Amid weakened export pricing, reduced domestic demand and a recent slew of bankruptcies, Consol Energy Inc. executives touted the coal miner's position as a consistent force in the international market as well as its flexible financial situation to handle challenging market conditions.
The price on thermal and metallurgical export coal has dropped significantly this year, but Consol President and CEO Jimmy Brock said on a Nov. 5 earnings call that there are signs of improvement. The API2 prompt-month prices, which measure the price on thermal coal sold into Europe, was up 22% at the end of the third quarter from a low point at the end of the second, and the forward curve is in contango, he said.
"Although the majority of our export coal doesn't price off the API2, we still have some volumes going into Europe, and it is a directional indicator of improving end markets for the seaborne thermal coal demand," the CEO said.
Brock said the company "is not a swing producer in the export market," noting that the company has navigated tough markets before. Consol's export coal terminal in Baltimore, contract with XCoal Energy & Resources LLC, quality coal and low-cost operations provide a solid contracted position, he said.
"Export markets are challenging right now, and there is a widespread fear amongst investors that all U.S. coal producers will have to retreat significantly from the export markets, resulting in significant EBITDA declines," he said.
Coal producers are rationalizing their supply, with some of the higher-cost or unhedged producers reducing output as experts call for a decline in exports, Brock said. Domestically, coal has suffered from competition with low natural gas prices and utility stockpiles have continued to increase.
But Brock said he is optimistic that gas prices could increase as producers struggle and potentially reduce their 2020 capital spending.
"We're optimistic that prices could recover but are preparing ourselves for this depressed pricing environment to continue through 2020," the CEO said. "In summary, there's a lot of pain in the marketplace, but we are starting to see some underlying improvements through supply rationalization and recovering export prices. As the industry goes through this curing process, we expect to hold our ground. We anticipate that our strong contracted position in 2020 and solid balance sheet will allow us to navigate through this period of low pricing and preserve value for our shareholders."
The company set a third-quarter production record of 6.5 million tons, up from 6.4 million tons in the year-ago period.
CFO David Khani said companies are increasingly being forced to rely on internal funding sources as access to outside capital continues to decline, a similar trend that occurred in 2016 right before coal prices rebounded in 2017. In the meantime, it is tougher for coal companies to fund long-duration and capital-intensive projects, he said. As producers deplete their existing mines, new investments dry up and output lessens as a result, the market should be more supportive of coal prices.
The company is proceeding with the development of a new low-vol metallurgical coal mine, Brock said. The Itmann mine, which is expected to produce more than 600,000 tons per year of high-quality, low-vol coking coal, is still on schedule to start production in the first quarter of 2020.
The executives touted Consol's ability to pull back on capital spending, including on the Itmann project, if necessary to spend money elsewhere, noting that most of their projects do not require a significant amount of capital at any time.
Responding to a question about Pennsylvania Gov. Tom Wolf's decision last month to order the state's Department of Environmental Protection to draft a rulemaking to allow the state to join the Regional Greenhouse Gas Initiative, a market-based program among several states to reduce greenhouse gas emissions, Brock said it was too early to tell how such a proposal might affect the company.
"Generally speaking, RGGI is not good for any fossil fuel, whether it's coal or natural gas," he said. "It makes us less competitive versus the renewables, which are already heavily subsidized. So, we'll do work on this end. … If it goes through as proposed it certainly would not benefit any fossil fuel."
Consol's third-quarter adjusted net income totaled $7 million, or 16 cents per share, compared with $9.1 million, or 20 cents per share, in the year-ago quarter.