CONSOL Energy Lifted to Neutral

We have upgraded our rating on the diversified fuel producer CONSOL Energy Inc. (CNX) to Neutral from Underperform. The upgrade takes into consideration the strong production outlook and consistent reserve replacements of the company.

The headwinds for CONSOL Energy are its concentration of operation in Northern Appalachia, dependence on a limited group of customers who purchase coal in bulk amounts and the likely formulation of stricter safety legislations and rigid penalties for underground mining, particularly after the Upper Big Branch mine incident. Stringent enforcement of safety measures will undoubtedly increase operational costs of underground miners like CONSOL.

However, countering the negatives are strong performance from the company’s coal division, a deep and diversified portfolio and its low-cost coal production capability that puts it at an advantage versus its peers. CONSOL Energy is also trying to expand its sales in the growing international market, where the company can command premium prices for its high-volume metallurgical coal. These tailwinds prompted us to upgrade our rating on the stock.

Fourth Quarter and Fiscal 2010 Recap

CONSOL Energy posted fourth quarter 2010 adjusted earnings of 54 cents per share, falling short of the Zacks Consensus Estimate of 56 cents. For the full-year 2010, the company reported earnings of $2.28, beating the Zacks Consensus Estimate by a penny.

CONSOL Energy saw a 9.6% rise in revenue to $1.357 billion in the quarter, driven by record contribution from the coal division. Revenues however compared unfavorably with the Zacks Consensus Estimate of $1.394 billion.

Total revenue for the whole of 2010 was $5.2 billion, up 13% from $4.6 billion in 2009. However, the company’s yearly revenue was shy of the Zacks Consensus Estimate of $5.3 billion.

Our View

Despite the recent top-line misses, CONSOL’s substantial growth in gas reserves and cost control measures would benefit the company going forward.

CONSOL Energy currently retains a Zacks #3 Rank (short-term Hold rating). We also have a Neutral rating for its peer Peabody Energy Corp. (BTU).

Based in Canonsburg, Pennsylvania, CONSOL Energy is a multi-fuel energy producer as well as energy services provider, primarily catering to the U.S. electric power generation industry.

CONSOL ENERGY (CNX): Free Stock Analysis Report

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