Noble Energy Inc. on Thursday added the Marcellus Shale to its core U.S. holdings after securing a $3.4 billion deal with CONSOL Energy Inc. that gives it half of a 663,350 net-acre leasehold in Pennsylvania and West Virginia, including existing wells and midstream infrastructure.
The Houston-based independent, which until now has concentrated its exploration efforts in the deepwater Gulf of Mexico and the Denver-Julesburg (DJ) Basin, plans to sell some of its noncore properties to help pay for the acquisition, CEO Chuck Davidson told financial analysts Thursday. He declined to detail what properties would be put up for sale.
“We’ll take time to identify noncore properties,” he said. “I don’t want to put a number on it.”
Under the arrangement, Noble 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. Using an acreage value of $3.2 billion, the discounted present value of the leasehold is estimated at $7,100/net acre.
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.
The gas price cap would allow Noble to temporarily suspend its drilling payment obligations if the gas price were to fall below $4/MMBtu using a three-month average Henry Hub benchmark price, Davidson said.
The gas price trigger is a “circuit breaker,” he said. “If one of the parties wanted to continue to drilling program, we’d have a head’s up and there’d be no [drilling] carry. In our view, in [CONSOL’s] view, it’s perfectly aligned with the economic benefits we’d be receiving…” The drilling carry obligation wouldn’t be canceled; it “gets pushed off into the future. We’d still have an obligation; it just that it gets deferred if gas prices fall below the threshold.”
The joint development plan calls for the rig count to increase. CONSOL now is running four rigs in the play with plans to increase that to six by the end of this year. By the end of 2012 there should be eight rigs running in the play, which would increase to 12 in 2013, eventually reaching a plateau of 16 horizontal rigs in 2015.
CONSOL would operate in the dry gas areas of the acreage, which comprises about 80% of the leasehold. After a ” transition period,” Noble would operate the wet gas acreage. Noble is expected to operate a portion of the dry gas area after the wet gas area has been fully developed.
Noble CEO David Williams told analysts the acreage being acquired is “in the Marcellus fairway of southwest Pennsylvania and northwest West Virginia, both wet and dry gas windows.” By working with CONSOL, “we have defined a long-term development plan to raise the rig count. It’s a unique structure that provides superior value creation…We’re partnering with a well-known, experienced Appalachian operator,” enabling the two companies to share best practices, coordination with area mining activities and drilling expertise.
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 about 700 MMcf/d of firm transportation, said Williams. A natural gas liquids processing agreement is in place and “water resources and recycling already exist,” he noted.
“The Marcellus, combined with our ongoing developments in the DJ Basin and deepwater Gulf of Mexico, will provide important balance to our rapidly expanding international programs,” Davidson said. “Spreading the transaction costs over an extended time horizon creates better partner alignment on investment decisions and maintains our strong balance sheet.”
Davidson in the not-so-distant past had said Noble wasn’t interested in buying gas-weighted properties until prices were stronger. However, he said Noble had been scrutinizing the domestic shale plays for “several years” and the Marcellus is “one of the most economically attractive plays in North America.”
As to why Noble hadn’t bought into a shale play until now, the CEO said Noble’s management team “needed greater confidence and where the commodity markets were headed and, more importantly, we needed further progress on our own portfolio of major projects…We now believe the time is right.”
Under the partnership agreement Noble would pay $1.07 billion for the acreage stake in three equal installments over three years, as well as $2.13 billion for drilling costs. The company also would pay $219 million for a 50% stake in CONSOL’s existing wells and midstream properties. The terms of the agreement imply a $7,100/acre cost.
The acreage holds estimated reserves equal to about 7.4 Tcf of natural gas, he said. Gas output is expected to reach 600 MMcf/d net by 2015 and grow further thereafter.
“To put this into perspective the resources being acquired are greater than our 2010 year-end proved reserves,” he told analysts.
According to Noble management, the joint venture would provide:
During a separate conference call, CONSOL CEO J. Brett Harvey said the agreement would benefit “the regional economy, the communities in which we operate, our employees and our respective companies. Together we will be able to accelerate the development of this significant resource safely, efficiently and economically.”
Even with the agreement CONSOL affirmed its 2015 production target of 350 Bcf net because “the incremental drilling that is expected to occur as a result of the development plan, combined with improvements in type curves and drilling completion technology, is allowing CONSOL to maintain the original production goal set forth at the time of the Dominion acquisition.” CONSOL acquired about 491,000 acres in the Marcellus as part of a $3.48 billion cash deal with Dominion last year (see Daily GPI, March 16, 2010).
The transaction is expected to close by the end of September. Once the transaction is completed, CONSOL said its board of directors would 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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