Fast track to big money

Peter-FallonToday I’m going to show you how the world’s largest coal producer is transforming itself into one of the world’s largest oil and gas exploration and production (E&P) companies. These E&P companies are focused on locating, augmenting, producing and merchandising oil and gas.

But it’s not just a great story, it’s a great investment opportunity. In the last twelve months, the company’s stock was up 42%!

As its transformation continues, I believe this company will be one of the best investments in the oil and gas E&P sector…

A Small Start in Western Maryland

Let’s start with a little history.

Back in 1864, several independent coal-mining companies were operating in western Maryland. They agreed to “consolidate” their holdings by combining.

Their merger formed the Consolidation Coal Company. However, the Civil War delayed meaningful production until its end in 1865.

That first year, the company shipped about 40,000 tons of coal. By 1927, the Consolidation Coal Company was the largest coal producer in the U.S.

During the 1970’s, the company implemented long-wall mining techniques. Long-wall mining is the safest and most efficient way of mining coal underground.

In 1981, Consolidation Coal Company was acquired by DuPont. It then sold its coal-mining interests to a German energy company, Rheinbraun A.G.

In 1991, CONSOL Energy was formed from a joint venture by Rheinbraun A.G. and DuPont. In 1999, CONSOL underwent a public offering, becoming CONSOL Energy Inc. (NYSE:CNX).

The Transformation Begins

In the early 2000s, CONSOL saw the demand for coal becoming more uncertain. The Environmental Protection Agency’s (EPA) ever-tighter emissions regulations were hurting coal-fired power plants.

Utilities began studying the economic viability of older plants and it became clear that many would close. The new EPA regulations made it too expensive to recover upgrade costs on the oldest plants.

It became clear to CONSOL that natural gas was becoming the de facto fuel for new electrical power generation plants. In 2007, one of CONSOL’s subsidiaries, CNX Gas, began investing in natural gas exploration. It targeted Pennsylvania’s Marcellus Shale.

In 2010, CONSOL purchased Dominion Resources Inc.’s (NYSE:D) E&P assets for $3.74 billion. It included almost 500,000 acres in the Marcellus Shale.

That purchase tripled CONSOL’s Marcellus position to 750,000 acres. In late 2013, the company sold half of its coal assets to Murray Energy Corp.

A Fast-Tracked Natural Gas E&P Company

It’s clear that CONSOL Energy’s focus is now on natural gas production. Here’s a quote from their June 12th Analyst Day presentation: “We are a growing E&P company focused on developing the Appalachian shale with the benefit of fully capitalized, premier coal assets to help fund E&P growth.”

CONSOL kept its best coal assets. Its Bailey mine complex produces one of the highest bituminous thermal coals and its Buchanan mine is one of the lowest-cost metallurgical coal producers in the country.

And CONSOL is putting its coal profits to good use. It’s using them to fund its E&P activities in the Marcellus and Utica shale formations.

CONSOL’s acreage in the Marcellus and Utica is in the sweet spots in both the wet and dry portions of both plays. It has multiple stacked pay opportunities, as the Marcellus and Utica overlap one another.

CONSOL’s transformation is proceeding at a breakneck pace. In 2013, coal produced 68% of the company’s earnings and natural gas produced 32%.

In 2014, coal earnings estimates are 47% and natural gas, 53%. By 2016, CONSOL expects 63% of its earnings to come from natural gas, with 37% coming from coal.

How is CONSOL able to make such a rapid transformation? The following four graphs from CONSOL’s latest presentation really tell the story.

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Let’s look at the upper left graph first. It shows the increase in the average lateral (horizontal) length. In the last four years, lateral length has quadrupled. It’s now over 1.5 miles long.

Looking at the lower left graph, the number of frac stages— as in fracturing the rock that holds the oil and gas— has increased nearly eight times. While one would expect an increase with longer lateral lengths, CONSOL is fracing at much closer intervals.

This releases even more gas from the surrounding shale. That’s evident from the graph at the upper right.

It shows the average maximum initial production (dark blue) in thousands of cubic feet per day and the average 30-day production rate (light blue). In the last four years, initial production rates have nearly quadrupled and 30-day rates have tripled.

Perhaps the most important graph is at the bottom right. It shows the average estimated ultimate recovery (EUR) per well.

That’s an increase of more than three times in the last four years. There’s no doubt that further improvements in horizontal lateral length, fracing and completion technology will result in increased future EURs.

It’s clear that CONSOL Energy is on a natural gas fast track and energy investors should seriously consider CONSOL for their energy portfolio. However, the most important aspect for investors and traders is understanding WHEN to buy and sell, which is why I have my own newsletter service to help you with that.

In my Wealth from Power newsletter, we’re capitalizing on our newfound energy surplus here in the U.S. From time to time, we recommend energy and infrastructure companies like the one I’ve profiled above.

How are we doing? We have nine stocks in our Wealth from Power portfolio. Eight are profitable and three have double-digit gains. The remaining stock is just below our buy price.

We booked gains on one of our closed options positions of 507%. A number of our other closed positions had gains of 201%, 282% and 389%.

We just added the ninth stock to our portfolio this week. Right now, it’s one of the hottest exploration and production companies in the U.S.

I expect to close out many more triple-digit gainers between now and the end of 2014. To find out how you can get in on the action, and our anticipated profits, check your email to see if you received an exclusive invitation.

Profitably Yours,

Peter Fallon

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