.Iwillfocusonthisalittlebitlater.




Andthen,last,oursupplychaingroupismovingfromexecutiontostrategicandwillbeabigdifferentiatorin2015.Lastyear,webeganmanyprogramsthathavejustbeguntobearfruit,withanNABupliftofabout$15million.Thisisjustthetipoftheiceberg,andexpectthebenefitstoincreasetoover$100millionin2015andreduceservice,inventory,andvendercosts.Wehavebeguntoimplementkeysafetyandperformanceindicatorswithourkeyvendors.

Now,let'slookatthecommodityandhowwemanagedtheriskaroundrealizations.Thoughwecontinuetomanagethroughcommoditycyclesbyfocusingoncontrollingthecontrollables,andwearefortunatethatwehaveadiversifiedportfoliooftieroneassetsandrevenuestreamsthatenableustomanagecommodityrisksdifferentlythanmostpureplayE&Ps.

Weproducefourmajorcommodities--naturalgas,condensateliquids,met,andthermalcoal.WemeasurethepriceriskusingVaR,orvalueatrisk,whichwehighlightonpage153.

Forthenaturalgasstability,wemaintainahedgeprogramthatweuseaprogramhedgeatabaselevelofhedgesandlayersinadditionalopportunistichedgeswhenprices[rose]aboveacertainthreshold.Duringthefourthquarter,theCompanyraiseditshedgepositionfromabout27%to45%,andthisispurelyongas.

WhiletheE&Pspacehasfelttheimpactoffallingoilprices,itsdeclinehashadlittleimpactonCONSOL'sbottomline.TheCompanyoffsetsthisdownturnbyoilbysavingondieselcosts.CONSOLconsumesbetween30and40milliongallonsofdieselperyear,abouttwo-thirdsofwhichisusedonthecoalside.

Metallurgicalcoalpricesappeartobeformingastructuralbottom,absorbingtheslowdowninsteeldemandandthemanysupplygrowthprojectscomingoutofAustralia.Toimproverealizations,wehavereducedourAsianexposureandincreasedourmettonsalestothedomesticsteelmills.

Last,ourstrongsteady-statethermalportfolioprovidesconsistentvisibilityonrevenue.Wecontinuetocontractoutourthermalcoalandaremanagedtolockintermdealsovermulti-years.

For2015,ouroverallthermalcoalportfolioiscontractedabout85%inprice.Asaresult,our2015monthlyVaRhasdeclinedfromabout10%,atthebeginningof2014,toabout3.5%,presently.

Now,let'stalkaboutcapital.Weannouncedthismorninga$1.2billioncapitalnumber.That'sdown,actually,from$1.7billion,excludingthebenefitsofcarry.

Our2015E&Pdivisioncapitalof$1.1billionisactuallydown30%versusour2014spendinglevelsof$1.3billion.AsNickstatedearlier,ourgoalistoachieveour30%growthforboth2015and2016,andwefeelourbudgetachievesthesegoals.

Someofthekeyassumptionsbehindthebudget.Oneisourcoalmaintenanceproductioncapitalofabout$160million.OurD&Ccapitalwillbenefitfromthe15%efficiencygoalsandadditionalreductionsfromallfieldservicecosts.Andlast,theCONEwillbearaportionofitsgatheringcapital.

Now,wewanttopointoutthatour2015E&Pcapitalbudgetreallysetsupourproductionfor2016and2017,asthecycletimestobringonourmulti-wallpadrangesfrom18to24months.

Aspriceshavedeclinedandaccesstocapitalisslowing,onequestionwe'vebeengettingrecentlyis,whatisourdeclinerate?Whatisourmaintenancecapitalspendingneeds?

OurMarcellusbasedeclinerateisabout34%.AndwhenyoucombineitwithourCBMandconventionalassets,wehaveanoveralldeclinerateofabout14%.Now,whenyoufactorinthatwehaveaPAthermalcoalbusinessthatessentiallyhas25yearsofflatproduction,ourBtudeclinerateactuallygoesdowntoabout5%.



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SowhenyoutakeallthatinbetweencoalandE&P,ourmaintenanceofcapitalissittingaround$460million.Combinedwithalowdeclinerate,ourHBP,ourfeemineralbenefit,ourlowcostFT,andthe$1.67billioncarry,wecanpreserveandgrowourNAVinalmostanyenergypriceenvironment.

SoasNicktouchedupon,youknow,wedointendtoparticipateinstockbuybacks.Aseveryoneknows,notallbuybacksaregood.Butbuyingbacksharesattherighttime,whentheytradeatsignificantdiscounttoourinternalviewsofNAV,isgood.

Duetowhereoursharepriceiscurrentlytrading,webelieveourstockistradingatameaningfuldiscounttoourNAV.Obviously,wedon'tprovidewhatourNAVis,butwedofeellikethisistherighttimetobuybackstock.

Soinsummary,CONSOLremainsincrediblyactive,focusedondrivingefficienciesandgrowingshareholdervalue.Thetwotransactionsthatwearepursuing,alongwithstockbuybacks,areinastepintherightdirection.Now,I'dliketoopenitupforquestions.

QUESTIONS&ANSWERS

Operator:

(OperatorInstructions)FirstfromthelineofNealDingmannwithSunTrust.Pleasegoahead.

NealDingmann(Analyst-SunTrustRobinsonHumphrey):

Nicequarter,andgoodcolor.Firstquestion,justaroundproduction--ifyoucangivemeanideaonthat30%productiongrowth,Nick,foryouorDavid,thatyouwerespeakingof.Obviously,aprettysolidnumber.Howtoyouthinkofthat,whenitcomestoyourJVs?I'mjustwondering,numberone,howmuchoftheJVsareincludedinthat?Andthensecondly,howyouthinkaboutthat,ifNobleorHessdecidetocutbackmore?Wouldyou,maybe,pickupsomeofthatslack?Orhowdoyouallthinkaboutthat30%growth?


Yes.Withthe30%inthepast,too,it'sgoingtobeverysimilartowhatourjourneywasin2014,whichmeansMarcellusandUticaareeffectively95%plusofthatproductionramp.Now,whatthemixisbetweenMarcellusandUtica--that'saveryfluidsituationrightnow.We'rewatchingeverythingfromNYMEX,tobasis,towellcostsandwellprofilestocomeupwithanoptimizedmix.

Butforthepathto30%for2015and,frankly,thepathto30%for2016willbeMarcellus-andUtica-driven.2016,now,youstarttolookatdryUticaandwhatthatmightmeanandwherewegowiththat.Thatwillbemoreofanimpact,Ithink,aswegetthroughthemiddleof2015withthattestwalldatathatwillbecomingin.

Butthat'swhereitwillcomefrom.Dave,anycomments?

DavidKhani(CFO):

No.I'djustsaywe'redoingsomeworkonCBM.Sothatmightplayintotherole,atsomepoint,downtheroad.


Okay.Then,Ijustwondered,secondly,onthehedges--Dave,maybeforyou.Anythoughtshere,obviously,withpriceslower?AndIknowyoumentionedthatinfourthquarter,yousteppedupthehedgesabit.Anythoughts,today,onwherehedgesareabout?Wouldyouconsiderlockinginanymore?

AndIknow,inthepast,that--nottooterriblylongago--youalladdedabout100millioncubicfeetaday.Ithinkitwasabove$4,andthestripwasn'trightthere.Iwasjustwonderinghowyouwereabletoaccomplish




that?

DavidKhani(CFO):

Well,thestripwasprobablytherebecausewedidn'tdoanythingthatwasunusual.We'rejust--wepayattentionverycloselytothecommodity.Andwhenthetimeisright,aboveourthresholds,we'llstepin,andwe'lllockitin.

Remember,Neil,wewereuptoaboutalmost80%lastyearbecausethecommoditywasthere.Andwefeltitwasrightthingtodo.Andifthecommoditygetsthere,itwill.

Anditsveryvolatile.Everybodyisshorttocommodityrightnow.Thestripisnotveryliquidbeyond2015.Soitreallysetsitselfupfor,asactivitystartstoslowand,asfarasproductiongrowth,eventuallyslowsandthentheindustrialmaneventuallycomesin,itwillsetitselfuptobeabletolockinmore,downtheroad.


Okay.Thenjustlastly,youmentioned,obviously,that--IthinkitdoesmakealotofsensethatMLPiscomingup.OnthethermalMLP,isthereacertainamountof,eitherfor2016or2017,amountofvolumesthatneedtobecontractedorthepricethatneedstobelockedin,inordertopullofftheMLP?

I'mjustwondering,for--onbothsides,wouldbemyquestionaroundthethermalandthenthelatterMLP--howyouthinkaboutthat,David.Istheresomethingthathastobecontracted?

DavidKhani(CFO):

Yes.It'sagoodquestion,andwethinkaboutitalot.Ithink,ifyoulookatourproduction,it'sbeeninplaceforawhile.Andsoourcustomersareprettyconsistent.

It'salittledifferentthanifwewerebuildingnewminesandtryingtofindamarketforcoal.Sotherepeatabilityofcontractingwiththesamecustomersandtherightcustomerswhohavealowheatrate,coalplants,andtherightmarketswillhappenyearinandyearout.Soitreallyendsupcomingdowntomoreofapricequestion,asopposedto,canyoucontractitout.

JamesGrech(ChiefCommercialOfficer):

I'msorry,Neal.ThisisJimGrech.Yes.Alongthoselines,withwhatDavidissaying,for2016,ifyoutakeinallthecoalthatwehavesoldforourPennsylvaniaoperations,whichwehavesomesoldthat'sunpricedaswell,itcomestoover13milliontons,whichisover50%oftheproductionforthecomplex.Andthatreallyisallbuiltoffofourcorecustomers,asDavidhassaid.

Soyearafteryear,webuildoffofthatfoundationandlayerinmoresalesinfutureyears,aswegoforward.Weexpecttokeepdoingthesame--usingthosecorecustomers,fillingouttheBaileycontractportfolioforfutureyears.

Andagain,itcomestoamatteroftiminginthemarket--whenwethinkit'soptimalforustoenterintothosenegotiations,andwhenthecustomersarereadytoenterintothosecontracts,aswell.Butwe'regoingtobuildoffofthatstrongbase,goingforward.


Good.Thatmakessense,Jim.Thankyou,all.Greatquarter.

Operator:

OurnextquestionisfromMiteshThakkarwithFBRCapitalMarkets.Pleasegoahead.




MiteshThakkar(Analyst-FBRCapitalMarkets):

Goodmorning,gentlemen.


Goodmorning.


Myfirstquestionisjustintermsoftheequipmentissues,whichyoumentioned,atHarveyandgeologicalissuesyoumentionedatEnlowFork.Areallofthosebehindus,orareyoustillgoingthroughtheinitialdealingtroublesatHarley?Howshouldwethinkaboutit?Obviously,fabulousperformanceonthecostsideatEnlow,despitegeologicalissues.


Yes.TheequipmentissuesatHarveyarebehindus.Thatwasmoreofanexplanation,whenyoulookat2014intotal,whatweresomeofthedriversoftheresults.Sothatequipmentitemwassolved,basically,justbeforemid-yearof2014.

OnthegeologysideforEnlow,therewillbedifferentperiodsoftime,overthenext12to18months,wheregeologywillbeafactor.Wespendalotoftimeandeffortwithourtechnicalexpertstomapthatout,panelbypanel.Andthoseimplications,orthosethingsthatwewouldbechallengedwith,arereflectedintheguidancenumbersthatwegaveandinthecostviewsthatwegavefor2014andgoinginto2015.


Okay.Great.Andjustafollow-uponthemetside.HowshouldwethinkaboutnormalizedcostatBuchanan?Again,averygoodperformanceonthecostside.Shouldit--wasthismorelikeyouranatallcylinders,intermsofproductivity?Orhowshouldwethinkabout,moreonanormalizedbasisforthatone,aswell?


Thecostperformancethatwepostedin2014isquarter-by-quarterin2014ofBuchanan,wasdriven,really,byawholerangeofdifferentactivitiesontheefficiencyfront,fromstaffinglevelsandtheschedulingofproduction,schedulingofmaintenanceprojects.Allthosethingsaccumulatedintothecostresultthatyousaw.

Ourviewin2015is,whenwegotoQ1--Q1costsofBuchananshouldbecomparabletowhatwesawQ4oflastyearinBuchanan,whichofcourse,isareallygoodresult.Now,whathappens,Q2onout,isgoingtobedriven,inpart,bywhatthemarketopportunitiesareforBuchanan.

Ifwesticktothecurrentviewwehaveandthereleaseon2015forBuchanan,Q2throughQ4shouldbenominallyhigherthanwhatweseeinQ1andQ4oflastyear.Ifwe'reabletotakeadvantageofthestrengtheningmarketoradditionalsalesopportunitiesthatoursalesteamsandPartnerareworkingonconstantly,thenQ1andQ4oflastyear--thosecostsresultsandexpectationshouldcontinueonforQ2andbeyondinto2015.


Great.Thankyou.Andgoodluck.


Thanks.




Operator:

OurnextquestionisfromJoeAllmanwithJPMorgan.Pleasegoahead.

JosephAllman(Analyst-JPMorgan):

Thankyou,operator.Goodmorning,everybody.


Goodmorning.


Hey,David,intermsoftheCapEx,Iknowyousaidthatthe2015budgetforE&Pis$1billion.Andin2014,youspent$1.3billion.Ifyoujustisolatedtheexplorationanddevelopmentspending,whatdoyouexpectthattobein2015?Andwhatwasthatequivalentnumberin2014?

DavidKhani(CFO):

The$1.3billionisprettyclosetoD&C,D&C.Wetriedtokeepthatasclosetoapplestoapples.


Okay.Sothen--okay.So,inotherwords,in2014,youspendabout$1.3billioninD&C.Andthen,in2015,the$1billionisD&C?Isthatwhatyouaresaying?

DavidKhani(CFO):

That'sright.


Okay.

DavidKhani(CFO):

Thereisalittlebit--Iamsorry.ThereisCONEinbothofthem--I'msorry.Thereisabout--thereissomeCONEgrosscapitalinthere.Butwe'renotbreakingitoutnowbecausewehaven'tprovidetheCONEbudgetpubliclyyet.


Okay.


Thebig--youlookat2015.Thebig--I' llcallit--non-delineation,somewherebetweendelineationandexplorationdollarsthatwespendwillbeforthedryUticathatwe'vegotplannedin2015.That'sthatwellinGreenecounty,PA,thewellinWestmorelandCounty,PA,andwhatwe'vegotgoingoninMonroe.

AndIsaysomewherebetweenexplorationanddelineation,becausewe'veobviouslygotexpectationandviewsforsuccessinthoselocations.Butthatwouldbeaboutthemostexploration-orientedforfocusthatyouwouldseeinthe2015$billionbudget.





Okay.That'shelpful.Andwhatwasthetotalcarrythatyoureceivedin2014?Andwhat'syourexpectedcarryin2015?

DavidKhani(CFO):

Well,wegeneratedslightlyover$200millionfortheyear.We'vereceivedabout$180millionofitin2014.Sowewillhavesomecarryoverofcarryin2015.Andrightnow,we'llplanforzero.Butwe'rehopingforaspendthatwouldgeneratesomewherenorthof$200million.


Okay.SoIknowtheNoblecarryisoff,buttheHesscarryisstillon,so--

DavidKhani(CFO):

Oh,yes.That'sbakedintoit.Ibelieve--


$100million.

DavidKhani(CFO):

It'sabout$100million.


Okay.Gotit.Okay.Andthen,ontheproductionside,Iknowyou'regrowing30%full-year2015overfull-year2014.But,liketheexitrate2014,exitrate2015--atleast,basedonourpreliminarymodeling--ismorelikeup10%or15%,dependingonifImaketheadjustments.Soforexample,inthefourthquarterof2014,ifIaddbackintheshut-inproduction,theimpliedexittoexitgrowthisabout10%.Soifyoucouldtalktothat?Butitrampsupin2016.Ifyouactuallyhadthe30%expectedgrowthin2016,itreallyrevsup.

Socouldyoujusthelpuswith--there'sabitofaslowergrowthin2015,andthenitseemstorampupin2016.Doesthatimplyyou'regoingtobespendingmorein2016?Ifyoucouldjusthelpuswiththat.

DavidKhani(CFO):

No.It'shardtogiveyouthewellcountbyquarter.Butweshouldnothaveaproblemmeetingorexceeding30%growthbecausealotofthoseactivitiesthatwe'vespentdollarsonin2014willgotoputtingthewellson.

Andit'sreallygoingtobequartertoquarter.Ithinkthat's--it'shardto--it'sjustaquartertoquarterthing.Idon'tthinkyouhavetoreadintotheexitrateversusexitrate.


I'msorry,Dave.WhatI'msayingis,Imean--the30%growthin2015,alotofthathas--atleasthalfofthat--isreallytherampupthatyousawin2014betweenthefirstquarterandthefourthquarter.

DavidKhani(CFO):

Right.


AndsoI'mgettingsomethinglikea10%or15%4Q2014and4Q2015.Andtome,it'sstillgoodgrowth,right?But--




DavidKhani(CFO):

Oh,you'resaying--okay.Soyou'resayingwe'regoingtoneedtospendalotmoredollarsin2016becauseyou'reseeingthe4Q2015ramp--exitrateisnothighenough.It'shardbecausewehaven'tgivenyouthe4Q2015numbers.SoIthinkif--youhavetoseethewellscomingonlinetoseewhatouractuallevelwouldbe.


Gotyou.Isitfairtosay,though,thatthereisarampup?Justinquartertoquarter,istherearampupin2016,basedonyourpreliminarylookat2016?

DavidKhani(CFO):

Youmean,asfarascapital?


Yes.Iguess,yes--capitalleadingtoactuallyaquartertoquarterrampupinproduction.

DavidKhani(CFO):

Well,partoftheanswer,Joe,willbehowproductivewilltheUticawellsbe.Becauserightnow,thoseUticawellscouldbetwotothreetimesaMarcelluswell.Soit'sreallyhardtosaythatwe'llhavetorampupalotmoreactivitytodothat.


Theotherthing,Joe,too,is--andLarryandTim'scommentsgivealittlemorecoloronthis--isthatabigdriverofthis,asyouknow,isthetiming,especiallyonthecompletionsideoftheequation.Whenwedothecompletions,whichareagoodproxyfortimelines,andhowthattimingisquarter-by-quarterlateintheyearversusearlierintheyear--that'sabigdriverofhowwesmoothout,effectively,orsculptthe30%rampinto2015andtheninto2016.

Thatabilitytodothatisgoingtocreate,Ithink,alotofcapitalefficiencyandlowercapitalintensityinthe2016numbertogetthere.Butyoumightwanttocommentalittleonthat.

TimothyDugan(COOofE&P):

Itis--alotofitisjusttiming.Withcompletionscomingoutofthewintermonths,we'llseemoreturninglineslaterintheyearthatwillhelpcontributetothe2015growth.Butthat'swherealotoftherampin2016willcomefrom--thosewellsthatareturnedin-linelaterintheyear,in2015.Andwe'llseeasimilartyperampin2016.Soourplanwillachievethe30%growthinbothyears.


That'shelpful.Then,justtwoquickones.Whatkindofreturnsdoyouthinkyou'regetting?IfyouuseNYMEXfuturesprices,whatkindofreturnsareyougettingintheMarcellusandintheUtica?Andasasecondquestion,whenyoucalculateyourNAV,areyouusingNYMEXfuturestodothat?Orareyouusingsomeotherpricedeck?

DavidKhani(CFO):

Wedoitbothways.Wehaveaninternalreview,andwealsousetheNYMEXview.Butagain,theNYMEXjust--ifyoulookattheliquidityintheNYMEX,theamountofvolumethat'stradedontheNYMEXdropsby90%from2015into2016.Andthenitdropsby97%into2017.




Soeventhoughit'sthebestwaytogetsomesortofvisibilityonwhatpricediscoveryyouhave,it'sbasedonvery,veryilliquidtransactions.Soit'sveryhardtowanttobaseeverythingoffofthecurve,rightnow.Sowedoitbothways.

Youknow,ourreturnsreallyrangeanywherefromabout10%uptoabout25%,30%.Sothey'vecomedown.Butwhat'salsobakedinthereisthecycletimeimprovementsthatwearedoing,aswellasgreatexpectationsofsomeservicecostdeflation.


Overallcostreductions.

DavidKhani(CFO):

Yes.


Soyousaidthey'renotbakedinthere,ortheyarebakedthisthosereturns?

DavidKhani(CFO):

Inthere,yes.Sothat'spartially--that'swhatoffsetsit.Sothekeyforusistomovearoundtheprogramalittlebittomakesurethatwe'reoptimizingthoseratesofreturn,baseduponwhatweseeastherealizations.


Okay.So,David--sothe10%to25%--soyouarebakinginsomeservicecostdeflation?

DavidKhani(CFO):

Absolutely.


Okay.Good.Allright.Great.Allveryhelpful.Thankyou.Appreciateit.

Operator:

OurnextquestionisfromCalebDorfmanwithSimmons&Company.Pleasegoahead.

CalebDorfman(Analyst-Simmons&CompanyInternational):

Goodmorning.


Goodmorning.


Goingbacktoservicecostdeflation--whatareyourcurrentwellcostsinthedifferentareasoftheMarcellus?Andhowmuchsavingshaveyoufullyrealized?AnddoesyourCapExbudgetfullytakeintothesavingsthatyouhavegottensofar,ordoyouthinktherecouldbeadditionalsavings?


Well,wehaveagoodpieceofthe15%efficiencygainsbuiltintoourcapitalbudgetbecausewefeelverygood




aboutit.Iwouldsay,wefeellikethereismoreupsidethere,overtime.AndTimcouldprobablytalktothat.

Bakedinsomeservicecostsdeflationintoourcapitalnumbers.Welookatiteveryweek,andwearehopingtoeclipseit.

Iknowthere'salotofpercentageofreductionnumbersfor2015beingthrownoutthere.We'lljustsaywe'regoingtobeverycognizantofthosereductions.

Andwe'retryingtoaccomplishacouplethings.Oneis,we'dlikelowercosts.We'dliketokeeptheactivitylevelintact,andsowe'retryingtopartnerwiththerightservicecompaniestokeeptheprograminplace.

Andthensecondis,thatwe'retryingtokeeptherightcrewsandgetbetterproductively,aswellasjustcuttingcosts.Becausewecanwakeupandcutourwayintoaproblemfor2016.


That'shelpful.SoDavid,youusedtoincludeaslideinyourslidedeckwhichhadcashburnassumptionsandEBITDAassumptions.Thatwasn'tintherethistime.Canyouhelpusthinkthroughcashburnin2015and2016?

DavidKhani(CFO):

Yes.Rightnow,weshowaverymodestcashburn.Andthat'sbasically--whatwe'vedoneis,we'vetakenthecurrentcommodityviewandthrownitthroughthe2015model.Whatwehaven'tdone,now,isthere'ssomeactionsandsomethingsthatwewilldotooffsetthat.

Soifyoulookinourslidedeck,you'llseeourdebt-to-EBITDAgoesup,slightly.Wedonotwantthattohappen.

AndsoIthinkwhenyouwakeupattheendofthisyear,you'llseethatwehaveoffsetthecommodityfallin,particularly,naturalgas.That'sprobablythebiggestimpacttoourmodel.


Okay.Athen,aquestionforJimGrech.Canyoutalkabouthowmuchincrementalcoaltogasswitchingyouareseeingrightnow?WhenIlookattheNorthernAppalachianpricingthisseason,itseemslikethey'vefallenoff,maybe,$4to$5atoninthelast2,21/2weeks.Canyoudiscusswhatyou'reseeinginpricingenvironment,rightnow?


Hey,Caleb.Thereisacoupleofthingswe'reseeing.Firstoff,asfarasourcontractcoalsales,ourcustomersaretakingallofthecoalthatwehavesoldandhavebeenconsistentlytakingit.Sowehaven'tseenanyofthatslowingdown.There'salwaysanissue,hereandthere,withweather.Butthere'snothingsystemicofcustomerstryingtostartslowwalking,takingcoal.Thepoolhasbeenverygood,andtherailroadshavebeenmovingthecoal.

Theeffectthatwe'reseeinginthemarket,though,withthelowgaspricesisverylittletoalmostnonexistentspotactivity,atthemoment,forthermalcoal.Wearegettingsomeconversationsgoingwithsomeofourcustomerswhoarelookingoutlaterintothefirstquarterandthesecondquarteraboutthepotentialforgettingintothespotcoalbuying.Butthere'salotofwaitandseeinwhat'sgoingtohappenhere,withtherestofFebruaryandMarch,withthewinterweather,andwhatthatdoestostockpiles.

SoIthink,Caleb,theanswertothequestionisit'sstilltobedetermined--theeffectofthelowgaspricesaregoingtohaveonthecoalmarkets,asfarasthedemandsideofit.We'rejustgoingtohavetowaitandsee




howtherestofthewinterplaysout.


Appreciateit,gentlemen.


Thankyou.

Operator:

OurnextquestionisfromJeffreyCampbellwithTuohyBrothers.Pleasegoahead.

Jef f reyCampbell(Analyst-TuohyBrothers):

Goodmorning.IwantedtostartwithacoupleUticaShalequestions.ItseemedthatyouwerereallycallingouttheUticaShaleactivitiesthisquarter.Youincreasedyourtargetswithacreageacquisitions.Youincreasedyour2015,2016productionguidance,andthenyoupointeddrillinginGreeneandWestmoreland.EarlierthisweekyourOhioUticaJVpartnerannounceddialingbackactivityin2015.CanyouqualifyyourcurrentattitudetowardstheUtica,relativetolastyear'sanalystday?


Sure.Wecontinuetobe,ifnotmoreexcitednowabouttheUticathanwewereatanalystdaylastyear.OurJVpartnerisjustaportionoftheUtica.Thatis,really,thewetUticaoverinOhio.

ButasyoumoveeastwardandgetintothedryUticawherewehave100%workinginterest--that'swherewe'retalkingaboutthewellsinWestmorelandandGreenecounty--we'reveryexcitedabouttheresultsthere.Andthenwhenyoulookatproductionin2014inthewetarea,weoperatedthetopfouroilwellsintheUticainthethirdquarter,inthestateofOhio.Sowecontinuetobeexcitedaboutthat.


Andanotherthing,too.AlotofthepotentialforCONSOLonUtica,and,inparticular,dryUticawasbasedlastyear,atanalystdayoffoftheconceptofthestackedpaysandtheimprovedcapitalefficienciesandreducedcapitalintensitiesthatwecouldaccrueifwe'vealreadygotmidstreamassetsorpadassetsorwaterinfrastructureinplace.

Buttogetthinking--onewaytogetacertainproductiontarget.Anotherlayerofthehorizonthathaseconomicopportunity,likedryUtica,canyougetacertainproductionrampmuchmoreefficientlythanyouwouldbeabletoindividuallyacrossthoseplays.That'sanotherkeycomponentofhowwefeelaboutdryUtica,andlookingatwherewe'reattodayonthatissue,wearewaymoreexcitedthanwewerebackinanalystday.

Analystday,itwasaconcept,andwehadlogictiedtoitwithwherewethinkthiscouldaapply.Butyoucouplethatwiththedatathat'sflowinginfromtheindustryandwhatwe'vegotplannedforourdrillingprogramonthedryside,coupledwiththecapitalizedinfrastructurewe'vegotinplaceacrosstheUticaandMarcellusfields--thatcouldbesomethingthatisdefinitelymovingtheneedleonNAVpersharefourusintheoutyears,starting,asIsaid,in2016.


Great.Thatwasveryhelpful.Slide64showsUticadrillingcostreductionswithoutanyreductionforservicecostdeflation.What'sareasonableexpectationfordeflationinUticawells?OrisUticaaplaywherethecrew




isparticularlyimportant,asyoureferredtoearliertoday?

DavidKhani(CFO):

Thenumbersthatweshowintheredonothavedeflationinthere,asyousaid,andtheydidcomeinataverylow$2.24all-incost.SomeofthatisafunctionofthecarrythatwegetandthebenefitinoftheD&Crate.Alotofthatis--alotofthatisthefunctionofthequalityoftherockandtheproductivityofthewellsanddebt.

Andsocanwecontinuetotakethosecostsdown?It'sagoodquestion.

Ithinkit'srunningataverylowrate,andIthinkifwecouldkeepitflat,thatwouldbegreat.Ifwecouldtakeitdown,somuchthebetter.IthinktheMarcellusisprobably--myguessisMarcellusisreallymoretheareawe'llbetakingmorecostsdown.


Okay.AndifIcouldaskonelastquestion.Slide28and35suggestthat100%ofcurrentcompletionsfeatureRCS/SSL.First,isthatcorrect?Andifso,shouldwebemodeling--shouldourmodelingbebiasedmoretowardsthehigherRCS-typecurves,goingforward?Andifyouwantmoredata,whendoyouthinkyou'llhaveenoughtoconsidertowardsadvisingtowardstheRCS-typecurve?


Yes.AllofourcompletionsareRCS/SSL.Wehaveseenthebenefitsofthat--theincreasedIPsandtheincreasedEURs.Wecontinuetoworkonoptimizingourcompletions.We'veseenthebenefitRCS,butnowwe'relookingmoreregionally,areabyarea,andoptimizingourcompletiondesign,basedonareaspecifics.Sowe'llcontinuetoseeprogressinthatarea,butweareusingRCS/SSLinallareas.


Sojusttoreturntothelastpartagain,isitincreasinglymorerealistic,then,tobethinkingofthehighertypecurvesthatyoupublishedfortheRCSratherthanthenormalized5,000curves?


Yes.Wecontinuetoseeourtypecurvesimprove.


Okay.Thankyou.

Operator:

OurnextquestionisfromLucasPipeswithBreanCapital.Pleasegoahead.

LucasPipes (Analyst-BreanCapital):

Goodmorning,everyone.


Goodmorning,Lucas.


NickandDave,youemphasizedthesharerepurchaseopportunityinthismarketenvironment.Andinlightofsomeoftheself-imposedconstraintswiththeorganicgrowthtargetsandtheninvestingthisinyourcash



©2014TheStreet,Inc.AllRightsReserved Page18 of 22

flows,whatdoyouthinkwouldhavetohappenforthesesharerepurchasestotakeplace?


Lucas,again,thefilterwe'reusingforallofthisistheNAVpersharefilter.Ifyougoback--lasttimewehadourthirdquarterearningscall--andyougobacktotheNovembertimeframe,wherethatbalancedsatbetween--I' llcallit--sharecountreductionandallocationofcashflowforthatversustheE&Pproductionramp,we'reprobablylookingattakingthemomentumthatwewerecomingoutof2014withandcomingupwithaplan,orsetofplans,thatwouldgetusnorthof30%in2015,2016,thenacertainlevelofsharebuybacks.

Ifyoufastforwardtowherewe'reattoday,westillhavethosethatwesaidinthecommentary--thosetwooverridingobjectives.Butthere'sbeenashift.Again,thereasonwehadashiftisbecausewe'readaptingandusingthat10NAVpersharefilterwiththenewassumptions--newpricing,newefficiencies,newshareprice,etcetera.Sorerunningallthesethings,sotospeak,realtime.

Andthatshifthasresultedinthebalanceandtheobjectivesfor2015thatwequoted,whichisnow30%ramp.Sogivinguponsomeofthatupsidethatwebuiltwithmomentum,andnowrefocusingmoreofthatemphasistothesharecountreduction.

Now,whereitgoestomorrow?Wedon'tknow,right?Wedon'tknowwhat'sgoingtochangeoverthelonghaul,especiallywithpricing,withshareprice,andwitheverythingelse.

Butwhatwedoknowishowwe'regoingaboutthatdecision-makingasmanagement.Sowe'restillgoingtousethatNAVpersharefilter.Weconstantlylookatthechangingassumptionsfromwell-typecurves,todeflationsavings,tocommoditypricechangesupordown.

Andthenwerunthatmath.Andwe'llseewherewecomeoutatwiththe30%,versusthesharecountreductioneffortsforgoinginto2016andbeyond.


Great.SoyouwouldmayberelaxsomeofthoseconstraintsthatImentionedunder--dependingonthevalueproposition?


Longerterm,yes.AndIthinkthewaytothinkofitis--insteadofsayingwe'removingtowardsrelaxingitis,ifyoulookoverthenextthreeyears,ourtwobigbucketsofcapital--orcashflowallocation--willbecapitalexpendituresforE&Pproductiongrowthandsharecountreduction.

Whatthewaitingisbetweenthetwoofthose,year-over-year--that'swherewe'realwaysusingNAVpersharefiltertomaketherightoptimalallotment.Todayin2015,it's$1billiontogetusthat30%rampin2015and2016,andacertainlevelofsharecountreductionthatwillresultfromthat.


Great.That'sveryhelpful.Andmaybetoshiftgears.Jim,coalproductionguidancecamedownalittlebit,atleastinmynumbers.

Couldyoumaybewalkmethroughthedriversforthat?Isthisaresultofdecreasedutilization,competitionwithinNorthernAppalachia,competitionfromoutsidethebaseofnaturalgas?Ifyoucouldmaybegiveusaflavorforthethermalcoalmarketandyoursalescommitmentsthere.





Lucas,thedecreaseintheproductionthere,shownforthePennsylvaniaoperationswasreallyduetotwofactors.Neitherofthemhadanythingtodowiththemarket.

Oneisthe--morelongwallmovesoccurringintheyearthaninthepreviousyear,which,ofcourse,takestonsoutoftheforecast.Andwedidn'thavethatbakedinallthewaythere.Wehadtochangethatandrevisethat,aswegoforward.ThesecondoneiswestillexpecttohavesomeofthesegeologicconditionstoslowdownsomeofourmininginthePAops.

Sothecombinationofthose--theaddinginsomelongwallmovesandthegeologicconditions--iswhattookthetonnagedowninthosenumbers.Itwasnothingdowithmarketconditions.


Theothersideofthat,Lucas,too,iswe'vegotthebenefitofhavinganactualnumberfor2014.Ifyougobacktofirstquarter2014,wehadastrongquarterinthePennsylvaniaoperations.Andwewere,effectively,abletowalkuptheproductionnumberandtheactualresultsasthingsunfolded.

Ourexpectationandhopeisthat,in2015,we'llhavetheopportunity--we'lldoexactlythesamethingbecause,asJimsaid,themarketwillbetheretotakeit.Butfirstthingsfirst,givingyouthebestshotawhatweseein2015--withgeology,timing,everythingelse--that'swherewecameoutat.Whenwehavethefirstquartercall,we'llbeabletogiveyouanupdateonwhattheprogresshasbeenandwherewesit,relativetonewproductiongrowthfortheyear.


Goodluckwitheverything.


Thanks,Lucas.


Thankyou.

Operator:

Andnext,gotoBrandonBlossmanwithTudor,Pickering,HoltandCompany.Pleasegoahead.

BrandonBlossman(Analyst-Tudor,Pickering,Holt):

Goodmorning.


Goodmorning,Brandon.


Ihatetodragthisdown.Butjustacoupledetailclarificationquestions.OneontheCapEx.Evenjustdirectionally--rigcountthatyou'reexpecting2015versus2014,tokindofnormalizethat?


Therigcount,onaverage,willremainrelativelyflat.Wehavegotabouttenrigsrunningnow,andwe'llaverageabout10rigsthroughouttheyearin2015.





Okay.Great.That'shelpful.Andthen,reconcilingthe5%to10%CAGRonproductioncostsavingsorrigefficienciesorcostsavingswiththe15%.AndIthinkthat15%savingsonD&Cwasayear-end2015number,orwasthatafull-yearaveragereduction?


Ithink,lastyear,wetalkedabouta15%reductioninD&Cbytheendof2015.Andwe'rewellonourwaytoachievingthat.Andthatfitsinwellwiththe5%to10%reductionthatDavewastalkingabout,earlierthisyear.


Great.That'seasy.Andthen,onbasis.Sobasisinfourthquartercameinaboutwhatyouexpected.Andthen,therewasacommentthatyoumaybeabletobeflatorshownobasisdifferentialinQ1,basedondifferentsellingpoints.

Istheremoredetailavailabletothat?AndIassumethisisallrelativetoHenryHubpricing?Isthatcorrect?

DavidKhani(CFO):

That'scorrect.


Yes.Brandon,whatourmarketingdepartmentwasabletodoisto,basically,flipbetweenthetwodifferentpricingpointsandgetustoamorefavorableone.

Forexample,lastyear,withtheDominion,SouthPoint,wehadabout26%ofthegasbeingsoldthere.Andthat'sgoingtogodownto14%in2015astheproduction.Andagain,usingsomeoftheflexibilitywehaveinEFT--we'regoingtomoveitawayfromthelower-pricedmarketandmoveittoovertotheTETCO-M3market.Whichagain,in2014,wasabout15%ofourgassales,andin2015,it'sgoingtogoupto29%.

Sobasically,weflipped.WecuttheDTISouthsalespointinhalfandjustaboutdoubledtheTETCO-M3,gettingtoamuchmorefavorablemarket.

SowhenDavidwasgivingthatquote,ifyoutaketheTETCO-M3market,theEastTennesseeTranscoZone5market,andtheTECOmarket,that'sabouttwo-thirdsofourgasproductionthat'sgoingtothosethreepricingpoints,whicharesomeofthemorefavorablepricingpointsthatyouaregoingtoget.Andthat'sleadingtothedifferenceinthebasisfromthefirstquarterthisyeartofourthquarteroflastyear.


Great.Andpresumably--atleastaswelookthroughouttheyear--theQ1hedgeprofile,Iassumeisabithigherthanaveragefortheyear?

DavidKhani(CFO):

That'saboutright.That'saboutright.


Allright.Great.Thankyouverymuch.

Operator:




AndournextquestionisfromDavidGaglianowithBMO.Pleasegoahead.

DavidGagliano (Analyst-BarclaysCapital):

Thanksfortakingmyquestion.IappreciateallthefocusontheNAV,andobviously,itmakessense.Thequestion--obviously,weallhaveNAVs,andthey'reprettysensitivetothepricedeck.Iknowthere'salotofsensitivityaroundgivingapricedeck.Butmyquestionis,atwhatpointdo--ifyoucouldjustgiveusasense,maybearangeorsomethinglikethat--dotheprojectsbecomeNAVnegative?


Andremember,thecapitalthatwe'respendingthisyearreally,actually,goestoproductionincomesyear.Soyouhavetothinklikethat,aswell.

Soit'sagoodquestion.Ithinkitisafunctionofwhatweseetheimprovementsalsoinefficiencygains,goingout.

Soit'samovingtarget.Soyou'vegottobecarefulaboutusingoneprice.ButIwouldsay,ifwewerelookingat$2realizationsformulti-years,that'swhereitwouldstarttoreallyimpair,dramatically,ouractivity.


$2realization.Okay.Fairenough.Thenthe--well,asomewhatrelatedquestion,Iguess.Obviously,we'vehadthecollapse,latelyinthe--atleast,thenearprices.

Somyquestionis,allthingsconstanthere,aswelookforwardtothenextcoupleofquarterseven,giventhemarginsthatwerejustreportedinthegassegment,giventhefallingpricing,doyoustillexpecttobedeliveringpositivemargins,onanear-termbasis,inthegasbusiness,ifpricesstaywheretheyare?


Wedo.Andobviously,it'sveryvolatile.Butwedo.Yes.


Andifwemark-to-marketwithoutthehedges,wouldthatstillbethecase?


Therewillbemomentsintimewherethey'llbeneutral,butclose.Andthen,therewillbespots--likeliquidswillbepositive.Soyouhavetolookateachproduct.


Allright.Fairenough.Thankyou.


Youarewelcome.

Operator:

Andthatwillconcludeourquestionandanswerportion.Iwillturnitbacktothepresentersforanyclosingcomments.

TylerLewis (DirectorofIR):




John,thankyou.Andthankyou,everyone,forparticipatingtoday.Ifyoucouldpleaseinstructthecallersonhowtoaccessthereplayinformation.

Operator:

Certainly.Andyes,ladiesandgentlemen,thisconferenceisavailableforreplay.Itstartstodayat12:30p.m.Eastern.ItwilllastuntilFebruary6atmidnight.

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Documents

CONSOL ENERGY INC (CNX) Earnings Report: Q4 2014 …s.t.st/media/xtranscript/2015/Q1/13030304.pdf · Of the total, we had record Marcellus Shale production of 111.7 Bcf in 2014. That