On Nov 12, we issued an updated research report on CONSOL Energy Inc. (CNX - Analyst Report). CONSOL’s emphasis on natural gas assets is yielding results with increasing revenue contribution coming from its E&P division. However, dependence on a limited group of customers for bulk sales and inherent risks associated with underground mining are headwinds.

CONSOL Energy reported a loss of 28 cents per share for the third quarter of 2015, much wider than the Zacks Consensus Estimate of a loss of 2 cents. The company had reported earnings of 9 cents per share in the third quarter of 2014. CONSOL Energy’s quarterly revenues decreased 8% year over year to $813.9 million. However, revenues surpassed the Zacks Consensus Estimate of $719 million by 13.2%

During the reported quarter, the company registered 33% year-over-year growth in gas production volumes to 86.1 billion cubic feet equivalent (Bcfe), which outstripped the guidance of 75–79 Bcfe. In addition, the company was able to reduce production cost at both its E&P and Coal divisions. However, cost savings failed to offset the sustained commodity price weakness.

Despite weak prices, CONSOL’s current focus on natural gas production is justified given the increasing emphasis on clean burning fuels worldwide. Even with a reduction in planned capital expenditure, the company is striving to achieve its E&P production growth target of 39% year over year in 2015. The company aims to produce 325–330 billion cubic feet equivalents (Bcfe) in 2015, and further targets 20% annual gas production growth in 2016 taking 2014 production as the base year.

CONSOL Energy’s decision to form an MLP, CONE Midstream Partners LP (CNNX - Snapshot Report), jointly with Noble Energy Inc. (NBL - Analyst Report) will help the company to transfer its increasing production from the Marcellus shale. The company also formed CNX Coal Resources LP (CNXC - Snapshot Report), a thermal coal MLP, to focus on its remaining core coal assets. CONSOL expects to benefit from the monetization of other coal assets through dropdowns.

Despite lowering its coal focus, nearly 61% of the total revenue in the first nine months of 2015 came in from the Coal division, leaving one-time items. CONSOL Energy depends on a limited group of customers who purchase coal in bulk amounts. If the company fails to renew expiring contracts on favorable terms given the rising concerns on emission, its performance would be severely affected.

Moreover, CONSOL Energy is principally an underground miner, with 93% of its coal production in 2014 coming from underground mines. Despite adhering to safety measures, underground mines are exposed to a number of operational hazards.

CONSOL Energy currently has a Zacks Rank #3 (Hold).