Consol Expands U.S. Natural Gas Footprint with $3.5B Deal
Consol Energy Inc., expecting that coal and natural gas will continue supplying U.S. energy needs for years, shored up its operations with the $3.5 billion purchase of Dominion Resources Inc.'s Appalachian Basin natural gas exploration-production business.
The primary resource Consol acquires in the deal announced Monday is more than 491,000 acres in Pennsylvania and West Virginia that are part of the natural gas-rich Marcellus Shale formation. The transaction includes nearly 1.5 million acres, with more than 9,000 producing wells.
The deal gives Cecil-based Consol about 742,000 acres within the Marcellus formation, making it the third-largest player in terms of acreage controlled in the formation, and the overall acreage acquired in the deal allows Consol to supplant EQT Corp. as the Appalachian Basin's largest natural gas producer. Consol is Appalachia's largest coal producer, mining 60 million to 70 million tons annually from the region, according to the company.
"Our strategy was to expand our natural gas footprint, and we're doing that, and we're accelerating our natural gas production," Consol CEO J. Brett Harvey told analysts. With the deal, about 35 percent of Consol's revenue will come from its natural gas business.
Within five years, Consol projects its annual natural gas production will more than double, from about 142 billion cubic feet this year, including 100 billion cubic feet from 83 percent-owned CNX Gas Corp., to 350 billion cubic feet in 2015. Most of that growth will be from Marcellus production, the company said.
Nick DeIuliis, chief operating officer for Consol and CNX, said the acquired land within the Marcellus formation breaks into "nodes": The first is centered on Indiana, Pa; the second is in Southwestern Pennsylvania and the northern panhandle of West Virginia; the third is in northern West Virginia.
About 195 Dominion employees, primarily located in Indiana County and in central West Virginia, will become Consol employees.
"We aren't getting out of the coal business; we're getting more into the natural gas business," Harvey said.
According to Consol, it's wasting little time ramping-up Marcellus Shale production, drilling 22 Marcellus wells this year using two drilling rigs and drilling 165 wells using 10 rigs in 2012.
"It appears they really are going to push Marcellus development," said James Rollyson, an energy analyst who follows Consol for Raymond James Financial Inc. of St. Petersburg, Fla.
Dominion last fall said it wanted to sell its Marcellus Shale holdings to focus more on its regulated businesses of natural gas distribution and electric power. Discussions with Consol began about Thanksgiving and soon became negotiations for Dominion's entire Appalachian Basin exploration-production operations, Harvey said.
"This deal gives Consol the opportunity for growth through natural gas and is a hedge on its coal business, depending on what happens with this administration and coal usage," Rollyson said.
Rollyson is maintaining his "outperform" rating on Consol stock. The stock yesterday closed down $5.48, to $48.85. CNX shares jumped $4.23, to $30.46.
Dominion stock closed up 2 cents a share, at $39.71.
The deal could mean Consol again will try to reacquire the 25 million shares in CNX it doesn't own. Consol spun off CNX in July 2005, but early in 2008, the former parent began reacquiring its growing, profitable child, offering $932 million in Consol stock for the publicly held shares.
When the two sides couldn't come to an agreement on a purchase price, Consol dropped the offer two years ago this month.
"It's an odd complication in that the deal was by Consol and not CNX," Rollyson said. "It suggests that Consol will (purchase) the shares in CNX it doesn't already own."
Consol expects to raise about $4 billion to pay for the deal, including $500 million to move forward production in the Marcellus Shale holdings, Harvey said. The transaction is expected to close by April 30.
Copyright (c) 2010, The Pittsburgh Tribune-Review. Distributed by McClatchy-Tribune Information Services.