CONSOL Energy to acquire Dominion’s Appalachian E&P Business for $3.475 Billion in cash
Enhances CONSOL Energy’s Position As the Leading Appalachian Diversified Energy Company With A Balanced Portfolio of Coal and Natural Gas Adds 1.04 Tcf of Proved Reserves, 41 Bcf of Annual Production and Triples CONSOL Energy’s Strategic Marcellus Shale Gas Holdings to Approximately 750,000 Acres
CONSOL Energy Inc. announced that it has entered into a definitive agreement to acquire the Appalachian exploration and production business of Dominion Resources, Inc. for $3.475 billion in cash. CONSOL Energy is already the most profitable coal-focused energy company and is the second largest holder of coal reserves among U.S. publicly traded coal companies. This acquisition will substantially increase its natural gas reserves and production capacity – further enhancing CONSOL Energy’s position as a leading diversified energy company with a balanced portfolio of coal and natural gas.
The acquisition of Dominion’s E&P business, one of the oldest and most active drillers in Pennsylvania and West Virginia, complements CONSOL Energy’s existing natural gas business which is operated through CNX Gas, its 83% owned subsidiary. As a result of the acquisition, on a pro forma basis, CONSOL Energy will be the largest, and among the fastest growing and lowest cost producers of natural gas in the Appalachian basin. Importantly, the acquisition will give CONSOL Energy a leading position in the strategic Marcellus Shale fairway by tripling its development assets to approximately 750,000 acres with the addition of Dominion’s approximately 500,000 Marcellus Shale acres in Pennsylvania and West Virginia.
The acquisition increases CONSOL Energy’s total proved gas reserves by more than 50 percent from 1.9 trillion cubic feet to approximately 3 trillion cubic feet and doubles its potential gas resource base to approximately 41 trillion cubic feet. CONSOL Energy will acquire a total of 1.46 million oil and gas acres from Dominion along with over 9,000 producing wells that are expected to produce more than 41 Bcfe in 2010, approximately 27 Bcfe of which will be imputed to CONSOL Energy between May 1, 2010 and the end of the year assuming an April 30, 2010 closing. Upon completion of the transaction, CONSOL Energy’s natural gas business is expected to account for as much as 35 percent of CONSOL Energy’s total revenue.
“CONSOL Energy’s acquisition of Dominion’s Appalachian E&P business is 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,” said J. Brett Harvey, president and chief executive officer. “Since 2005, CONSOL Energy will have doubled its annual gas production to 100 Bcf in 2010. This acquisition will further accelerate that trend with the addition of the extremely attractive resource-rich, low-cost Marcellus Shale assets. Two compelling aspects of this transaction are that 98 percent of Dominion’s Marcellus acres are held by production and the average net revenue interest is 87.5 percent. These characteristics will enable CONSOL Energy to implement development plans that are driven by technical and marketing fundamentals rather than lease conditions–for example, expirations or drilling commitments.
“In addition to bolstering our gas platform, this transaction will also result in a more balanced energy portfolio, improving the Company’s risk profile and positioning it to deliver sustainable long-term growth and increased value to shareholders.”
J. Brett Harvey added, “Not only is our Appalachian footprint growing wider with this transaction, but more importantly, it is growing deeper as we substantially increase our opportunities to extract incremental value through stacked pay zones of surface assets, coal, coal bed methane, shale gas, and conventional gas assets. As we expand our natural gas production, we remain fully committed to utilizing state-of-the-art exploration and production techniques, which enable us to operate efficiently, safely and compatibly with the environment. We look forward to building on our strong capabilities in natural gas – and on our talented workforce. We welcome the addition of Dominion’s experienced and talented workforce of 193 employees into the CONSOL Energy family. Both Dominion and CONSOL Energy share similar cultures, so we look forward to a smooth integration of our teams.”
Mr. Harvey also added, “The significant proved producing reserves and cash flows generated by Dominion’s E&P business, coupled with the very large Marcellus acreage position and related upside associated with the transaction, makes this a compelling acquisition from a valuation perspective.”
CONSOL Energy is evaluating a range of structural alternatives to facilitate the operation and development of the acquired assets including, among other things, consideration of the acquisition by CONSOL Energy of the shares of CNX Gas common stock that it does not already own.
Mr. Harvey stated that, “CONSOL Energy will be in a position to use its capital and free cash flow from its coal operations and newly-acquired gas assets to fund the development of both its coal and natural gas activities. We will deploy our capital in the projects that will generate the highest return for our shareholders.”
The Company expects to raise approximately $4.0 billion and is targeting a balanced mix of equity and debt to fund the acquisition and development of the acquired acreage. Following the transaction, CONSOL Energy will maintain its strong balance sheet and liquidity position. The transaction is expected to close by April 30, 2010, subject to regulatory approvals and customary closing conditions.
BofA Merrill Lynch acted as lead financial advisor to CONSOL Energy and Wachtell, Lipton, Rosen & Katz and Akin Gump Strauss Hauer & Feld LLP acted as legal counsel. Stifel, Nicolaus & Company, Incorporated also acted as financial advisor and provided a fairness opinion to CONSOL Energy’s Board of Directors. BofA Merrill Lynch and PNC Bank have provided financing commitments to complete the acquisition.
On the coal side of its business, CONSOL Energy continues to enjoy some of the highest operating margins in the industry. Furthermore, the company expects to see margin expansion in 2010 from its low-vol met business, its high-vol met business, and its thermal business.