CNX Resources Corporation
Q3 2009 Earnings Call Transcript

Published: 22 Oct 2009

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the CONSOL Energy and CNX Gas third quarter 2009 results conference call. As a reminder, today’s call is being recorded. I would now like to turn the conference call over to the Vice President of Investor Relations, Dan Zajdel. Please go ahead sir.

[Dan Zajdel:]

Thank you, Tony and good morning everyone, and welcome to our joint earnings call with CONSOL Energy and CNX Gas. With me this morning is Brett Harvey, Chief Executive Officer of CONSOL Energy and Chairman and CEO of CNX Gas. Also with us today are Bill Lyons, Executive Vice President and Chief Financial Officer for both companies. This morning, we will be discussing third-quarter results for both companies. In addition, we will be discussing our views on the outlook for the remainder of 2009 and for 2010. Any forward-looking statements we may express or our expectations for results as you know are subject to business risks, and we have enumerated those risks in both earnings releases issued this morning and in our SEC 10-K filings. In addition, the US Securities and Exchange Commission permits oil and gas companies in their filings with the SEC to disclose any proved reserves that the company has demonstrated by actual production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions. We may use certain terms in this conference call such as unproven reserves or resources which SEC guidelines strictly prohibit us from filing with our filings with the SEC. We also caution you that the SEC views such unproved resource reserve estimates as inherently unreliable, and that these estimates may be misleading to investors unless the investor is an expert in the gas industry. With that, let me begin the remarks and then take questions. We will start today with Bill Lyons. Bill?

[Bill Lyons:]

Thank you, Dan, and thank you everyone for joining us this morning for the joint CONSOL Energy and CNX Gas earnings conference call. CONSOL Energy is reporting net income of $87 million or $0.48 per diluted share for the third quarter of 2009, just about equal to the net income of $90 million or $0.49 per diluted share in the third quarter of 2008. Net cash provided from operating activities is $162 million compared with $213 million in the third quarter of last year. The third quarter is usually the most challenging financial quarter for us because of normal vacation shutdowns. In addition, these vacation periods provide us with the opportunity to do wide ranging maintenance while the mines are not in operation. This results in higher operating costs. We are pleased with the third quarter results, particularly in light of the current economic environment. This past quarter again illustrated the financial power of being a low cost diversified energy company. Before I go into the details of our third quarter results, I want to call your attention to some changes we’re making in the format of our press release that we hope you will find useful. We’ve taken what we used to call our coal business and split it into our metallurgical coal business and our thermal or steam coal business. The activities of our metallurgical coal business and our steam coal business are key performance indicators that disclose important aspects of our company. In our view, this additional information can be used to give evidence as to how these businesses are being managed in the differing environments in which they operate. We hope that this will provide more transparency and understanding of the company, and as a result, provide significant insight into the sources of CONSOL’s value. In our met coal business, we sold 700,000 tons in the third quarter at an average price of $97 per ton. With costs of just over $60 per ton, we had an all-in margin of $37. We believe our met coal costs may be the lowest in the United States. Low cost coupled with premium low-volatile coal makes us believe that our met coal business is without equal. On the thermal or steam coal side, we saw sold 13 million tons in the quarter at an average price of $58 per ton. This was up 24% from last year’s average realized price per ton. We believe this to be the highest price per ton that we have ever realized for our thermal coal in a single quarter. Cost per ton of thermal coal was $47.83, up 5% from last year. Almost all of the increase can be attributed to our decision to reduce production to help the market stay at an equilibrium. Thermal coal financial margins for the third quarter were $10.24 per ton or seven times the financial margin of a year ago. While many of our thermal coal contracts were priced last year when the thermal coal market was tight, we do believe that a substantial portion of this pricing reflects the continued scrubber build-out. Increasingly, our thermal coal is being priced for its high heat content, not its sulfur content. Margin expansion is a key driver in our step change in profitability in both our metallurgical and thermal coal businesses. We are maintaining our 2009 production guidance of 58 million tons. Of this, 1.9 million tons will be Buchanan coal destined for met coal customers. This means that in the fourth quarter, we expect to produce 700,000 tons of met coal, and 13.4 million tons of thermal coal. Our current inventories are at 500,000 tons of met coal and 2.8 million tons of thermal coal. By year end, we expect no change in our met coal inventories and we expect to reduce our thermal coal inventories by 700,000 tons. Our mines continue to do well. We are out in front with our development work so that when the demand for thermal coal rebounds, we will be ready and able to meet the increased need. As the low cost producer for both met coal and thermal coal, we are well positioned for additional profitable growth. Our gas segment, CNX Gas, of which we own around 83.33% interest, had another outstanding quarter. Production increased 26% quarter-over-quarter to a record 24.8 Bcf. This record production was driven by better than anticipated results in our Virginia coal bed methane and our Marcellus Shale operations. In the third quarter of 2009, overall costs of CNX Gas operations were $3.44 per Mcf or $0.41 better than they were in the third quarter of 2008. However, the record production volumes and lower costs were not enough to overcome the depressed spot price for natural gas. Even though we had 13.2 Bcf of our gas production hedged at $8.69 per Mcf in the quarter, our average realized price per Mcf was $6.25, a reduction of 36% from last year’s third quarter. Net income at CNX Gas was $35.5 million or 23% per diluted share. This is about one half of the net income earned in the third quarter of 2008. The decrease in net income is solely the result of lower spot prices. CNX Gas has an envious position in what some are now calling the world’s second largest gas field, the Marcellus Shale formation. We are very excited about our Marcellus Shale opportunity. Our current footprint is 230,000 acres of which two thirds are considered by most to be category tier 1 acres. We are actively seeking additional acreage. Our goal is to increase our position to 250,000 total acres by the end of the year. Our acquisition efforts remain focused on Southwest Pennsylvania and Northern West Virginia where we have many inherent advantages. If you have seen the latest slide on the CNX Gas website, you’d know that we’ve been driving down drilling costs while increasing our per-well estimates of reserves. Right now, we believe that we can earn a 26% after-tax return on our horizontal Marcellus Shale wells with $5 gas. Keep in mind that all this drilling has occurred on acreage that CNX Gas owns in fee. This means that we have 100% net revenue interest. No other producer that I am aware of can say this. You might have seen that we reiterated our 2010 gas production guidance of 100 Bcf. We feel that 100 Bcf is a reasonable starting point. It assumes one horizontal Marcellus Shale rig for the next year and the drilling of 175 Virginia CBM wells, plus some ancillary drilling. We are currently formulating our 2010 plans but this much is clear. When gas prices rebound, we will have the ability to quickly add rigs. There are some other items in the quarter that may be helpful to mention. We incurred additional idling costs primarily at Mine 84, Shoemaker and Jones Fork that impacted net income by about $13 million. Additional reclamation requirements at our Central Appalachia surface operations impacted net income by $4.2 million, and dry hole costs and lease drops impacted net income by $3.5 million. Also of note is that the decrease in coal demand caused a reduction of $6.3 million in net income from our transportation activities this quarter compared to the 2008 third quarter. Now, let me return to CONSOL Energy’s overall financial position. Our balance sheet remains strong and we continue to have excellent liquidity. This combination has enabled us to continue to prudently invest in our businesses without diminishing our earnings power. At September 30, 2009 CONSOL Energy, and that’s including CNX Gas, had over $500 million in total liquidity available for immediate use at interest rates that are well below market. During the third quarter of 2009, we have expended $193 million in CapEx, and for the nine months our CapEx is $689 million. This is split about 60% in coal and 40% in gas. This is consistent with our comments that we made during last quarter’s conference call when we stated that we will continue to identify and allocate resources to strategic areas that are critical to our long-term success, while protecting our financial position. Determining the proper level of capital spending is always the challenge, and the challenge is magnified in this uncertain political and economic environment. Our goal is to provide and allocate capital in a manner that maximizes long-term shareholder value. In the energy business, this requires a high degree of understanding of pricing, demand, cost, competition and project investment requirements. It also requires flexibility to change direction when our CapEx models indicate a change is needed. We continue to expect our CapEx spending to be around $1 billion for 2009, which is about the same as what it was in 2008. While we are still formulating our 2010 spending plans, we believe that we’ll be in a position to ramp up drilling in the Marcellus Shale when gas prices rebound. On the thermal coal side, we will not be starting any new production projects until we begin to receive additional customer commitments. The increasingly stringent regulatory environment for coal also concerns us. We remain steadfast in our confidence in our business model. Our powerful balance sheet and our status as a safe, low cost producer enables us to effectively compete and produce excellent earnings and cash flows even during times of economic turmoil. Among our met coal reserves, our thermal coal reserves and our gas reserves in Appalachia, CONSOL Energy controls the greatest concentration of BTUs in the Eastern United States. We believe our diversification into three premium products gives us a diversified portfolio that will prosper in the decade to come by providing safely and economically a fundamental human need which is energy. Brett, your comments on the quarter?

[Brett Harvey:]

Thank you, Bill. Bill has done a good job of covering the numbers and part of the strategy. I would like to give you a color or my perspective on where we are at and where we see the marketplaces. Welcome to the Gas shareholders as well as the shareholders of CONSOL Energy which includes coal and gas. It’s good to talk with you and answer questions today. Let’s talk about gas first, because I think it continues to be a very bright spot in the marketplace, and as we know overall, the chosen few so to speak in terms of the way the government looks at it and regulation. We see continued growth there. We raised to 92 Bcf. We did this through the price trough. We believe we think prices are going to go up. Our ability to add more revenue at higher volumes is certainly in place. That’s why we continue to grow. One thing I want to stress very, very adamantly is, we’re dealing with very little debt. We are using our own cash to grow. We’re the second highest growth gas company in the United States, and by far the highest growth within our region. That needs to be noted by those who evaluate gas companies on growth. We have the lowest unit costs in the industry. We lowered them again based on volume and our ability to control and maximize our capital spending in the footprint that we have. Our CPM side is growing and it’s stable. I look at that as a very long-term valuable play, and from our shareholder perspective, I see it as a long-term annuity that’s going to keep giving and giving and giving. Now, let’s talk about the Marcellus Shale. There’s a lot of press about the Marcellus Shale and a lot of excitement about it, and let me tell you that we are very excited about it. It is the real deal. We are doing very well in the Marcellus Shale. As you can see by the charts that we’ve put out today, these are very valuable wells. We have control in the technology. We have control on the costs. We are adding acres to the Marcellus Shale and we expect to be at 250,000 acres by year-end, and don’t forget, most of that is fee. We already have it in fee. We haven’t paid hundreds of millions of dollars for that position, which is a real advantage to our shareholders. The rate in gas next year at 100 Bcf we think is a very doable and that’s a good base to start off of. If we see gas prices rise, we will add another rig. However, right now, we think it’s very valuable to our shareholders to add more opportunities to drill as we see the Marcellus Shale continuing to add value to society as, “The chosen fuel,” natural gas going forward. Our hedge position is very strong for 2010. We have [48 Bs] that are at about $8. That’s a good position. That will give us cash flows. In fact, I think it’s one of the best positions in the gas business. Our focus as always is on being a low cost producer at a very high growth rate, using very little debt, growing on our own cash and developing the highest margins in the industry. Those are our goals and objectives and clearly we want to do it in a safe way and we’ve been able to do that. So, with that, I will move onto the coal side. When we look at CONSOL Energy in total, clearly there’s two pieces. We talked about the gas. Now we’re looking at the coal side. This is a market driven business right now and we cut 7 million tons in 2009. We have strong real margins on that 58 million tons that we cut to. We showed you the steam and the met side and how we break it out. We think the delivery side on the steam side is going to be soft, and we know the stockpiles are high, and it’s about a 60 day supply for the utilities in the Northern App or what I would call our strategic market area. When you look to the Southeast, this is as high as 80 to 85 days. So that is the real effect on the Central App production. On the met side, we see movement there. In Asia, the steel plants are running at about 75% capacity. Domestically, we’re running about 60%. We see some upside there. We see demand coming on the met side, and we believe that our locked-in number price at about $114 or $115 per ton of what we priced for 2010 is solid and that is a good base to come off of. We don’t expect to price anything less than that next year. We have cost pressures at this lower volume and I want to say that we’ve controlled our costs very well. With any volume type business, you have to adjust yourself. I think our operation’s people have done a good job of doing that. We have accelerated our development within this cost structure and when things turn and there’s a bigger demand for steam coal, we can add extra days to our big eight longwalls and we think we have the ability to create quick value for our shareholders in 2010 when it rebounds. Now, we still see 2010 is a bridge year. Our capital is going to be very focused on efficiency projects that were already authorized in 2008, and we will finish those. We will only do mop capital. We will add no new projects in coal. We are concerned about the inventories at the customers’ level, and we think that 2010 is a bridge year towards a tighter market and a volume constrained market based on financial capabilities of our competitors as well as the pressure from the federal government and the state governments for a new environmental push at a much higher threshold in terms of what has to be done to extract coal from the ground, especially in Central App as it relates to mountaintop mining. We see the steam business as very stable, but flat. We think the Buchanan mine met coal is in great shape, and we believe it’s ready to operate at full production all the way through 2010, 2011 and 2012, and is well capitalized. In terms of regulation, the seals have done very well and we believe it is set up to do very well for our shareholders. There is an upside in volume for steam if we see a change or when it changes, but our shareholders need to be aware that we are not going to mine this coal unless we have a place to put it. We’re going to manage our inventory. We’re not going to put ourselves in a distressed position. We think some of our competitors have done that and that’s why we believe 2010 is a bridge, and we will work our way through that as a reliable large supplier in the East. On the met side, we have the highest margins in the industry, I believe, in terms of big volumes. On the steam side, I think we have the highest margins as well. I think we are also well hedged. We’re in a great position. When you look at the coal business, I think it’s a big cash machine. It gives us a lot of flexibility to do things in gas, to make more moves in coal, to make acquisitions when the time is right, but an asset base like CONSOL Energy has, if you think of CONSOL Energy in terms of energy in the ground per acre, between gas and coal, there’s no more concentrated value on a heat basis anywhere else in the world. We have a fee position there, and I’d like our shareholders should continue to be aware that that is an advantage by location, and one of the greatest markets in the world in terms of use of energy. So, with that, I would like to open it up for questions.

[Dan Zajdel:]

Tony, could you please instruct the listeners on how to place questions?

[Operator:]

(Operator Instructions). We’ll take our first question in queue from the line of David Khani with FBR Capital Markets. Your line is open.

[David Khani:]

Can you talk a little bit about your expectations for natural gas price, because obviously it has a big swing factor both on the coal side and obviously on your current natural gas production?

[Bill Lyons:]

Right. We expect 2010 to average $6 to $7.

[David Khani:]

$6 to $7. Okay. The second is, can you talk a little bit about your customer base and sort of the industrial nature I guess of the Northern App region? Are you starting to see signs that the industrial side is picking up and so therefore the demand for power would pick up?

[Brett Harvey:]

Actually, David, we just see some movement which would be considered bright spots but all of our big utility customers on the industrial base side showed very weak sales, and that’s why we think that 2010 is going to be a bridge year in terms of energy growth. We just don’t see it at the utility side. They build inventories, and they’re not burning down the inventories. So, we see it as flat for probably the next four quarters.

[David Khani:]

Okay, and then going back a little bit to the $6 to $7 per Mcf or MMBTU, how much of an impact do you think that will be on the steam coal demand inside your region? Have you guys done to math there?

[Bill Lyons:]

We think it shifts. It’s about 25 million tons, but we think it shifts at about $5.50 per million. If you look at the cost structures of our big competitors in the Marcellus Shale, 5.5 is where it breaks down. They’re not making money unless they’re above 5.5, and we see that as a natural economic break, and they will shift back to coal at that point in time. So, about 5.5 is where we see it right now.

[David Khani:]

How much met do you expect to export for 2010? Then are you seeing any signs also for the steam coal side for 2010?

[Brett Harvey:]

We see the steam coal side as being a pretty bright spot. On the met side we expect to export about 3.5 million tons. On the steam side, we expect that to increase year to year. The price is rising right now. If you look at a Bailey type coal at the mine, it’s up to about $53 into Europe, if you look at all the components going all the way to Europe, and that’s rising. We think that our port capacity that we have at Baltimore is going to give us an advantage there to raise volumes and move that coal into the Atlantic market.

[David Khani:]

Can you just remind everybody how much you’ve exported for this year so we know what to measure it against for next year?

[Brett Harvey:]

I think this year it’s going to be about 3 million tons.

[David Khani:]

3 million tons on the steam side, okay. One last question. If you add back the shifts and then obviously run Shoemaker, what would be your productive capacity you think, assuming the demand was there?

[Brett Harvey:]

If it was a demand driven market, I think we could probably add 6 to 7 million tons.

[Operator:]

Our next question in queue is Shneur Gershuni with UBS.

[Shneur Gershuni:]

I was wondering if I can just start on the gas side for a second. I was trying to reconcile I guess your production guidance and so forth. Just given the strong performance of the three quarters thus far, are you kind of expecting the fourth quarter to tail off relative to the third-quarter production levels or would you expect the trend to continue to be up quarter-over-quarter?

[Brett Harvey:]

Well, storage is full. We’re not sure exactly what’s going to happen to storage, but the trend in terms of productive capacity is probably right there. We don’t know how the storage is going to do if we have to curtail or do anything like that. So, we’re pretty conservative on how we are looking at the fourth quarter. However, if we have an open market, we’re going to see growing trends because we’re capitalized to do that right now.

[Shneur Gershuni:]

Your guidance said that there’s no actual curtailment modeled into your numbers.

[Bill Lyons:]

No, there isn’t.

[Shneur Gershuni:]

Okay. My next question is just with respect to your thought process with respect to your 2011 hedging strategy and so forth. Should we continue to expect you to layer in hedges in 2011? Is that sort of how we should be thinking that you will do one to two years at a time and so forth?

[Brett Harvey:]

Yes. We will continue to do that. I think that has been successful for us, but one of the real strategies is as we grow, we want to come back at higher prices and higher volumes. So, we will lay in similar to what we’ve been doing at $0.50 increments. If we see a big jump, we will probably take more at a higher price.

[Shneur Gershuni:]

Can you also talk about a little bit about the impact of lower completion costs and what it’s doing to your ability to stretch your CapEx further to drill more wells and so forth?

[Brett Harvey:]

Well I think that’s an interesting subject because if you look at our completion costs over, we’ve gotten better and better at that for two reasons. One is we’ve got the technology and the expertise and the experience now. The other one is we can be more efficient because of our footprint. We’re looking to drill six wells per pad now, and that makes us a lot more efficient than some of our competitors who have to jump from pad to pad to hold their lease position based on their requirements. So, those two advantages I think put us in a good place, and I think in some cases, we can be below 3 million per hole on Marcellus Shale, which is right in the leading part of the industry right now.

[Shneur Gershuni:]

You were just talking about drilling off a pad and so forth, does that mean you’re doing less exploratory work and we should see a slowdown in sort of proved reserve growth as you just sort of move off to a pad drilling type of performance or should we continue to see reserves continue to grow at a healthy pace?

[Brett Harvey:]

I think you’ll see our reserves grow very rapidly based on our success in what we are doing. We are not focused on growing reserves. We’re focused on growing money. Wherever the optimization there is, we will cut it off now. Now, the reserve is interesting, but we own it in fee. We know the guess is there and we’ll optimize the capital to get the highest rate of returns in the short-term for our shareholders.

[Shneur Gershuni:]

Okay. If I could just switch to coal for a second. First and foremost, thank you for the improved disclosure with respect to the met coal. You said in your prepared remarks that you don’t expect any change in inventory. One of your competitors yesterday said they were turning away business and so forth. Is this more in expectation that spot prices have weakened that you don’t want to sell these tons into this market? Is it market conditions or so forth? If you could just sort of give us a little bit of color with respect to that.

[Brett Harvey:]

There’s probably two things there. I think one thing is that a lot of this is under contract and we’ll move it when the time is right. There’s no real spot market that we are seeing that is heavy right now. I would be surprised if people are turning business away at this point in time. So, that 500,000 really is a mix of the contracts, our ability to produce, and we actually produced a little bit more than we thought we would in the third quarter. Like I said, Buchanan is doing very well. So, we have built a little inventory which is good news because that drops the cost, and gives us more room when the market does change. So, it’s more in preparation for what we think is a pretty strong market for next year on met.

[Shneur Gershuni:]

One last question if you don’t mind. You’ve done a lot of work on face extensions and so forth. Assuming input costs kind of remain constant and demand returns, what kind of productivity improvement do you expect and how it will impact costs and so forth?

[Brett Harvey:]

Well, what happens is, when you widen the face, you drop your ratio between your development ton and your longwall tons. So, we should see a downward pressure on longwall production costs and that is part of the mix. So, overall, it should rise in productivity. We expect to see, I would say, on tons per hour, we expect to see about 2% to 5% increase in productivity.

[Operator:]

Thank you. Our next question is queue that will come from the line of Jim Rollyson with Raymond James. Your line is open.

[Jim Rollyson:]

Brett, it looks like just on the bookings side, it looks like you guys added about 11.7 million tons this quarter versus last and the kind of imputed prices is in the low 50s. I was kind of wondering if some of that was the collared coal you guys have noted from quarter to quarter, it looks like that number went down, and just maybe trying to back into what kind of prices you are seeing for what you are booking outside of those collars in this market.

[Brett Harvey:]

The collared coal is in there, and I think you’ve done a good job of picking that up. There’s no met coal in that either. So, you’re seeing steam coal prices. Our expectations for 2010, if you look at the Shoemaker, River type coal, you’re going to be $50 to $55, and if you’re looking at the Bailey, Enlow type coal, we expect to be $60 to $65.

[Jim Rollyson:]

Perfect, that’s very helpful. Your preference right now seems to be from the capital side focusing on the gas side of the business with acreage and development. Are you seeing opportunities on the coal side for deals or is it still a little early for some of the guys to see some paying as contracts roll off? I mean, kind of what is your thought process on the coal side?

[Brett Harvey:]

We are watching it very close and we think it’s a little bit early on the coal side, but we are opportunistic when it hits right. We have models that show what we would like to do at certain times at certain prices. So, I think it’s still a little bit early. There’s still some paying in the coal business to come for the people that are in poor financial positions.

[Shneur Gershuni:]

Excellent. The last question from me is, your kind of view on number one, the EPA shenanigans as it relates to permits and how you feel you guys are positioned. Secondly, any thoughts on this recent regulation potential of the coal waste as hazardous material instead of non-hazardous.

[Brett Harvey:]

As always, when you see a change in administration, you see a change one way or the other in how they look at all these mining issues. It never gets better. It always gets tighter and that tightness reflects on two things. One is larger companies have the ability to adjust to that, and smaller companies have a much tougher time adjusting to those kind of issues. We think in Central App, the mountaintop mining issue is I think a very poignant issue there and critical to get permits there. We have low exposure to Central App but we think it will affect Central App in a big way and that could translate back into an advantage for Northern App because we have very big mines that are well capitalized and have 20 to 25 year lives, which is a function of the government pushing it around. We would rather see everybody get permits and be competitive, but if there is a positive for us, it does push value back to Northern App if Central App continues to struggle based on permitting.

[Shneur Gershuni:]

Any thoughts on the coal waste stuff that’s coming out of the EPA?

[Brett Harvey:]

Well, they’re trying to make natural materials into toxic materials. There will be some legal action over that, and I think they will write some new regulation I think in an effort to throttle the industry somewhat. However, over time, I think that just makes coal more valuable and into well capitalize cold. All of this gets passed through in the price of electricity over time. They think they’re hurting the coal business. All they’re doing is driving the price of electricity up. If you look at over the last 20 years, the regulations I think for good reasons have got tighter and tighter, and we’ve got cleaner and cleaner. I think that’s going to continue to go like that, but it will be reflected in the power prices going forward.

[Operator:]

Thank you. Our next question in queue that will come from the line of Michael Dudas with Jefferies. You line is open.

[Michael Dudas:]

Brett, I have two questions. First, the ability for Buchanan to ramp up given your current mine plans and what you’re budgeting for 2010. If demand is there, when can we see full run rate potential of that mine?

[Brett Harvey:]

Well, if we had sales, I think you could run it through 2010 at about 5 million tons. Beyond that, I would say, we would have to add some capital to the prep plant as well as put that vertical belt in which could give us another million tons, and I believe it would take 18 months to get all that installed. So, it’s a bit of the chicken and the egg. When the market strengthens, we will probably do that, because I see Buchanan having the ability. At that quality, the market is going to be very strong for it going forward, I believe.

[Michael Dudas:]

You anticipate a major change in the customer mix of your Buchanan coal 2010, 2011 and 2012 than what you’ve been witnessing in the past?

[Brett Harvey:]

We think that the domestic market will stabilize to soften. We believe there is a very large growing market in Brazil, and the Atlantic market will probably be a little more diverse than we have been. As you saw, we actually moved some coal to China, about 400,000 tons this year, and they are very interested in the quality of coal. Now, that’s a long haul but we are willing to work with all of them if we can get the right price at the mine.

[Michael Dudas:]

Brett, turning to the export terminal market, given where the dollar is and freight rates are, could you see a scenario where we start to see a recovery and some more demand for Northern App or Central App steam coal maybe sooner than people anticipate if the Pacific basin continues to be strong and Europe may need our coal?

[Brett Harvey:]

I agree. The weak dollar is probably the biggest driver, and there’s also the piece of some of our coal is the PCI type coal. So, you can see some real strength in us taking the PCI coal with our Buchanan coal into the marketplace in the Atlantic and creating more volume that way. So, that would be like leverage up Buchanan, with PCI coal, and that would take away from the steam market in the US. That would really drive us to have more capacity for CONSOL at our port facilities in Baltimore. With a weak dollar, those combinations, I think even steam could get in there. So, I think that’s going to be the story of 2010 more than anything. If the dollar stays weak, we will see more coal move out of the United States.

[Michael Dudas:]

My final question is, a year from now, do you anticipate further significant involuntary production cutbacks in the market, and do you think that the market will see some continued discipline as we move through the first part of 2010?

[Brett Harvey:]

I think there’s going to be financial discipline. I think there’s going to be environmental discipline, and I think there would be some just straight discipline where people don’t want to build inventory. Public companies don’t like to build inventory and put their dollars on the ground. They’d rather pull back. So, those three factors I think is going to drive it into another 50 million tons of cut.

[Operator:]

Thank you. Our next question in queue that will come from the line of Kuni Chen with Bank of America. You line is open.

[Kuni Chen:]

I guess just first off on the EPA, some new rules coming down the pipeline as far as sulfur emissions. I just want to get your take on how you see that playing out as emission caps come down and how that could be certainly a positive for Northern App.

[Brett Harvey:]

Well, it’s a positive because at this point in time, the tighter the emissions the more the scrubbers, the more the scrubbers the bigger the market is for sulfur coal, because, at the end of the day, the utilities are buying heat. If they put the mufflers on to get rid of the sulfur, it’s just an advantage for Northern App, because they want the high BTU coal once they build the scrubbers. So, I would say Northern App’s value would increase and the advantage that Central App had on sulfur decreases. So, the tighter the better from a Northern App perspective.

[Kuni Chen:]

Do you see a potential material shift in those emissions caps?

[Brett Harvey:]

No, I don’t see much. I think that the second part of the Clean Air Act is very tight. I think EPA is going to be more focused on CO2 and their wish is to monitor CO2. I think they believe they’ve got sulfur under control. They might adjust some things, but I don’t think it’s going to be much tighter than that last part of the Clean Air Act.

[Kuni Chen:]

Then just on Buchanan and going back to met coal, any operational issues that we should be thinking about going forward, anything that kind of keeps you up at night from an operational perspective as we ramp up to higher rates next year?

[Brett Harvey:]

From an operational perspective and the way Buchanan’s capitalized, I would say no. From a safety side, that always keeps me up at night. That is a very gassy mine and we watch it very closely, we monitor it close, and that is always a concern. However, the way we’ve changed the mine plan, the way we’ve done the seals, the way we’ve done the ventilation, the way we’ve done the width of our longwall panels there and put the best science to it, even our roof controlling the intersections. We’ve taken all the wood out of the mine, put all steel in the mine for the roof support. I would say technology wise and production risk, we have lowered the bar a long way.

[Operator:]

Thank you. Our next question in queue that will come from the line of John Bridges with JPMorgan. Please go ahead.

[John Bridges:]

One interesting question that keeps on coming up is this disconnect between the firm coking coal prices and the sloppy or flat steel prices in China. I just wondered if you had a view on that?

[Brett Harvey:]

I think it all lies in the coke pile. The price of coking coal varies based on how much coke they have on the ground and how much their ability is to move the price from quarter-to-quarter. I don’t have a lot of say about that other than I do believe that they’re going to line up again. We are hearing there’s a shortage of coke in Europe right now, and I think the Chinese have the ability to manipulate because they’re such a large volume consumer. They push the market around a little bit. So the values have been haven’t lined up yet, but I think they will over time I hope that answers your question?

[John Bridges:]

We’ll keep on pushing on that one.

[Brett Harvey:]

Okay.

[John Bridges:]

You had some AMVEST related permits that the EPA is looking at. When would that be heard?

[Brett Harvey:]

That permit right now, we are running the bigger mines that we have in AMVEST, and they are running on year to year permits. We had five other permits in the queue, and those permits were more expansion type, and we’ll continue to push for those permits, but it’s not in our 2010 plan at this point in time.

[John Bridges:]

A final one for Bill maybe. In your cash flow, there’s a big swing on other operating liabilities. Is that anything in particular? It went from $18 positive last year to $40 million negative this year?

[Bill Lyons:]

The one thing on that, John, is that we are making some payments into our pension fund, and as a result that takes up some cash flow, but other than that, it’s just timing. There’s nothing significant there.

[Operator:]

Thank you. The next question in queue that will come from the line of Scott Hanold with RBC Capital Markets. Please go ahead.

[Scott Hanold:]

Can you talk about any kind of thought change or process going on regarding how you best allocate capital between the coal and the gas, because it sounds like you did state a $6 to $7 gas price outlook for 2010, which is actually pretty good relative to the rates of return you guys can get? So, could you just talk in general about your appetite to ramp up in that type of environment?

[Brett Harvey:]

Well there’s two choices we have on the gas side. The first choice is to add more acreage which we think is very valuable in the Marcellus Shale. That’s been our priority and will continue to be our priority on the gas side in the short-term. We also have the ability to ramp up with a second rig, maybe a third rig depending on where we see gas prices. So that’s a very quick rate of return for our capital. If you look at CONSOL in total, we’ve actually used our free cash flow to grow our gas business out of nothing over the last five years. Now, going forward, if gas price has strengthen, we will add the second rig and we will add more volume as quickly as we can as we continue to add more acreage into the Marcellus Shale. Each rig is about $100 million a year and that gives you a look at what it would take to get that done. From the coal side, it’s a very long-term project but they create huge cash flows to build the gas business over time. So, think of the coal business as anywhere from 60 to 70 million tons and feeding the 1 billion ton market consumption for electricity at a very optimal rate with high margins, creating enough cash to keep itself alive, so it keeps the cash machine alive, and grow the gas business. So, in short, I would say the next three or four years, you’re going to see the coal business in what I would call a harvest mode, creating a lot of cash; and the gas business in a strong, very strong growth mode, and that’s where our cash will go.Now, if we see an opportunity to grow in coal at the right price, we will do that as well with an acquisition, but in terms of new projects, gas is where it is at right now.

[Scott Hanold:]

Okay. So, if I could read between the lines, if gas is above $6 next year, you’re looking at anywhere from two to three rigs?

[Brett Harvey:]

We could get there, yes.

[Scott Hanold:]

Okay. With respect to the acreage pickup you guys are planning on doing, how big do you want to make the Marcellus for you all? Also, what opportunities to pick up more acreage do you see? Is there some synergies with the coal company that allow you to get stuff like you have done in the past or is it basically just getting a lot of the [land men] out there and picking up what’s left?

[Brett Harvey:]

Two things are happening. One is, people aren’t living up to their drilling commitments, and so we’ll go back to pick some of that up, but we are going to pick it up within our footprint of where we see the most value. There’s two kinds of value. There’s the value of what’s right next to you, there’s the value of where we think the most gas is, and there’s also the political value of where you have the most influence with coal and gas and so forth. We also see some places where we can even pick some more up with coal relationships. So, I hope I’ve answered your questions. It’s kind of a shotgun approach but we’re looking at all of those things at the same time.

[Scott Hanold:]

Okay. It sounds like all of the above. Then how big do you want to try to get the Marcellus? I mean, is there a number that is comfortable or is it just add it as you can?

[Brett Harvey:]

I think if we were at 400,000 acres, I think that would be a good place for us to be, and I think we can accomplish that.

[Scott Hanold:]

One last question if I could. On your recent Marcellus results, they’re pretty decent, and I sort of respect the fact that a lot of this is a statistical plain. There will be some variability, but the last couple of wells that came in did have smaller peak production rates. Is there anything you can lend as far as color on that or what you expect from some of your step out activity?

[Brett Harvey:]

I think the last one we did was up at 2.8 million per day. So, we are seeing some variability, but they’re all a high rate of return projects.

[Dan Zajdel:]

I would just add too that we are moving to the Nineveh area in Northern Greene County which we have started drilling already. We refer to the one well in the release. The wells in that area are going to have much longer laterals. Everything we’ve drilled to date has been a lateral of somewhere around 2,100 feet. As we go to 3,000 plus foot laterals, we obviously expect higher IP rates and higher EURs.

[Scott Hanold:]

Are you expecting to put more frac stages on those longer lateral wells too?

[Dan Zajdel:]

Right now we are doing frac stages for about every 300 to 350 feet of lateral.

[Brett Harvey:]

So, you would see that, if you’re at 1,000 feet, you’ve get three more frac stages.

[Operator:]

Thank you. The next question in queue that will come from the line of Brian Yu with Citi. Your line is open.

[Brian Yu:]

My question relates to your coal production costs. We’ve seen that kind of fluctuate quite a bit, and I think some of that has to do with just greater development tons given the lower volumes. However, if you settle down at a, call it, 60 million ton per year run rate, where should we look at your unit cost tracking?

[Brett Harvey:]

I would say, if we settled in at about that rate, you would probably see about flat year-to-year, because we’re going to get some productivity jumps. I would say around $43 to $44, you can see it pretty flat. Now, you mentioned 60 million tons, now with the 70 million tons, you’ve got a different cost structure. So, it all depends on where you are in volume. The reason you jump around at these levels is because remember, you’re in a market constrained position. So, you’re not opening the mines up at this full, efficient capacity. You’re trying to match the market. So, the fluctuation really is a reaction to that, to control inventory. The advantage you see in this is, we’ve been able to develop our longwalls at a much faster rate than the longwall blocks.

[Bill Lyons:]

Also, Brian, keep in mind that even though cost control is very important and we’re not downplaying that, we’re really focused on margin expansion. So, if we can expand our margins and have to bring on us some higher cost of production, we will do that. Again, it comes down to coal mining is non-manufacturing. Not all mines are equal and you have different cost structures that across different geologies. As a result, we believe if we focus on margins, then that will increase our profitability.

[Brian Yu:]

Got it. When should we next expect any major longwall moves, because it looks like all of them are running now?

[Bill Lyons:]

Okay. When you have the number of longwalls that we have and you move them twice a year, at any given time, you’re moving a longwall. So, basically, things are just moving according to plan. We probably have 12 or 13 longwall moves a year, and so you can see we’re always generally moving a longwall.

[Brett Harvey:]

I’m looking at it this way. That’s baked into CONSOL numbers because we have so many longwalls. We tend not to emphasize those because they’re already baked into our numbers.

[Brian Yu:]

Okay, and then just on the metallurgical coal with your commitments, could you provide us a breakout of how much might be related to domestic versus international business? Also, is there any kind of pricing differential between those two markets relative to your $115 per ton position?

[Brett Harvey:]

I would say on the domestic market, it’s about 1.8 million, and the rest of it would be the international market. I would say at the mine, it’s going to be a very similar price.

[Brian Yu:]

What about as it pertains to the 1.4 million tons you have committed right now?

[Brett Harvey:]

I’m not sure. It’s right around $114 per ton, and domestic I think it’s about half and half.

[Dan Zajdel:]

Tony, we have time for one more question.

[Operator:]

Thank you, sir. Next question will come from the line of Paul Forward with Stifel Nicolaus. Your line is open.

[Paul Forward:]

CONSOL’s total inventories went from 3.5 million tons to 3.3 during the third quarter. I was just wondering at the production rate that you’re operating at which was obviously at a low level, why didn’t you see more of an inventory decline, and where would you expect that to be by year end if all goes well?

[Brett Harvey:]

That’s a good question. Two things happened. We brought the mines back that were idled in the first part of the quarter. They were more productive which is a good thing, but it also creates a problem in a market constrained world. We’re running Central App a little bit harder. We have gained some inventory in Central App, and we think the price is going to change there probably in the first or second quarter. So, we’re building a little inventory there. We also have a deport; off-site. Okay, let’s go to the end of the third quarter. There’s 2.5 million tons at the mines at the end of the third quarter. There’s 800,000 tons off-site of which 400,000 is ready to be shipped within the next two or three weeks. So, we expect to be back down around 2.6 million tons at the end of the fourth quarter, and I would say about 1 million of that is going to be Central App, and we will sell that coal and move it. We think we even might be able to move it into the near- met coal category.

[Paul Forward:]

All right. Does the presence of somewhat higher inventories, does that change any of your expectation for the Shoemaker startup, and we know that that’s a low-cost mine that you want to have operating in 2010. I guess the question is, do you have to make room for that by possibly taking some production out of high cost mining elsewhere?

[Brett Harvey:]

No, no; actually, Shoemaker, we brought it back. It’s sold. Everything that comes out of there is already sold, and it’s on schedule and it’s the big utilities that burn lots of that type of coal. So, we are not concerned about that at all.

[Paul Forward:]

Okay. Maybe lastly, your guidance on met coal for 2009 production was 1.9 million tons. That implies a 700,000 ton production rate at Buchanan in the fourth quarter. I know it was a really good quarter a year ago, but last year it was 1.4 million tons produced at Buchanan. Just wondering, are you just waiting for the market for this coal to come back to the point that you can produce at that full rate. I guess I’m just curious.

[Brett Harvey:]

Somehow we got a [bust] here, because I got almost 1.2 million tons in the fourth quarter from Buchanan.

[Paul Forward:]

Okay. I guess the thing is that, in your press release, you say 1.9 million tons of met coal production for the full year, and I believe the year-to-date production number was 1.2 which would get to the 0.7 number.

[Brett Harvey:]

Actually for 2009 it’s 3.1. So, we need to look and see if we have got a problem there.

[Paul Forward:]

You are anticipating production at Buchanan at 1.2 in the fourth quarter?

[Brett Harvey:]

1.2. That’s right.

[Paul Forward:]

Okay. That’s great.

[Dan Zajdel:]

Thanks everyone for participating on the call. Tony, could you instruct us on the replay information?

[Operator:]

Thank you, sir. Ladies and gentlemen, this conference will be available for replay after 1 PM Eastern Time today through October 29, 2009 at midnight. You may access the AT&T Teleconference replay system at any time by dialing 1-800-475-6701, and entering the access code of 106655. International participants may dial 320-365-3844. Those phone numbers again, 800-475-6701 and 320-365-3844, using the access code of 106655. That does conclude your conference call for today. We do thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.