CONSOL Energy Inc. (NYSE:CEIX) Q3 2023 Earnings Call Transcript

CONSOL Energy Inc. (NYSE:CEIX) Q3 2023 Earnings Call Transcript October 31, 2023

Operator: Good morning and welcome to CONSOL Energy’s Third Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Nathan Tucker, Director of Finance and Investor Relations. Please go ahead.

Nathan Tucker: Good morning, everyone and thank you for joining us. Welcome to consol energy’s third quarter 2023 earnings conference call. Any forward-looking statements or comments we make about future events are subject to risks, certain of which we have outlined in our press release and in our SEC filings and are considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. We do not undertake any obligations of updating any forward-looking statements for future events or otherwise. We will also be discussing certain non-GAAP financial measures, which are defined and reconciled to comparable GAAP financial measures in our press release and furnished to the SEC on Form 8-K which is also posted on our website.

A coal miner emerging from a vast underground mining operation, his clothes blackened from the day’s work.

Additionally, we filed our quarterly report on Form 10-Q for the quarter ended September 30, 2023 with the SEC this morning. You can find additional information regarding the company on our website www.consolenergy.com, which also includes the supplemental slide deck that was posted this morning. On the call with me today are Jimmy Brock, our Chief Executive Officer; Mitesh Thakkar, our President and Chief Financial Officer; and Bob Braithwaite, our Senior Vice President of Marketing and Sales. In his prepared remarks, Jimmy will provide a recap of our third quarter 2023 achievements and a detailed discussion of our operation. Mitesh will then provide an update on our marketing and financial progress, and our updated 2023 outlook. In his closing comments Jimmy will lay out our key priorities as we prepare to head into 2024.

There will be a Q&A session followed by our prepared remarks in which Bob will also participate. With that let me turn it over to Jimmy.

Jimmy Brock: Thank you, Nate. Good morning, everyone. I want to begin by acknowledging a major milestone that we reached during the third quarter. After retiring our Term Loan B in Q2 2023 we made a final discretionary payment of $24 million to fully retire our second lien notes during the third quarter. In doing so, we have officially retired all of the $800 million of debt that was raised in conjunction with financing our spinout transaction in late 2017. Through the first nine months of the year, we’ve generated $522 million of free cash flow which has already eclipsed full year 2022 total. With that free cash flow plus deploying some cash from our balance sheet we’ve returned significant value to our shareholders year-to-date through October.

We spent $292 million towards buying back shares of our common stock, $75 million toward dividends and $183 million toward debt repayments. From an operations and marketing standpoint we continued our pivot into the export market during the quarter and as such 71% of our total reoccurring revenues and other income has come from export sales year-to-date. As of early October, our CONSOL Marine Terminal has surpassed its previous annual throughput tonnage record of 14.3 million tons and is on pace for 19 million tons this year. Let’s now discuss our operational performance in more detail. On the safety front, our Bailey preparation plant Itmann Preparation Plant and CONSOL Marine Terminal each had zero employee recordable incidents during the third quarter of 2023.

Our coal operations finished the quarter with a total recordable incident rate, well below the national average for underground coal mines. Coal production at the Pennsylvania Mining Complex came in at 6.1 million tons in Q3 of ’23, an improvement compared to 5.3 million tons in Q3 of ’22. Additionally, we finished the third quarter of 2023 with 447,000 tons of inventory, simply due to the timing of export vessel shipments. On the cost front, our PAMC average cash cost of coal sold per ton for Q3 ’23 was $38.36 compared to $39.77 in Q3 of ’22. The improvement was mostly due to the fixed cost leverage that came from our fifth longwall, which was not operating in the prior year quarter. As we’ve said before, one of the major benefits of having the fifth wall is that it allows us to better smooth out weaker volume quarters due to planned shutdowns or multiple longwall looks.

For Q3 ’23, although expected, cash costs were higher than our annual public guidance range, as the third quarter is our seasonally weakest quarter because of our planned summer maintenance shutdown. We also had a planned longwall move in the quarter. However, for the full year, we still expect to be within our average cash cost of coal sold per ton guidance range. Moving on to Itmann. During the third quarter of 2023, the complex showed improved production performance, producing 91,000 tons compared to 70,000 tons in Q2 of ’23. All three of the super sections mined additional height for mains development, which requires cutting some rock. This caused our mining rates to slow during the quarter versus expectations, but this is necessary to support the long-term needs of the coal mine.

Furthermore, although all three continuous minor super sections are installed underground, we are currently operating two of the three as two super sections, as we continue to deal with a challenging labor market in the region. Once we have completed our mains development, we will operate the three super sections and targeted blocks of our coal reserves. This is expected to lead to more efficient mining heights and improve production rates and cost. Finally, in the third quarter, the complex sold 123,000 tons of Itmann and third-party coal. And year-to-date, the complex has sold 357,000 tons of admin and third-party coal in aggregate. Moving to the CONSOL Marine Terminal. We achieved a throughput volume of 4.3 million tons shipped during Q3 ’23 compared to 2.7 million tons in the prior year quarter.

The CONSOL Marine Terminal continues to prove its worth in executing our longer-term strategy of moving more PAMC tons into growing export markets. Terminal revenues for the quarter came in at $22.7 million and CMT operating cash costs were $7.5 million. Accordingly, CMT adjusted EBITDA finished at $14.9 million compared to $8.3 million in the prior year period. With that, let me turn the call over to Mitesh to provide the marketing and financial updates.

Mitesh Thakkar: Thank you, Jimmy, and good morning everyone. Let me start with an update on the marketing front and our contracting progress. During the third quarter, we continued to take advantage of our high-quality product and sold 60% of our total volumes into the export markets where the demand for our coal remains strong in the industrial and crossover metallurgical markets. On the industrial side, while the Indian cement market is by far our largest, we continue to explore new markets for our product. We are pleased to report that during the quarter, a cargo of our PAMC coal was delivered into a country in South Asia, which was the first time for this country in the history of the PAMC. A deal for a second cargo into the same country has already been signed with an expected delivery schedule for the fourth quarter.

Traditionally this country imports Mitsui coals from Indonesia, Russia and Mozambique but it is interested in further testing the high heat content of our PAMC product. Furthermore, on the crossover metallurgical front, we shipped approximately 630,000 tons during 3Q 2023, which similar to the second quarter is one of the highest quarterly levels we have achieved in recent years. With the commissioning of our fifth longwall at the Enlow Fork mine, which has lower sulfur content, we are seeing increased demand for our product. Much like the industrial market, we are focused on penetrating new crossover metallurgical customers and geographies as well. We are pleased to report that during the third quarter, we sold our first direct cargo into Indonesia to a co-producer and are currently in negotiations for 2024 sales.

We are seeing significant demand growth for our crossover product in Southeast Asia specifically Indonesia where coke-making capacity is expected to double by 2025. This again highlights the desirability of our high-quality product on the global stage where it can be used in many different applications. Indonesia, which is the world’s largest exporter of coal still has certain applications that require high quality imported coals, which are in short supply globally. Coal demand in the domestic power generation market was predictively underwhelming in the third quarter as coal stockpiles remained elevated in certain areas following a weak second quarter. However, domestic power generation overall was strong during the summer of 2023. We expect that the continued increase in LNG export demand and reduced rig comps will support improved natural gas price futures, which is evident in the current forward curve.

This will in turn support increased coal demand and coal prices. During 3Q 2023, we sold 6.1 million tons of PAMC coal at an average realized coal revenue per ton sold of $70.34 compared to 5.3 million tons at $72.83 in the year ago period. As Jimmy alluded to, we finished the third quarter with elevated inventory levels compared to what is typical for us. We ended 3Q 2023 with 447,000 tons in inventory due to the timing of export vessel loadings, which essentially reduced our sales tonnage for the third quarter. However, given that this was only timing in nature this should be a tailwind to our fourth quarter sales. Additionally during the third quarter, we negotiated partial buyouts of some contracted volumes in exchange for certain fees paid to us, which contributed $16.4 million to miscellaneous income.

Had our customers not bought out these partial volumes, we would have recognized $2.67 higher coal revenue per ton during the quarter and would have surpassed the average realized coal revenue per ton sold from the prior year quarter. For the third consecutive quarter and the third time in our history, sales into the export industrial market outpaced sales into the domestic power generation market. Overall, sales into the export market on a year-to-date basis, accounted for 71% of our total recurring revenues and other income. Conversely, domestic power generation has accounted for less than 25%. Since our last earnings call, our sales team increased our forward sold position at the Pennsylvania [Ph] mining complex by 5.4 million tons for delivery through 2025.

Most of these tons were sold into the export market, where we continue to increase our sold position. As such, we have 21.5 million tons contracted for 2024 and 10.8 million tons contracted for 2025 at attractive prices. We are currently ahead of the schedule for 2024 and 2025 compared to where we typically expect to be at this point. As we speak, we are in talks with multiple strategic partners for future contracted volumes. Now let me provide an update on our balance sheet management progress, before discussing our financial results. First, during 3Q 2023, we generated $120 million of free cash flow and reduced our unrestricted cash and cash equivalents and short-term investments by $42 million in aggregate. Approximately, 19% of which was deployed towards reducing our gross debt and 85% was deployed towards share buybacks within the quarter.

As Jimmy mentioned, we fully retire our second lien notes during the quarter and have now achieved our target gross debt level of approximately $200 million. Second, when factoring in our unrestricted cash and short-term investments, we remain in a net cash position. And as of September 30, we had net cash of $50 million. Third, we finished the quarter with a strong liquidity position of $465 million. Now let me recap our financial results. This morning we reported a strong third quarter 2023 financial performance, especially when you consider that the third quarter is historically our weakest quarter. We finished 3Q 2023, with net income of $101 million or $3.11 per diluted share. Additionally, we finished the quarter with adjusted EBITDA of $186 million and generated $120 million of free cash flow.

On a year-to-date basis, we have generated net income of $499 million adjusted EBITDA of $808 million, and free cash flow of $522 million all of which are records for our company. Now, let me provide a quick update on our outlook for 2023. On the guidance, front for the Pennsylvania mining complex, we are simply tightening our sales volume range from 25 million to 27 million tons to an updated range of 25.5 million to 26.5 million tons. The midpoint of the range remains intact. We are also reiterating our average cash cost of coal sold per ton guidance range of $34 to $36 per ton, as we expect a strong fourth quarter performance to close out the year. Additionally, due to our success in optimizing our sales portfolio so far this year, and the continued strength in API2 forward prices offsetting weak domestic demand trends and partial contract buyouts, we are reiterating our full year expected average, realized core revenue per ton sold of $76 to $80 per ton For our Itmann mine, we are adjusting our 2023 production guidance range down to 300,000 to 400,000 tons from the previous range of 400,000 to 500,000 tons, due to the extended mains development time line and persistent staffing challenges.

Lastly, on the capital expenditures front for 2023, we are lowering our guidance range to $160 million to $175 million from the previous range of $160 million to $185 million as supply chain bottlenecks persist for certain pieces of equipment causing extended lead times and delayed deliveries. With that let me turn it back to Jimmy.

Jimmy Brock: Thank you, Mitesh. Let me now provide an update on our shareholder return program. We deployed approximately 77% of the free cash flow generated during the third quarter toward repurchasing shares of our outstanding common stock. In total, through October, we deployed $93 million of our Q3 2023 free cash flow toward, repurchasing nearly 1 million shares of CEIX stock at a weighted average price of approximately $95 per share. This brings our year-to-date share repurchases as of the end of October to 4.1 million shares or nearly 12% of our public float as of year-end 2022. As we close out 2023, we have a few key areas of focus to set us up for success in 2024. First, we are excited by our contracting progress to date specifically our success beyond 2024.

We continue to build new long-term relationships particularly in the export industrial and crossover met markets and our contracting progress allows us to be patient and more opportunistic moving forward. Second, we are committed to ramping up the Itmann mine to full run rate production by the end of the year to ensure we hit the ground running in 2024. Our focus is on bringing consistency to the operation and eliminating some of the staffing challenges we faced throughout the year. This will be crucial in achieving a consistent production profile at the mine and bringing further revenue diversification to CONSOL Energy. We remain very excited about the potential of this complex and the revenue diversification that our Itmann low-vol product will bring.

To-date, we have seen strong interest for our Itmann product in domestic and export markets. Achieving consistent operating results is the key area of focus so we can get to the business of cultivating these potential new markets and relationships. Third, we remain focused on returning value to our shareholders through our rigorous capital allocation framework. We’ve always prioritized the highest rate of return in the most advantageous use of our capital and we will evaluate our capital deployment decisions regularly. We continue to believe that share buybacks remain the most attractive and accretive form of shareholder returns and as such we intend to continue that strategy. In aggregate, we are pleased with our execution in 2023 to this point and our ability to optimize our sales book throughout the year.

We are also very excited about our demonstrated ability to generate the majority of our revenue from the growing seaborne coal markets and our ability to grow our market share over time as the demand for our product expands. This is made possible through the high-quality characteristics of our coal, our first quartile cost structure, and our significant logistics advantage through our dual rail service and ownership of our CONSOL Marine Terminal. For these reasons and many others we remain even more excited about the future. Looking back on the success we’ve achieved in our roughly six-year history, we’ve returned well north of $1 billion to our shareholders through share repurchases, dividends and substantial debt pay down. We’ve proven we are no longer a domestic power generation driven company and that the tail of demand for our high-quality assets is much longer via niche and growing export markets.

Finally, let me wrap-up by once again acknowledging our hard working employees across the organization. Through their efforts and dedication, we’ve achieved tremendous success to-date. Our balance sheet is strong. We’re at a target gross debt level. We’re in a net cash position. Our liabilities have been declining. We are returning capital to our shareholders. And we continue to expand our sales reach and open up new markets for our coal. I remain proud of this team. And I thank all of our team members for their commitment to our core values. With that, I will hand the call back over to Nate.

Nathan Tucker: Thanks Jimmy. We will now move to the Q&A session of our call. At this time, I’d like to ask our operator, to please provide the instructions to our callers.

See also 20 Least Diverse Countries in the World and 25 Most Dangerous Gangs in the US.

Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Lucas Pipes with B. Riley Securities. Please go ahead.

Lucas Pipes: Thank you very much, Operator. Good morning everyone.

Bob Braithwaite: Good morning, Lucas. A – Jimmy Brock Good morning, Lucas.

Lucas Pipes: Good to see you maintained the full year outlook this morning. And I wanted to touch on first, pricing for 2024 and 2025. You gave us the volumes in the release. And I’m sorry if I missed it in the prepared remarks, but could you maybe share the pricing as well? What would be the kind of average locked price? And I understand there are sensitivities to power and API2. But as of today, what would the average price be? And if you could maybe then also give a breakdown of what amount is fixed domestic? What is power linked? What is locked fixed price in the export market? What is floating collar in the export market would really appreciate additional details on the commercial book. Thank you so much.

Bob Braithwaite: Sure. Lucas, this is Bob. I’ll take that. This morning we did announce that we had new sales of 5.4 million tons through 2025. I think very importantly, there yes most was in the export market. But we did in particular, concluded a two-year deal with a domestic utility in the third quarter and just say that pricing had a six handle on it. And then, furthermore, this morning, we received confirmation for additional domestic business through 2027, that’d be 1.6 million tons. And the average pricing on those new tons is north of $60. So when you look at 2024 in particular we announced this morning 21.5 million tons which is about a 3.9 million ton improvement quarter-over-quarter. When you look at the breakdown about three million is linked to power.

We have about 9.5 million slated for the export market of which 6.5 million do have, indices linked to them all have ceilings and floors and then the balance or about $9 million is domestic and fixed price. When you look at where we modeled the API2 price for 2024, it was $120. And then we also modeled in power at the floor. I will also tell you that based on where the futures are today, we certainly could see some upside to power, should they remain at those levels. But the pricing we’re seeing today on that 21.5 is upper 60s to close to $70. And then for 2025, 10.8 million tonnes, we announced this morning, the breakdown there is 2.5 to power, 3.7 is domestic and fixed and the 4.6 is export, 100% of the 4.6 is linked indices, all have ceilings and floors.

And again based on $120 API2 price for 2025, we’re looking at pricing in the upper 60s there as well.

Lucas Pipes: Bob, you’re saying it like you’ve committed this to heart. Thank you very much for all the color there. Very, very helpful. To follow-up on the pricing side more for 2023. I’d love to understand the delta from Q3 to Q2, a little better, right? Q2 I think the average realized price was $81.27, Q3, $70.34. I’m backing into $75 to $76, again in Q4. Can you provide a little bit of color, what caused that variance in Q3? And why do you think it’s going to kind of snap back up here in the fourth quarter of this year? Thank you.

Bob Braithwaite: Sure. So Lucas, we did anticipate a lower sales price in Q3. If you look at our original guidance of $78 midpoint, we’re certainly on pace to hit that. A couple of things in Q3 that drove the lower pricing or I should say several things. One, API2 prices were down quarter-on-quarter. So I think API2 prices were down $7, $8, $9 from Q2. Second was just the mix of sales. We actually exported more volume in Q3 than we anticipated. We had some higher priced domestic contracts that did not load in Q3. However, those will be loaded in Q4. We’re starting to see a pickup in domestic demand in October and we expect that to continue through the balance of the fourth quarter. A lot of that’s due to the increase in natural gas prices.

We’re starting to see gas, well north of $3 in the futures are there as well. So we expect additional coal burn from our domestic customers. If we don’t get those tons moved in Q4, we’ll certainly continue to get the value of those into next year. And then third, I think it’s just we had lower volumes and that was anticipated but when you have lower volumes you just have less ability to optimize the portfolio. So in Q4, we’re expecting to end the year strong. We had 400,000 tons of inventory carry into Q4. I can tell you pretty much all that has been loaded out of the terminal. So we’re anticipating a 6.8 to 6.9, call it type of level to get to the midpoint in total sales. So that gives us a better opportunity to optimize. So again, optimization, higher-priced domestic business.

And right now API2 prices are certainly looking to be stronger in Q4 than in Q3.

Mitesh Thakkar: But Lucas in summary, I think the neighborhood that you talked about for Q4 is reasonable, given what our guidance is and the fact that we have three quarters behind us.

Bob Braithwaite: Yes that’s fair.

Lucas Pipes: Thank you so much. I want to end with a higher level question. You mentioned your – you sold coal into South Asian country for the first time. And — can you provide some color as to what allows you to compete that far away from home. Indonesia is on the doorstep, Australia with high BTU coal is on the doorstep. How do you get into that market competitively? Thank you very much for your details.

Jimmy Brock: Yes. That’s a good question, Lucas. I think, it’s more tied to our relationships that we’re trying to build long term. It takes a lot of travel and Bobby and Mitesh have certainly been doing that. They just visited Indonesia and our high-quality coal allows us to get in those markets, particularly with the BTU basis and our ability to ship out of the Baltimore terminal.

Mitesh Thakkar: And the other thing I would mention too Lucas is like, we have been shipping coal in South Asia. India is the greatest example, right? Like India is a country in South Asia, where we have been doing business for a very long time. I think, there are smaller markets around that area that can use and benefit from some of the hard calorific value coal such as ours. They are a little bit more tolerant on some of the other things such as sulfur and those. So it helps us. I think, if you look at one of the traditional suppliers and I touched upon briefly, they used mid-CV coal in the past from Indonesia, Russia and all these places I think. So, we had an opportunity to replace some of that here with everything that we are seeing geopolitically.

And I think this is one of those things that once you develop these markets, I think tend to become a more regular supplier which is what we ended up happening in India. So if you look at the playbook that we had in India, we’re going by a similar playbook here. It’s smaller markets though, it’s not as big as India.