Consol in $3.5B gas deal
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A multibillion-dollar deal announced Monday could place coal giant Consol Energy solidly within the ranks of major natural gas producers.
The Cecil company has agreed to pay $3.5 billion to Dominion Resources Inc. of Richmond, Va., for its Appalachian natural gas exploration and production business.
The deal, slated to close by April 30, will add 1.64 million acres to Consol's footprint, with about 500,000 acres in the so-called "fairway of the Marcellus shale," the portion of the natural gas reserve running northeast from central West Virginia through southwestern Pennsylvania.
Consol's new total of 750,000 acres in the Marcellus shale should put it in third place behind Range Resources, of Fort Worth, Texas, and Chesapeake Energy, of Oklahoma City, each of which has leased well over a million acres in the Marcellus.
The Consol purchase will include more than 9,000 producing wells in Pennsylvania and West Virginia, with net annual production of 41 billion cubic feet.
J. Brett Harvey, Consol president and CEO, said the acquisition will transform the business into "a leading diversified energy company."
The seed for that transformation was planted in 2006, when Consol spun off subsidiary CNX Gas as a standalone company. Consol holds about 83 percent of CNX Gas shares.
CNX Gas, created to exploit the methane released as a byproduct of coal mining, later joined the fray of companies rushing to acquire Marcellus acreage after horizontal drilling was introduced to the region. Now CNX Gas has about 250,000 Marcellus acres.
Consol plans to pay for the deal by issuing between $2 billion and $2.5 billion of new stock, and between $1.5 billion and $2 billion of debt.
While issuing new stock could dilute the value of existing stockholders' shares and taking on new debt carries the risk of hurting credit ratings, analysts generally saw the deal as one that would benefit the company in the long term.
"Shale gas is likely to be a game changer for the U.S. energy mix and this deal positions [Consol] for the new energy reality," according to a J.P. Morgan research note.
Investor response was mixed. Consol shares fell 10 percent to $48.85 from Friday's close of $54.33, while CNX shares rose more than 16 percent to $30.46, from $26.23. Dominion's stock price barely moved and closed at $39.71, up from $39.69.
Alay Patel, Wood Mackenzie analyst for upstream research, noted the deal is only the latest in a string of Marcellus shale megadeals, beginning with the 2008 agreement between Chesapeake Energy and StatoilHydro, in which the Norwegian energy giant paid $3.375 billion for a 32.5 percent stake in Chesapeake's Marcellus assets.
In August, Dallas-based Chief Oil and Gas along with Fort Worth private equity firm Tug Hill Inc. sold 30 percent of jointly owned Marcellus interests to Canadian oil and gas producer Enerplus Resources Fund for $406 million.
Just last month, Anadarko Petroleum Corp., of The Woodlands, Texas, sold a 32.5 percent stake in its Marcellus assets to Japanese conglomerate Mitsui & Co. for $1.4 billion.
The key difference between those deals and this one, Mr. Patel said, is that in those cases the buyer was a non-U.S. company in search of more than land or gas. Those deals gave buyers "access to shale gas extraction expertise. In the end, they can apply the same technology to shale gas plays the world over."
For Consol, it's not about gaining expertise. It's about the land and the gas.
For expertise, Consol need look no further than CNX Gas. The company is expected to turn over the operations of the new business to CNX. Mr. Harvey said with the purchase of Dominion's operations, CNX is raising its 2015 target for natural gas production from 200 billion cubic feet -- twice the current production -- to 350 million cubic feet.
Monday's announcement also hinted at the possibility Consol will seek to acquire the 17 percent of CNX that it does not own, bringing the company entirely back into its fold.
Consol attempted to acquire CNX two years ago, with an all-stock deal offering .4425 share of Consol -- then worth about $35 -- for each share of CNX. That offer was rejected.
The two companies consolidated their management in January 2009.
While many natural gas companies have swarmed into the Marcellus, Consol is the only major coal company to make the natural gas play a key part of its growth strategy.
Such an approach may prove especially advantageous as the Obama administration continues to press for "clean energy." In a meeting with key congressional leaders last week, President Barack Obama said he would still like to see a price set on carbon emissions.
An energy bill that included cap and trade provisions was passed by the House last year, but the Senate version remains in committee, leading to speculation that carbon pricing may emerge -- not as a provision of new legislation but as an expansion of current Environmental Protection Agency regulations.
However it happens, carbon pricing could reduce profit margins for coal producers and increase them for natural gas producers because of the differences in emissions by the two energy sources.
First Published March 16, 2010 12:00 am