It appears that Loews Corp (NYSE:LTR) isn't the only one finding value in natural gas acreage these days. On Monday, CNX Gas (NYSE:CXG) announced that it acquired Peabody Energy's (NYSE:BTU) coal bed methane and natural gas rights to roughly one million acres for $66.5 million. It appears to be a rather stunning value, but first we need to suss out the difference between this purchase and a more traditional one such as the Loews-Dominion (NYSE:D) deal.
CNX Gas is a spin-off of CONSOL Energy (NYSE:CNX). CONSOL pioneered the capture of coal bed methane when it became economical to do so in the 1980s. CNX Gas, therefore, has great technical experience in the exploitation of this non-conventional gas resource. By drilling predominantly in coal seams, it also has a cost advantage in not having to drill as deeply as more balanced players like Pioneer Natural Resources (NYSE:PXD) or Cimarex Energy (NYSE:XEC).
The Peabody assets are largely coal bed properties, but there is also a shale gas play nestled within the purchase. Management classified this New Albany Shale acreage as the core, Tier I property in the deal. When we consider its conservative estimate of unproved reserves within this play, CNX investors may just cry tiers of joy.
CNX is acquiring 114,500 acres at New Albany Shale, a play within the Illinois Basin, an area in which the company already had a growing presence. One rule of thumb for estimating probable reserves for conventional natural gas acreage is to assume 5 billion cubic feet equivalent (bcfe) of gas per thousand acres. CNX's expectation of 258 bcfe of reserves falls right in line with this metric. To stay grounded here, let's just assign the full purchase price to this one property, and consider the other 922,500 acres pure gravy.
Now, we can't directly compare this $0.26 per thousand cubic feet equivalent (mcfe) purchase price with other recently reported deals, because those were for proved reserves fetching roughly $2.50/mcfe to $3.00/mcfe, or $1.64/mcfe in Loews' case. CNX's estimate would have to be risked by a full 90% -- in other words, divided by ten -- to bring the purchase price in line with deals on proved assets. To my mind, this adds up to a very compelling deal for CNX.
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Fool contributor Toby Shute doesn't own shares in any company mentioned. Cimarex is an Inside Value recommendation. There's nothing unproved about the Motley Fool's disclosure policy.
