Thanks to its acquisition of Dominion’s natural gas exploration and production business, longtime coal giant Consol Energy is making its name in the natural gas sector as the Canonsburg, PA-based diversified energy producer continues to analyze its position in the Marcellus and Utica shales.

During its 3Q2010 earnings call, Consol’s management team reaffirmed its previously announced production guidance of 127 Bcf for calendar year 2010 and 170 Bcf in 2011. The output for 2011 would represent a 21% increase over the 2010 annualized run rate of 141 Bcf, which is what the gas division would have expected to produce assuming twelve months of production from the Dominion assets in 2010. During 3Q, gas production increased by 44% to a record 35.8 Bcf.

Moving forward, the company’s CEO said Consol is still sorting out its holdings in the Marcellus that were gained through the Dominion deal (see Daily GPI, March 16). “We continue to integrate the Dominion acreage into our drilling plans and to delineate our vast acreage holdings,” said CEO J. Brett Harvey. “Our goal is to have a clearer understanding of the Marcellus reserves by the middle of 2011 and determine which areas will be integrated into our long term drilling plans and which areas may be considered for possible sale. In the short term, we are consolidating our position through swaps and trades with other producers and will sell or lease small acreage positions outside our core areas of interest.”

However, Harvey said the company plans to be careful “about precipitously engaging in a sale or joint venture of our oil and gas acreage” before Consol knows what it has.

“As delighted as we are with our recently announced Utica Shale discovery in Eastern Ohio, it points out a potential pitfall in ‘running too soon to the altar,'” he said. “Had another producer come to us about a joint venture in Eastern Ohio, we might have agreed to sub-optimal terms for our shareholders because we had not adequately delineated this acreage. While prices continue to be attractive, especially relative to what we paid for our oil and gas acreage, we have a duty to maximize the returns to our shareholders in any potential transaction.”

Two weeks ago Consol made its first discovery in the Utica Shale in Eastern Ohio. At a depth of 8,450 feet, the vertical well encountered 200 feet of Utica Shale. During a 24-hour period, the unstimulated well open-flowed 1.5 MMcf. The company plans to hydraulically fracture, and then open-flow the well. If successful, the Consol said it will drill a horizontal well on the same pad.

Harvey noted that the delineation process has resulted in the company moving its first rig into the central Pennsylvania operations area, “where we estimate that we have 230,000 acres with Marcellus Shale potential. In our other new area, northern West Virginia, where we have about 270,000 acres, we have drilled the vertical portions of the wells on our first pad. Shortly, one of the rigs currently drilling in Greene County, PA, will be relocated to northern West Virginia to drill the horizontal portions of these wells.”

During the third quarter, Consol produced 23 Bcf from coalbed methane (CBM), an increase of 5.5% from the 21.8 Bcf produced in the year-earlier quarter. The company drilled 61 CBM wells in the third quarter, nearly all of which were in Virginia. Total production out of the Marcellus was 3.3 Bcf, an increase of 43.5% from the 2.3 Bcf produced in the year-earlier quarter. The company drilled six horizontal wells during the quarter.

Conventional production during the third quarter totaled 9 Bcf, an increase of 2,150% from the 0.4 Bcf produced in the year-earlier quarter. Consol noted that the increase in production reflects the impact of the Dominion acquisition. The company drilled 33 conventional wells in the third quarter, including 24 wells in West Virginia.

The quarter’s earnings were still led by the coal division, which drove the company to record revenue of $1.319 billion. However, Consol reported 3Q net income of $75 million, or 33 cents per diluted share, down from $87 million, or 48 cents per diluted share, in 3Q2009. Adjusted earnings before interest, taxes, depreciation and amortization were $347 million, 45% higher than the $240 million reported in the year-ago quarter.

Total hedged gas production in 4Q2010 is 11.9 Bcf, at an average price of $6.18/Mcf, the company added.