Consol Explores a Breakup

The 150-Year-Old Miner Seeks Bidders for Coal Assets to Focus on Its Gas Business

Wall Street Journal
11 October 2013
By John W. Miller and Kris Maher

Consol Energy Inc., one of the world's oldest coal companies, is exploring ways to significantly reduce its coal holdings and focus more on natural gas.

Company executives have felt its stock was undervalued in part because of its historic dependence on coal, and have been exploring ways for the 150-year-old firm, whose stock has fallen about 33% from its 2011 high, to optimize its value.

Under consideration, according to people familiar with the matter, is splitting up its coal and gas assets, and having them traded separately. Consol has invested heavily in the natural-gas market in recent years, including a $3.5 billion purchase in 2010 of Dominion Resources Inc. 's Appalachian gas business to take advantage of the shale-gas boom.

Another scenario is selling about half of its coal capacity—mainly that tied to the utility markets—and retaining those assets linked to the export market and steel, such as the Buchanan mine in Mavisdale, Va., which last year produced 3.5 million tons of metallurgical coal. It could later sell its remaining coal holdings if it found buyers at the right price.

A third scenario is selling all of the coal assets outright, which are valued at $6.5 billion, but those close to the company said Consol would like to be able to retain some of its more profitable coal operations.

After inquiries from The Wall Street Journal, Consol issued a statement Friday, saying "that the evaluation process regarding our corporate structure continues and all options are being considered. There can be no assurance that any particular option will be pursued."

Consol shares rose 3.8% to $38.17 at 4 p.m. on Friday, giving the company a market value of about $8.7 billion.

In July CEO J. Brett Harvey said the case for investors had become "confusing" because of the multiplicity of assets. The company, he said, needs to "let our shareholders bask in the value of all these assets, whether it is by sale or structure, and we're working on that right now."

Most likely buyers would be domestic coal companies, which have mines and infrastructure close to Consol's 12 Appalachian mining complexes. Coal analysts say likely buyers for Consol's coal mines include Chris Cline's Foresight Energy LLC, Alliance Resource Partners LP, and Murray Energy Corp. A representative for Mr. Cline said he couldn't be reached. Alliance and Murray didn't return requests for comment.

Getting out of the coal business would mark a historic pivot for the company, which started mining during the Civil War, mainly in Appalachia, and would also mirror a national trend toward greater reliance on cheaper, cleaner-burning natural gas.

Consol is still considered primarily a coal company—80% of its revenue came from its coal operations last year. But that is changing. Between 2008 and 2012, its coal production slipped nearly 14%, while its natural gas production rose 104%.

The recent success of the initial public offering of Antero Resources Corp. , which has similar gas assets to Consol, has underscored Consol's undervaluation for some analysts. "The bottom line is Consol remains highly undervalued versus the sum of the parts," said Lucas Pipes , an analyst with Brean Murray.

Consol has already drafted plans to sell of a package of terminals, barges and pipelines. The company has a fleet of 600 barges on the Ohio, Allegheny, Monongahela and other rivers.

There are a lot of hurdles to Consol unloading these assets. "A lot of people are selling coal mines right now," said David Lipschitz , an analyst with Crédit Agricole Securities. "Let's see what they get for a price before we get excited about this."

The company first entered the gas business in the 1980s as a way to make its mines safer, by drawing off underground methane from coal seams before mining, which can reduce the risk of an explosion during mining. It took a big leap in 2010 with the Dominion Resources purchase, which gave it reserves in the Marcellus and Utica shale formations. The following year, it announced two joint ventures to accelerate its drilling capacity, with Noble Energy Inc. and with a Hess Corp. subsidiary. It has 3.5 trillion cubic feet of gas reserves.