The big news this morning in the coal business is that CONSOL Energy, the Pittsburgh-based coal giant, is buying the drilling operations of Dominion Resources Inc. for nearly $3.5 billion.
CONSOL’s press release is here, and we’ve got the AP story on the Gazette Web site here.
There’s more coverage from The Financial Times, the Pittsburgh Tribune-Review, and The Wall Street Journal.
The CONSOL press release describes the impact of this deal:
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.
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There may be need to Consol Energy section within WVDEP as a result of this purchase.
What’s not getting said is there are mostly likely are side-agreements giving Consol Energy special dibs on future coal supply contracts to Dominion which is a major buyer of steam coal.
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The sale includes rights to 491,000 acres [over 767 sq. miles] in West Virginia and Pennsylvania
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.”
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46 percent of Dominion’s total electric production comes from coal, 41 percent comes from nuclear power, 9 percent comes from natural gas, 1 percent comes from oil, and the remaining 3 percent comes from Hydro and other renewables.
The Richmond utility holding company, which had put most of its oil and gas assets up for sale last November [2006], said it would use the proceeds to reduce debt and buy back shares. A Dominion spokesman said the company also hopes to boost its stock price by shedding operations that hinge on volatile oil and gas prices and concentrating on more predictable electricity sales. It also plans to retain its natural gas pipeline and storage operations.
In an earlier deal, Dominion sold its Gulf of Mexico oil and gas reserves to Eni, the Italian multinational oil company, for $4.8 billion. And two Canadian energy trusts last week agreed to pay $583 million for Dominion’s deposits in Canada.
Those deals, combined with the two announced yesterday [6/3/2007], raised $11.9 billion, putting the company on better footing to add electric power generation in Virginia, which it said would require an additional 4,000 megawatts of capacity by 2011.
Dominion is building wind turbines in West Virginia with 82 megawatts of capacity, and it has proposed a variety of new power-generation projects, including a 300-megawatt natural-gas-fired plan in Ladysmith, Va., and a 600-megawatt coal-fired plant in Wise County, Va.
It is also seeking a permit to build 1,500 megawatts of nuclear capacity by adding a third reactor unit at its North Anna plant in Virginia.
Check out:
http://www.optionmonster.com/news/article.jsp?page=commentary/in_the_news/cramer_cnx_sounds_coals_death_knell_43461.html&cookie_test=0
OptionMonster
Cramer: CNX sounds coal’s death knell
March 16, 2010 Tue 9:09 AM CT
Far more important than what the analysts might be saying about the natural gas stocks is what Consol’s saying about coal with its buy of Dominion’s Marcellus properties. Coal and natural gas are locked in a death match against each other as suppliers of America’s utility fuel.
By paying so much for these Dominion properties, CNX is saying that coal’s not the future, hence the weakness in Peabody, Massey, and Arch. Some market participants are thinking that these declines are because of China weakness worries, but the idea that a major coal provider is saying that the future is natural gas has the coal adherents scared senseless.
I think they should be. The owners of the coal stocks have held them comfortably, because the secretary of energy is a huge booster of clean coal technology, and because of that, the utilities have shown little to no inclination to change to natural gas. CNX says that won’t be the case. And it is hedging its EPA bets.
The phrase in its release that has the coal adherents reeling is that it is buying this Dominion group of properties to create “a more balanced energy portfolio, improving the company’s risk profile.” RISK PROFILE? How does BTU fix its risk profile? How about Patriot Coal? Massey? They can’t. They ARE coal.
They are all worthless now that CNX has played it natural gas hand, because we now know that one of the largest coal players is worried about the risk of having too much coal. I do not like the coal stocks, except Walter Energy, which is metallurgical coal, lots of it headed for China. CNX’s move verifies that dislike, which will only grow worse over time.
Random musings: Elsewhere, Gary Morrow has a good technical analysis of the LAM and KLAC downgrades. I think these downgrades are just plain wrong and that the stocks offer good value based on a long-term turn in the semi cycles. You would only sell them if you thought the whole semi move was simply restocking.
Disclosures: At the time of publication, Cramer held no positions in the stocks mentioned.
(Chart courtesy of tradeMONSTER)
By: Jim Cramer
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This move by CONSOL speaks volumes about their view on the future of coal in West Virginia – CONSOL is betting on gas, and betting very, very big.
That puts a whole new spin on the failed efforts to tighten up regulations on gas drilling in the just-concluded legislative session. I suspect the drillers want to get as much done as possible in the next year or so, before any pesky regulations get in the way of disposal of their wastewater.
I wouldnt put too much time into Jim Cramers comments. CONSOL has owned a share of CNX gas for years. It started as a coalbed methane play out of the necessity to degas their Pitt 8 and Poca 3 reserves before mining. This simply shows that there is more growth in nat gas than in their coal reserves. If you look on their website you will see that they have invested 500 million in improving their effencies at their exsisting underground operations and the 300 million buy of AMVEST. Their underground operations are some of the largest in the world and coal demand is down. This is a smart play on their part. Buy low and sell high.