By now it’s no secret that the big play in natural gas exploration and production is found in the various shale plays within the US. One of the best is the Marcellus Shale in Pennyslvania, New York, and West Virginia. What makes it so valuable is its proximity to the huge markets of the northeast. Natural gas from the Marcellus shale doesn’t need to be piped 2,500 miles.
Dominion Resources, Inc. (D) has agreed to sell about 491,000 acres its owns in the Marcellus shale to CONSOL Energy Inc. (CNX) for about $3.5 billion. Dominion is essentially divesting its E&P business, and Consol, the country’s second-largest holder of coal reserves, is gaining more than 1 trillion cubic feet of proved natural gas reserves.
For Dominion, the move is “another significant step in moving toward a more regulated business model,” according to the company’s CEO. For Consol’s part, its CEO called the deal “a strategically compelling transaction that will transform CONSOL Energy into a leading diversified energy company with a strong position in natural gas as well as coal.”
Dominion’s focus now will be on its regulated oil and gas pipeline and storage business, and on its electricity generation business. Divesting its E&P operations gets rid of a capital intensive business with a higher risk factor than the regulated businesses. It also gives the company some significant cash that it can use to fund projects like its Appalachian Gateway Project, an approximately $600 million gas gathering and transportation system to move gas out of the Marcellus shale region.
Consol, for its part, boosts its natural gas reserves by 50%, and by the end of the year, Consol expects natural gas production to amount to 35% of the company’s total revenue. In addition to the Marcellus shale acreage, Consol will acquire nearly 1 million additional acres with more than 9,000 producing wells that are expected to pump 27 billion cubic feet equivalent of gas for Consol this year.
One small downside to the deal is that Consol expects to issue equity and borrow the $4 billion it needs to pay for Dominion’s acreage. Consol only had about $65 million in cash at the end of 2009, so the company really has no choice. The company is using bridge financing to pay for the deal initially, and the shares are getting punished for it. The share price is down about 9% this morning.
But the share price, knee-jerk reaction aside, this looks like a very good deal for both Dominion and Consol, and for the two companies’ shareholders over the longer run. Consol diversifies from its dependence on coal, and gaining a strong position in the fastest growing energy source in the country. Dominion gets rid of the high capital costs associated with E&P projects, and gains the capital to fund its transmission and storage projects for at least the next couple of years.
The deal makes a good bit of sense for both companies. But Dominion’s shareholders like it a lot better than Consol shareholders today.
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