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CONSOL Energy Seeks Separation of Mining and E&P Division

Zacks

CONSOL Energy CNX has filed Form 10 with the U.S. Securities and Exchange Commission (SEC) to separate its Coal Mining and Exploration & Production (E&P) Division into two distinct publicly-traded companies.

The filing with the SEC is a concrete step toward separating the business and is expected to become effective by the end of this year. The coal mining business will include the Pennsylvania Mining Complex as well as the company's ownership interest in CNX Coal Resources LP CNXC – that owns a 25% undivided interest in the Pennsylvania Mining Complex. In addition, it will include the coal export terminal at the Port of Baltimore, undeveloped coal reserves located in the Northern Appalachian, Central Appalachian and Illinois basins, and certain related coal assets and liabilities.

Shift in Focus Works for CONSOL

Softness in demand for coal in the past few years has prompted CONSOL Energy to concentrate more on natural gas operations. This strategy worked well for CONSOL during the difficult times, when big coal companies failed to cope with the significant drop in demand and filed for bankruptcy.

It was evident that natural gas operations, along with coal, primarily helped CONSOL Energy to survive during the difficult times.

What to Expect from the Strategy

As a result of this spinoff, the existing shareholders of CONSOL Energy will be able to own two distinct public companies, one focusing on coal and other on natural gas operation.

CONSOL’s E&P business has excellent long-term prospects. This is due to increasing focus of utilities toward using natural gas to produce electricity. Thanks to its focus on natural gas, CONSOL Energy has raised its 2017 E&P Division production to the range of 420–440 billion cubic feet equivalent (Bcfe), up from the previous expectation of 415 Bcfe.

In addition, coal is also staging a comeback, thanks to the coal industry-friendly moves from the new administration. Coal production in the U.S. is expected to improve from the 2016 levels. The U.S. Energy information Administration (EIA) has predicted coal production in 2017 to increase 7.9% from 2016 level to 785.6 million short tons (MMst). Production is expected to rise 0.2% from 2017 level to 786.8 MMst in 2018.

During its first quarter release, CONSOL Energy announced annual sales to be nearly 25.6–27.6 million tons for 2017 compared with the previous guidance of 26.0 million tons. Given the improving scenario, we expect the coal-focused standalone company to build up from the current expectation.

The coal business will operate under the name, CONSOL Energy Inc., after the spinoff. Meanwhile, the E&P company will operate under a new name that will be announced at a later date.

Price Movement

The decision to separate the two businesses was received well by the investors. Shares of CONSOL Energy have gained nearly 5.9% soon after the news was released.



Zacks Rank & Stocks to Consider

CONSOL Energy currently carries a Zacks Rank #3 (Hold). Two better-ranked stocks in the Oil & Energy sector are Delek US Holdings Inc. DK, sporting a Zacks Rank #1 (Strong Buy) and Suncor Energy Inc. SU, holding a Zacks Rank #2 (Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.

Delek US Holdings delivered average positive earnings surprise of 60.68% in the last four quarters. Its 2017 earnings estimates moved up 20 cents from a loss of 56 cents, over the last 90 days.

Suncor Energy Inc. delivered average positive earnings surprise of 3.70% in the last four quarters. Its 2017 earnings estimates moved up to $1.35 from $1.31, over the last 90 days.

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