CONSOL has 8 Dry Utica Wells, 2 Marcellus Wells on Tap

CONSOL Energy’s (ticker: CNX)  upcoming drill plans include adding back two horizontal rigs which are expected to resume drilling starting in August 2016, the company said in its Q2 2016 earnings release.

The company is looking to drill eight dry Utica shale wells, located in Monroe County, Ohio, (100% working interest) and two Marcellus shale wells, located in Washington County, Pennsylvania, (50% working interest).

The two new Marcellus Shale wells are located on a 6-well pad that contains 4 existing drilled but uncompleted (DUC) wells. CONSOL expects to finish drilling the remaining 2 wells in order to complete the pad. CONSOL expects that the lateral length for the 10 wells to average approximately 8,700 feet.

CONSOL said it expects to see a partial year production benefit from these new wells starting in April 2017. Also, the company anticipates its DUC well inventory to grow to 91 gross Marcellus and Utica shale wells exiting 2016, which includes 76 wells that are located in the wet areas.

For the second quarter, CONSOL’s E&P Division reported record production of 99.3 Bcfe, or an increase of 32% from the 75.5 Bcfe produced in the year-earlier quarter. The E&P Division’s total unit cash costs declined during the quarter to $1.23 per Mcfe, compared to $1.58 per Mcfe during the year-earlier quarter, or an improvement of approximately 22%, driven by reductions to lease operating and gathering, transportation, and compression expenses.

Marcellus production volumes, including liquids, in the 2016 second quarter were 53.1 Bcfe, or 33% higher than the 39.9 Bcfe produced in the 2015 second quarter. Marcellus total unit cash costs were $1.27 per Mcfe in the just-ended quarter, a $0.31 per Mcfe improvement from the second quarter of 2015 cash costs of $1.58 per Mcfe, which benefited in part from the company requiring less processing by shifting more towards drier gas.

CONSOL Utica shale production volumes, including liquids, in the 2016 second quarter were 23.3 Bcfe, up from 10.7 Bcfe in the year-earlier quarter. Utica Shale total unit cash costs were $0.83 per Mcfe in the just-ended quarter, which is a $0.39 per Mcfe improvement from the second quarter of 2015 total unit cash costs of $1.22 per Mcfe.

CONSOL’s previously completed 10-well GH53 pad, which was completed in the first quarter of 2016 and incorporated plugless completion technology, has now cumulatively produced over 4.8 Bcfe in its first 60 days of production with 9 out of 10 wells in-line, with one well shut-in due to an offset well completion. The strongest well on the GH53 pad, the GH53F, has produced 0.83 Bcfe in its first 60 days. Lastly, CONSOL’s 12-well GH46 pad located in Greene County, Pennsylvania, which was previously completed and TIL in the first quarter of 2016, has cumulatively produced 10.5 Bcfe in the first 90 days of production.

CONSOL said that its confidence in the dry Utica program grows as time progresses as it monitors the performance of the dry Utica Shale wells in Monroe County, Ohio, and Greene and Westmoreland counties, Pennsylvania.

The company said its Gaut 4I well in Westmoreland County, Pennsylvania, remains the second strongest producing well in the dry Utica across the industry. The Gaut 4I well has cumulatively produced 3.4 Bcfe in its first six months, according to the press release.

“During the quarter, CONSOL drove down E&P unit costs by 18%, compared to the prior-year quarter, generated $46 million in organic free cash flow from continuing operations, paid down approximately $390 million in debt, and increased estimated ultimate recoveries (EURs) in its prolific Marcellus Shale Green Hill field to 3.0-3.5 Bcfe,” Nicholas J. DeIuliis, CONSOL’s president and CEO, said in a statement.

Deluliis said the resumed two-rig program in the second half of 2016 came about because the “expected rates of return nicely exceed our cost of capital, while supporting our free cash flow plan and liquidity goals.”

Despite the decision to resume modest drilling activity, which will add approximately $25 million of capital expenditures in 2016, CONSOL said it expects the annual E&P Division capital budget to decrease to $190-$205 million due to continued capital efficiency improvements,” Deluliis said.

Shoring up the balance sheet

CONSOL said it used the $66.3 million of free cash flow generated during the quarter and the $426.7 million of the cash on hand from March 31, 2016 to reduce outstanding borrowings on the revolving credit facility. The company reported that as of June 30, 2016, it had $1.3 billion in total liquidity, comprised of $88.7 million of cash, excluding the CNXC cash balance, and $1.2 billion available to be borrowed under its $2.0 billion bank facility.

$5 billion raised in the process of exiting coal

As reported by CNX Coal Resources LP (CNXC) in its second quarter 2016 earnings press release, dated July 25, 2016, “From an operational standpoint, the second quarter came in ahead of our expectations primarily due to higher shipments. Our operational team delivered those tons despite four longwall moves, difficult mining conditions at the Enlow Fork Mine, and difficult longwall recovery conditions during one of the Bailey longwall moves. The Harvey Mine, which was idled in January 2016, was brought back online during the second quarter to meet customer demands, while the Bailey and Enlow Fork mines were undergoing longwall moves. Based on our current outlook for shipment volumes, we expect to run all five longwalls for the rest of 2016. Productivity for the second quarter, as measured by tons per employee-hour, improved by 17% compared to the year-ago period, despite the higher number of longwall moves negatively impacting production. For the third quarter, CNXC expects coal shipments and average realized price per ton to increase slightly, and cost of coal sold per ton to decrease compared to the second quarter.”

CONSOL Energy’s Miller Creek Mining Complex and Fola Mining Complex subsidiaries have entered into agreements for the sale of those Central Appalachia mining operations. The Miller Creek Complex, located in West Virginia, has an active surface mining operation, which produced 2.1 million tons in 2015, and two underground mines, which are idle. The Fola Mining Complex is a closed surface mining operation in West Virginia. The Miller Creek and Fola Mining Complexes each have 114 million tons of owned and leased coal reserves, and they have a total of $103 million of mine closing and reclamation liabilities on CONSOL’s balance sheets.

“Since 2012, we’ve divested approximately $5 billion in coal assets which has helped us to accelerate our transformation into an E&P company,” Deluliis said on the company’s Q2 call today.

No interest in diluting shareholders by issuing new equity

“We’ve also seen an influx of operators issuing equity within the E&P space particularly this year, and we believe that we’re one of the few E&P companies who haven’t done that. And why is that? We take a long-term view towards creating sustainable shareholder value and this goes hand in hand with delevering the company through reducing costs, by improving well productivity and selling assets and values which are accretive NAV per share.

“So issuing equity remains low on our list as we evaluate options to increase that NAV per share. We can never say that we would never issue equity since we are a public company and we got an obligation to evaluate all options. However, at this point in time, the little appetite to pursue that route instead we look at organic levers like the reduction of costs and we’re also benefiting from a comprehensive monetization program.”

On its Q2 call, CONSOL discussed its well results in more detail:

CONSOL Shifting Toward Dry Utica

“Our Gaut 4HI well in Westmoreland County PA is maintaining rates and pressures and we expect to hit line pressure in February of 2017. This well continues to impress as do our four wells located in Monroe County, Ohio. Our GH9, deep dry Utica well in Greene County, Pennsylvania hasn’t been quite as strong as the Gaut, although its performances been in line with other operators who have dry Utica wells in this area.

“So despite being in the early stages, CONSOL’s confidence continues to grow for perspective dry Utica developments as we accumulate more production data on the six operating well and 22 non-operated wells where we participate.”

New formula to rate Utica well strength

“These data points are translated into our new ranking analysis which incorporates the metric of A square root of K as a normalized measure of well strength,” the company said.

‘A’ square root of ‘K’: why CNX is more bullish than the rest of the industry

CONSOL Shifting Toward Dry Utica

“Slide 12 highlights how we rank and how this data helps us establish more bullish view than most in the industry. Our continuing dry Utica analysis and continued Marcellus out-performance in part and in addition to the backdrop of commodity prices normalizing, have led to the decision to add back drilling activity in the second half of the year.

“We intend to run a two rig program throughout the second half of the year and drill eight wells in Monroe County Ohio and two Marcellus shale wells in Southwest Pennsylvania. These wells will be completed in the first half of 2017 and turned in line predominantly in the second half of the year. We rank development opportunities by area and make decisions on few future capital allocations by evaluating rates of return infrastructure and end markets. We also consider our dry gas to wet gas balance as well as the balance between joint venture and CONSOLs 100% owned and operated wells.

“There is not necessarily a hard split or percentage that we try to maintain, but we do prefer diversification between markets, while maintaining a watchful hand on the production throttle. Our most recent decision is supported by expected rates of return of approximately 60% in Monroe County Ohio. These returns assume a $9.8 million well cost for 9700 foot lateral a $1.75 realized price and 2.8 Bcf per thousand foot of lateral.

“Our previous estimates were based on the $10 million well cost, assuming a 7000 foot lateral. For the Marcellus Shale in our most prolific area Green Hill, we expect to see rates of return approximately 55%, assuming a $7.1 million well cost for 9500 foot lateral, $1.75 realized price and 3 BCF per thousand foot of lateral.

“So when we look at Monroe County or the area that we call Switz, these are 100% owned and operated CONSOL pads that are rig-ready and proven area that directly offsets are Switz 6 pad already producing, 3 of the offset wells on the Switz 6 pad are averaging greater than 15million cubic foot a day after nine months production. This is an area that we’re excited about and there’s available takeaway in market flexibility.

In the call, analysts asked for clarification:

Q: With regard to the A square root to K stuff, I just want to make sure that you said that it gives you confidence about the industry view, I just want to be clear does this formula and application mean that you believe that the ultimate EUR of the Utica is greater than current industry assumptions?

CNX: I think it talks about our confidence in the Utica and it gives us a much more accurate approach to evaluating what we see in the Utica, we’re looking – that’s evaluate – its normalizing for lateral length, completion techniques, well spacing, say it really normalizes all those parameters and gives you a more accurate view as opposed to comparing IPs, which really vary from operator-to-operator and procedures can vary.

So we think the A square root to K just gives a more accurate view of Utica, and we think – when you talk about EURs, we think there is still a potential for upside there, and we look at the Gaut, it continues to impress us with the way it’s holding up from the pressure and rate standpoint, we’re seeing the same thing in Monroe County. So we think there is potential for additional upside on the EURs.

Q:  So if I’ve sort of understood what you were saying – you’re saying that it gives you more confidence in the prospectivity of the Utica as a whole, as opposed to maybe just your uplift or whatever?

CNX: We’ve got a lot of confidence in the Marcellus. And I think – as I said in my statements we take a more bullish view on the Utica than most other operators because of the data set that we have in our acreage position. So we’re still – we still think that the Marcellus provides tremendous opportunity. It’s still a large part of our production base, it’s over 50%. We see the Utica growing but they both will be a part of our growth moving forward.

Q: Service providers have been fairly resolute in saying that their prices have to rise to support any resumption of E&P growth. Do you see any evidence of that yet and the impending two rigs that you are going to add and what is your forward view on that going into 2017?

CNX: When we look at our cost savings, in general, about two-thirds have been organic and about a third of it has been as a result of the current market conditions. And certainly when activity increases we may see some increase in service cost but our job is to do everything we can to keep those costs down. That’ll be an ongoing process. But we haven’t yet bottomed on our organic cost reduction, so there may be some offset there if we do see some increases in service cost, but we’ll continue to fight that battle and work to get our costs down further.

91 DUCs going into ‘17

CONSOL said it will exit 2016 with a 91 gross Marcellus and Utica shale wells that are drilled, but uncompleted.

The CONSOL Energy 2Q slide deck is available to download here.

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