Consol Zeroes In On Natural Gas, Buying Marcellus Rights For $190 Million
To purchase 90,000 contiguous acres in the Marcellus and Upper Devonian formations.
Consol Energy Inc. (NYSE: CNX) is moving ahead on plans to increase its gas production, acquiring rights to nearly 90,000 contiguous aces in the Marcellus and Upper Devonian formations for $190 million.
Pittsburgh-based Consol and Dominion Transmission, a unit of Dominion Resources, announced the deal on Dec. 10. The $190 million will be paid in two installments. At close, about half of the money was paid to Dominion, based in Richmond, Va. The $95 million balance will be paid over nine years.
As part of the deal, Consol has committed to be Dominion's anchor shipper on its gas transmission system. Under the 15-year term, Consol has a 250 million cubic feet per day (MMcf/d) contract with Dominion. The transport contract starts in November 2016.
Tudor Pickering Holt & Co. said not all details were disclosed, but the deal appears to have much potential with little upfront money.
“From a transaction-specific basis at $2,111 per acre, CNX’s transaction appears attractive especially in light of the recently improved natural gas prices,” said Bill Herbert, managing director, co-head of securities, for Simmons & Co.
Houston’s Noble Energy (NYSE: NBL), Consol Energy's joint venture partner in the Marcellus shale, is exercising its right to participate at a 50% level in the transaction. The joint venture covers 628,000 gross acres, which now increases to 718,000 acres or 359,000 net. Due to low gas prices, NBL’s one-third carry has not been triggered.
The majority of the acreage, which is associated with Dominion's Fink-Kennedy, Lost Creek, and Racket Newberne gas storage fields in West Virginia, lies in the northern portion of Lewis County and the southern portion of Harrison County. Consol anticipates that over half of the acres will produce wet gas.
Dominion said it has farmed out nearly 80,000 acres to Consol in Lewis and Harrison counties storage areas. It has also subleased nearly 9,000 acres to Consol Energy mainly in Gilmer and Ritchie counties.
In October, Consol altered its century-old company by agreeing to sell its Consolidation Coal Co. subsidiary, which is valued at $3.5 billion, including $2.4 billion in liabilities. The deal generated $850 million cash.
Consol said the deal would allow the company to concentrate on natural gas production, which it wants to increase by 30% through 2016. The company’s 2013 drilling program calls for 123 wells in the Marcellus. It controls 30,000 core acres in the Utica.
“This transaction reinforces Consol Energy's commitment to being a leading natural gas producer in the Appalachian Basin,” said J. Brett Harvey, chairman and CEO. “These parcels represent what could be the largest untapped contiguous acreage in the southern core of the Marcellus shale. They complement our already significant acreage position in Northern West Virginia. As Consol Energy accelerates its gas drilling in the next few years, and continues to improve its efficiency through enhanced production techniques, we believe this transaction could provide us with more than 350 risked long lateral Marcellus shale drilling locations.”