Monday, March 15, 2010

Interesting Marcellus Transaction

I was very interested to see the announcement this morning that CONSOL Energy, one of the largest coal producers in the U.S., has agreed to buy Dominion's gas-focused E&P business for $3.475 billion in cash.  CONSOL already has a gas subsidiary, CNX Energy, but this purchase signals a strategic shift to increase the company's exposure to natural gas in a big way, as gas will represent 35% of the company's pro forma revenue. 

Dominion's E&P business is focused in the Appalachian region and has just under 500,000 acres in the Marcellus Shale (98% held by production) in Pennsylvania and West Virginia.  Combining that with CNX's acreage gives CONSOL/CNX 750,000 Marcellus acres.  Along with the acreage, CNX bought Dominion's E&P business, which is one of the oldest in the region.

CONSOL's press release makes a big effort to show that the company is a "diversified energy company with a balanced portfolio of coal and natural gas."  The transaction makes lots of sense from a geographic perspective since both coal and gas are +/- 5,000 vertical feet apart under the much of the region.  But most importantly for CONSOL, it likely represents a nod to the fact that thermal coal is not the future, especially because the largest part of CONSOL's current business is supplying coal to power plants. On the surface, it looks like a smart strategic move.  I wonder if any of the other Big Four coal companies will make a similar move.

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