Time to Buy This Tasty Appalachian Combination?

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"Hey, you got peanut butter on my chocolate!"

Just like the chocolate purist in those old ads who protested the delectable combination, coal investors protested CONSOL Energy's (NYSE: CNX  ) deeper dip into natural gas Monday with a 10% sell-off, dropping shares beneath $49 apiece. Although swallowing fossil fuels is never a good idea, investors may wish to "taste" this unique combination of fuels before protesting themselves.

With a landmark $3.48 billion deal to acquire natural gas assets from Dominion Resources (NYSE: D  ) , CONSOL will transform itself from a strong coal company with a relatively small gas kicker into a unique new sort of energy company, boasting a nicely balanced portfolio of coal and natural gas.

Two great fuels that fuel earnings together
Surprisingly, though coal and gas resources routinely appear in tandem in Appalachia, CONSOL is the only major coal producer to offer investors significant exposure to both fossil fuels. As CEO J. Brett Harvey explains, CONSOL Energy has just increased its "opportunities to extract incremental value through stacked pay zones of surface assets, coal, coal bed methane, shale gas, and conventional gas assets."

Like peeling back the layers of an onion, natural gas offers an additional stratum of profitable energy trapped beneath many coal assets extracted by the region's miners. Rich potential synergies lie in leveraging both the methane resources frequently found beneath Appalachian coal deposits, and the relatable exploration expertise and highly prospective real estate of those deposits. If its rivals ever catch on to the benefits of its new approach, we may one day see CONSOL's groundbreaking energy mix as the tastiest combination of all.

As CONSOL's website states:

... the importance of having an operational footprint in place can't be over-emphasized. CNX Gas (NYSE: CXG  ) is drilling its Marcellus Shale acreage directly beneath where it's drilling for coalbed methane in southwestern Pennsylvania. The same people and infrastructure are being used for both.

With a 3-trillion-cubic-foot head start of proved reserves over coal competitors like Massey Energy (NYSE: MEE  ) and Patriot Coal (NYSE: PCX  ) , CONSOL Energy now stands in a league of its own.

Through its 83% stake in subsidiary CNX Gas, CONSOL already enjoyed quality gas exposure before this deal, including prospective acreage in the coveted Marcellus shale. After a successful exploration program in 2009, CONSOL's subsidiary replaced 400% of production, raising proved reserves to 1.9 trillion cubic feet (Tcf). Adding some 9,000 producing wells with 41 Bcfe of estimated 2010 production, the Dominion assets are expected to raise CONSOL's proportion of revenue derived from natural gas from 15% in 2009 to 35%.

Both coal and natural gas have seen some noteworthy price swings over the past couple of years, including a difficult period in which utilities switched from burning coal to temporarily cheaper natural gas. Over the long run, CONSOL's dual exposure will smooth out the peaks and valleys of such price volatility. Toss in CONSOL's recent success in exporting coking coal directly to China, and it's easy to see why CONSOL retains this Fool's uninterrupted nod as the top name for coal in the Appalachian region. Sound off in the comments section below about this transformative deal.

The "Coal" tag in the Motley Fool CAPS community lists 29 companies. Find out what other investors are saying about the stocks you're watching, or share your Foolish thoughts with us. CAPS is free and fun!

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly in the CAPS community under the user name TMFSinchiruna. He tweets. He owns no shares in any of the companies mentioned. The Motley Fool scrubs its disclosure policy before releasing it into the atmosphere.

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