CONSOL Energy (NYSE:CNX) continues its transition from coal to natural gas. Just last week the company closed a massive $3.5 billion deal that offloaded five legacy coal mines in West Virginia. Now CONSOL is acquiring natural gas drilling rights on 90,000 acres in that state.
The $190 million deal with Dominion Resources (NYSE:D) sees CONSOL picking up the drilling rights to the natural gas below Dominion's natural gas storage fields. CONSOL is joined on this deal with its 50% joint venture partner Noble Energy (NYSE:NBL) which is exercising its rights to own 50% of this drilling allowance.
Dominion Resources sold off its legacy oil and gas exploration business years ago to focus on its utility segments. However, the company still owns a large natural gas storage business, as well as a sizable natural gas pipeline network. The drilling rights being sold to the CONSOL/Noble venture involve acreage it owns as part of its natural gas storage system. Dominion's natural gas storage business is actually made up of depleted conventional natural gas well. In addition to buying these drilling rights, CONSOL agreed to be an anchor shipper on Dominion's natural gas transmission system. That makes it a solid deal for Dominion, which cashes in on an asset that it wasn't using to generate income while also adding natural gas volumes to its transmission business.
CONSOL sees this as a great deal for its investors as well. CEO Brett Harvey said these "parcels represent what could be the largest untapped contiguous acreage in the southern core of the Marcellus Shale." He noted that the acres are a good complement to what CONSOL and Noble already own in the region. Furthermore, it is believed that more than half of the acreage will contain more valuable wet natural gas.
Overall, CONSOL and Noble believe that more than 350 future Marcellus Shale wells can be drilled on these acres. Further upside could come from drilling wells in the Upper Devonian formation, which is also part of the deal.
With this deal, along with the exit of some of its legacy coal assets, CONSOL Energy is positioning itself as a major player in the Marcellus Shale. The coal mine sale gave the company the financial flexibility to accelerate gas drilling over the next few years. CONSOL's gas production had been rather flat the past few years, but it's planning to grow production by as much as 32% next year and 30% in both 2015 and 2016.
Coal has been one of the biggest casualties of America's energy boom. That's a big reason why CONSOL has shifted its focus to natural gas, and that shift has the company well positioned to grow in future years. That makes it an interesting company to own in the years ahead.