Pittsburgh's CONSOL Energy Inc., which has increasingly been focused on its Appalachian natural gas operations, is selling Noble Energy Inc. half of its 663,350 net-acre leasehold in a portion of the Marcellus Shale in Pennsylvania and West Virginia, including a half-stake in existing wells, under a multi-year transaction valued at $3.4 billion.

CONSOL would hold sway over the dry gas operations, which are found on around 80% of the acreage, while Noble eventually would operate the wet gas operations. Noble has extensive experience in working with liquids-prone acreage in the Denver-Julesburg (DJ) Basin, CEO Chuck Davidson told energy analysts during a conference call earlier this month.

"We have spent considerable time looking for the right entry point into the Marcellus and I believe, with Consol, we have found the perfect partner that we have been searching for," Davidson said. Until now Noble has concentrated its exploration efforts in the deepwater Gulf of Mexico and the DJ Basin; it plans to sell some of its noncore properties to help pay for the acquisition, the CEO said. "We'll take time to identify noncore properties...I don't want to put a number on it."

Davidson not too long ago had stated publicly that Noble would eschew natural gas for more profitable deepwater Gulf of Mexico (GOM) and DJ Basin liquids. However, the Marcellus Shale, he said, offered the "best gas economics" in the country.

"We have been patiently waiting for a quality opportunity to present itself," he explained. "Nothing until now met the economic hurdles and strategic criteria, quite frankly, from Noble's perspective." Noble also "needed to see more progress on our major projects" in the DJ Basin and the GOM. "Now the time is right." The Marcellus "adds a new core growth area. It's entirely new and offers a very material growth area for Noble Energy for.. reserves, production and cash flows." Noble's acquisition has the "potential to reach 600 MMcfe/d in 2015. To put that in perspective, that's greater than Noble's year-end 2010 proved reserves."

Under the arrangement, the Houston-based independent would pay CONSOL $1.07 billion for a 50% stake in the undeveloped acres, payable in three equal annual installments. Noble also would pay $160 million at closing for CONSOL's existing Marcellus Shale wells, which have estimated proved developed producing reserves of 89 Bcf net. In addition Noble agreed to pay $59 million to acquire a half stake in Marcellus midstream infrastructure.

The agreement requires Noble to fund, over an eight-year period, $2.13 billion of CONSOL's future drilling and completion costs, limited to one-third of the costs with an annual cap of $400 million, and by suspending "disproportionate funding at natural gas prices below $4/MMBtu," the companies said. Using an acreage value of $3.2 billion, the discounted present value of the leasehold is estimated at $7,100/net acre.

Most of the leasehold (85%) already is held by production and CONSOL holds working interest on nearly 100% of it. In addition, CONSOL already has built infrastructure and has access to around 700 MMcf/d of firm transportation, said Williams. A natural gas liquids processing agreement is in place and "water resources and recycling already exist."

Noble CEO David Williams said there already is "a tremendous amount of well knowledge in these areas. When we look forward at the takeaway, one of the real advantages we see is the ability to share in some of the things CONSOL already has put in place...One thing that stood out is their long-term plan for this whole thing. It's not just what's going on now but two years, three years down the road. They were already lining up capacity, laying out the gathering system...The access and ability to share in what's already been laid out is a key part of this."

Plans are to "ramp up" joint drilling activity in stages rather than "suddenly accelerate a huge number of rigs in the area," said Davidson. CONSOL now has one hydraulic fracture (frack) crew in place and a second ready to go with an "option on a third...One crew can handle three rigs. We have frack crews and services covered."

The joint development plan calls for the rig count to increase from CONSOL's current rig count of four to eight rigs in 2012 and 12 rigs in 2013, eventually reaching a plateau of 16 horizontal rigs in 2015.

"Where we're starting from is four horizontal rigs," said Williams. Noble "will have one or two more that they are bringing in for their portion [of the joint venture] before the end of the year. We'll start with one horizontal beginning next year [with] two by the end of next year. It's a phased approach. With the amount of acreage held by production, we're not chasing lease expirations...By 2016, there will be 10 rigs in the dry [gas] portion; we'll have six in wet gas."

According to Noble management, the joint venture would provide acreage estimated to contain 7.4 Tcfe risked resources net to Noble's interest, of which 400 Bcfe were proven reserves at year-end 2010 and more than a decade of development activity anticipated, which includes drilling an estimated 4,400 gross well locations.

In a separate conference call with analysts CONSOL CEO J. Brett Harvey said the Noble transaction excludes CONSOL's extensive acreage in the Utica Shale and other Marcellus locations. The company still may pursue a partner for the other acreage but the company first wants to explore the acreage it has. CONSOL acquired about 491,000 acres in the Marcellus as part of a $3.48 billion cash deal with Dominion last year (see NGI, March 22, 2010).

Analysts quizzed Harvey about CONSOL's plans for the Utica Shale, which has gotten a lot of press in recent weeks (see related stories). Would CONSOL consider teaming up with Noble to explore the liquids-prone play?

"When you look at the Utica, it's really a baby with where it's going," Harvey said. "Our plan is to delineate the acreage and that's still the plan. Any conversation beyond that is speculation." The Noble partnership "underscores the value of the Marcellus acreage involved in a deal compared to a year ago..." CONSOL still has to determine "the rest of the value" of its exploration and production (E&P) acres in the Appalachian Basin and "whether those are less core or can be carved out separately. We want to see where we sit with acreage in the Utica and build up the value of the entire E&P and determine what it might be worth. This is a piece of the puzzle that will determine what is the rest of the story."

The transaction is expected to close by the end of September. Once the transaction is completed, CONSOL's board of directors is to consider the "impact" of the transaction on cash flows this year and beyond and consider using a portion of any excess cash to repay debt, pay dividends and to repurchase stock.

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