CXG Cnx Gas Corp

PITTSBURGH, April 29 /PRNewswire-FirstCall/ -- CNX Gas Corporation (NYSE: CXG), a leading Appalachian producer, reported net income attributable to CNX Gas shareholders of $45.6 million, or $0.30 per diluted share, for the quarter ended March 31, 2010. This compares to $54.9 million, or $0.36 per diluted share, for the quarter ended March 31, 2009.

Production was 24.0 billion cubic feet (Bcf), or 267 million cubic feet (MMcf) per day, for the quarter ended March 31, 2010. This was 9% higher than the 22.0 Bcf, or 245 MMcf per day, for the year-ago quarter, but slightly lower than the 25.1 Bcf produced in the fourth quarter of 2009. Approximately 0.6 Bcf of production was deferred due to the loss of power for several days related to a severe winter storm in our Northern Appalachia producing region in the quarter ended March 31, 2010.

"CNX Gas has drilled its best ever horizontal Marcellus Shale wells during the first quarter," said J. Brett Harvey, chairman and chief executive officer. "One well, GH 2B CV, has averaged 5.0 MMcf per day for the first 47 days of production. It peaked at 5.7 MMcf per day. This production is remarkable when one considers that the lateral is only 2,300 feet. Based on this early production, we think it is reasonable to assume reserves for this well in excess of 5 Bcf.

"A second well, GH 10 CV, has only 1,500 feet of lateral, but has a current daily production rate of 4.3 MMcf. This well is still inclining after being on line for 17 days, with an average production rate of 4.1 MMcf per day.

"A third well, GH 11B CV, had its last three stages fraced, as had been anticipated in the prior earnings release," continued Mr. Harvey. "This well, with only 1,800 feet of lateral, is now producing 2.2 MMcf per day from only those three stages. As we move to our new drilling area on June 1," continued Mr. Harvey, "we expect to see proportionate increases in production and reserves as we increase our laterals to 3,000 feet and beyond."

CNX Gas increased production by 9% in the first quarter of 2010, as compared with the prior year's first quarter, while paying down about $9 million of short term debt. The daily production rate of 267 MMcf was down 6 MMcf from the 2009 fourth quarter, as unusually heavy snows slowed the pace of drilling.

Quarter-to-Quarter Analysis

The average price realized for the company's gas production was $7.24 per Mcf for the quarter ended March 31, 2010, or $0.13 lower than the $7.37 per Mcf received for the quarter ended March 31, 2009. The average realized price for the just-ended quarter included 13.0 Bcf hedged at $8.76 per Mcf.

All-in unit costs for company production, exclusive of royalties, were $3.75 per Mcf in the just-ended quarter, or an increase of $0.46 from the $3.29 per Mcf for the quarter ended March 31, 2009. Unit production taxes were higher in the just-ended quarter because the prior year's first quarter contained a favorable revision to an estimate of a pending litigation settlement. Unit production DD&A was higher in the just-ended quarter as the increase in 2009 drilling capital exceeded the increase in proved developed producing reserves in Northern Appalachia.

As a result of slightly lower average sales prices and higher unit costs, pre-tax unit margins for company production were $3.49 per Mcf in the just-ended quarter, a decrease of $0.59 from the $4.08 per Mcf in the quarter ended March 31, 2009.

Safety

During the first quarter, CNX Gas employees continued to work without incurring a lost time accident. As of March 31, the cumulative time worked by employees without a lost time incident was 4.2 million hours.

Central Appalachia Operations

Total production in Central Appalachia, which includes Virginia CBM and Chattanooga Shale, was 18.5 Bcf in the quarter ended March 31, 2010. This was 1.3 Bcf higher than the 17.2 Bcf produced in the quarter ended March 31, 2009. The Central Appalachia March run rate was 210 MMcf per day.

CNX Gas drilled 30 vertical frac wells in its Virginia CBM Operations during the quarter. The company expects to drill 175 wells in Virginia in 2010 with a drilling budget of $50 million.

CNX Gas drilled 13 horizontal wells in the Chattanooga Shale during the quarter. For 2010, CNX Gas expects to drill 25 Chattanooga Shale wells for about $28 million, and three-to-five Huron Shale wells for about $8-12 million.

Northern Appalachia Operations

Total production in Northern Appalachia, which includes Mountaineer CBM, Nittany CBM, and Marcellus Shale, was 5.5 Bcf in the quarter ended March 31, 2010. This was 0.7 Bcf more than the 4.8 Bcf produced in the quarter ended March 31, 2009. The Northern Appalachia March run rate was 64 MMcf per day.

Of this Northern Appalachian production, 1.4 Bcf was from the Marcellus Shale in the just-ended quarter, versus a minimal amount in the same quarter last year.

No coalbed methane wells were drilled in Northern Appalachia during the quarter. For 2010, CNX Gas expects to drill 5 horizontal CBM wells in Mountaineer and some ancillary wells for about $17 million.

For the entire horizontal Marcellus Shale program to date, 18 horizontal wells have been drilled. The reserves associated with the first 11 wells total 35.6 Bcf, or about 3.3 Bcf per well. The laterals on these wells averaged less than 2,000 feet.

Upcoming drilling in the Marcellus Shale is expected to be predominantly horizontal and on multiple-well pads, with laterals closer to 3,000-3,500 feet. For 2010, the company expects to drill approximately two dozen horizontal wells, with a drilling budget of about $110 million.

CNX Gas successfully increased its acreage with Marcellus Shale potential by 10,000 in the quarter, to a total of 260,000. Of this, approximately 180,000 acres is considered to be Tier 1.

Financial Update

CNX Gas intends to invest $400 million in 2010, with $221 for drilling, $121 million for midstream, and the remainder for land.

The company ended the quarter with $49.2 million drawn on its $200 million credit facility. The amount drawn is down $8.7 million from December 31, 2009. Cash on hand was $1.1 million.

CNX Gas also has outstanding letters of credit of $14.9 million. Total funds available are $137.0 million.

Annualized return on capital employed for the quarter was 11.7%, on an after tax basis.

Guidance

The 2010 production guidance remains at 100 Bcf.

Total hedged production in the 2010 second quarter is 13.6 Bcf, at an average price of $8.15 per Mcf.

Natural Gas Outlook

At the close of the winter heating season, natural gas in storage was at 1,638 Bcf. This was 160 Bcf above the five-year average, but 16 Bcf below last year's level. Gas prices have weakened to about the $4.00 per Mcf level, as rising rig counts have caused concern that rising production could more than offset rising demand from an economic recovery. CNX Gas will add a second horizontal rig to its Marcellus Shale drilling program on June 1. CNX Gas, with its low costs and rising production volumes, is expected to outperform its peers during this period of price weakness.

Conference Call Information

CNX Gas and CONSOL Energy will co-host a conference call today at 10:00 a.m. Eastern Time to discuss the company's first quarter results. The teleconference can be heard "live" at the investor relations portion of the company web site: www.cnxgas.com.

Definition:  EBIT is defined as earnings (excluding cumulative effect of accounting change) before deducting net interest expense (interest expense less interest income) and income taxes.  EBITDA is defined as earnings (excluding cumulative effect of accounting change) before deducting net interest expense (interest expense less interest income), income taxes, and depreciation, depletion and amortization.  Although EBIT and EBITDA are not measures of performance calculated in accordance with generally accepted accounting principles, management believes that they are useful to an investor in evaluating CNX Gas because they are widely used to evaluate a company's operating performance before debt expense and its cash flow.  EBIT and EBITDA do not purport to represent cash generated by operating activities and should not be considered in isolation or as a substitute for measures of performance in accordance with generally accepted accounting principles.  In addition, because all companies do not calculate EBIT and EBITDA identically, the presentation here may not be comparable to similarly titled measures of other companies.  Reconciliation of EBITDA and EBIT to the income statement is as follows:

Return on average capital employed (ROCE) is a performance measure ratio. ROCE is defined as net income plus after-tax interest expense, divided by average capital employed. Below is a calculation of ROCE for the March 2010 quarter. In order to annualize the result on a compounded basis, a "1" is added to the quarterly ROCE, before it is raised to the fourth power.

Although ROCE is not a measure of performance calculated in accordance with generally accepted accounting principles, management believes that ROCE is a useful measure because it indicates the return on all capital, which includes equity and debt, employed in the business. Management believes that ROCE is an additional measure of efficiency when considered in conjunction with return on equity, which measures the return on only the shareholders' equity component of total capital employed.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

Various statements in this document, including those that express a belief, expectation, or intention, as well as those that are not statements of historical fact, are forward-looking statements (as defined in Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995). The forward-looking statements may include projections and estimates concerning the timing and success of specific projects, our future production, revenues, income and capital spending. When we use the words "believe," "intend," "expect," "may," "should," "anticipate," "could," "would," "will," "estimate," "plan," "predict," "project," or their negatives, or other similar expressions, the statements which include those words are usually forward-looking statements. When we describe strategy that involves risks or uncertainties, we are making forward-looking statements. The forward-looking statements in this document speak only as of the date of this document; we disclaim any obligation to update these statements unless required by securities law, and we caution you not to rely on them unduly. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks, uncertainties and contingencies include, but are not limited to:  our business strategy; our financial position, cash flow and liquidity; the deteriorating economic conditions in the United States and globally; declines in the prices we receive for our gas affecting our operating results and cash flow; uncertainties in estimating our gas reserves and replacing our gas reserves; uncertainties in exploring for and producing gas; our inability to obtain additional financing necessary in order to fund our operations, capital expenditures and to meet our other obligations; disruptions to, capacity constraints in or other limitations on the pipeline systems which deliver our gas; the cost of disposing of water from our coalbed methane and Marcellus Shale gas wells; the cost of removing impurities from the gas we produce; the availability of personnel and equipment, including our inability to retain and attract key personnel; increased costs; the effects of government regulation, permitting and other legal requirements; legal uncertainties regarding the ownership of the coalbed methane estate, and costs associated with perfecting title for gas rights in some of our properties; litigation concerning real property rights, intellectual property rights, royalty calculations and other matters; our relationships and arrangements with CONSOL Energy; and other factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 under "Risk Factors," as updated by any subsequent Form 10-Qs, which are on file at the Securities and Exchange Commission.

SOURCE CNX Gas Corporation