Consol Energy is selling about a third of its coal business in a deal worth at least $3.5bn, saying it sees “limited prospects” for growth in coal-fired power in its home market and will be focusing on increasing its gas production.
The US mining and natural gas group is selling five mines in West Virginia to Murray Energy, the largest privately held US coal producer, for $850m cash plus other items, including the transfer of $2.4bn in liabilities, principally retirement benefit obligations.
Consol is also halving its dividend, to bring it into line with what it describes as its peer group of fast-growing oil and gas production companies. It expects its gas production to rise 30 per cent per year in 2015 and 2016.
Nicholas DeIuliis, Consol’s president, said: “We see limited prospects [for growth] in the domestic thermal coal market for power generation, when compared to natural gas or coal for international markets.”
US coal demand has fallen 16 per cent in the past five years, hit by competition from cheap natural gas unlocked by the shale revolution and by new regulations on pollution from coal-fired power plants.
While Consol’s shares have risen 8 per cent in the past 12 months, other leading coal producers have continued to decline, with Alpha Natural resources falling 26 per cent and Arch Coal down 50 per cent.
The mines being sold by Consol account for about half its coal production by tonnage, about one-third of its coal reserves, and about 30 per cent of the earnings before interest, tax, depreciation and amortisation from the coal operations, which generated about 90 per cent of the group’s pre-tax profit last year.
Consol is retaining seven mines and a coal export terminal in Baltimore.
The sale follows speculation that Consol had been looking at spinning off its coal business, and earlier this month the company said it was looking at “all options” for its businesses.
Brett Harvey, Consol’s chief executive, said on a call with analysts “we’ll look at everything”, but implied that a more radical break-up of the group was more likely to come after it had realised its ambitions for increasing gas production.
“When [Consol’s] gas company gets very big and very valuable as it grows 30 per cent, I think it’s prudent for management to review that and make recommendations to the board,” he said.
He also said there was “a lot of effort that’s going to be required” to realise the potential of the gas business. Consol is planning to spend almost $22bn over the next ten years in developing its gas production in the Marcellus Shale of West Virginia and Pennsylvania.
For Murray, the largest privately-held coal producer in the US, the deal is transformative, more than doubling its coal reserves and number of employees, and almost doubling its production.
Last year Murray laid off 163 workers, blaming what it described as the “Obama administration’s war on coal”.
Robert Moore, Murray’s chief operating officer, said: “With our expertise, we will be able to efficiently operate the acquired Consolidation Coal mines and provide their employees with an opportunity for long term employment.”