Energy

How Capex Cut Affects Coal and Gas Producer CONSOL

Gas pipeline
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CONSOL Energy Inc. (NYSE: CNX) announced Friday morning that it is cutting its 2015 capital spending (capex) budget from $1 billion to $920 million. The announcement comes less than three months after the company first announced its planned capital spending budget for the year.

The company said that the revised budget “reflects a continued focus to high-grade the development plan to further reduce capital in a lower commodity environment, while maintaining the E&P production growth target of 30% in 2015.” CONSOL also expects to continue lowering its costs and said its goal this year is to keep its year-end leverage ratio flat compared with 2014.

The company will commit $100 million in capex to its Marcellus shale gathering system and approximately 52% of the remainder to dry-gas development. CONSOL is making a sizable bet that natural gas prices ratchet higher this year and next and that demand will grow as well. The company said that production growth in 2015 will determine growth in 2016, currently targeted at 20% above 2015 levels.

The important thing to remember about cutting capital spending is that technological improvements in drilling and completing wells make most of the production increases possible. Costs are kept low because services companies are squeezed, having to compete hard for drilling and completion services. CONSOL and other natural gas and crude oil producers can produce more with less expense, and they are unlikely to stop raising production until every storage tank in the United States is filled to the brim.

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Analysts at Bank of America Merrill Lynch downgraded the stock from Neutral to Underperform on Thursday and knocked $7 off the price target, leaving it at $26 a share. Last month Jefferies initiated coverage on CONSOL with a Buy rating and price target of $41.

CONSOL stock traded down about 4.5% at $26.38 in the early afternoon Friday. The stock’s 52-week range is $26.20 to $48.30, and the low was posted Friday.

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