CONSOL Sells Ohio Utica Shale Rights to Hess for $593M

Consol Energy Inc. has sold exploration and development rights for natural gas in the Ohio Utica Shale to Hess Corp. The $593 million deal was announced yesterday. The agreement gives Hess 50 percent of Consol’s mineral rights to some 200,000 acres. Hess will pay Consol $59 million when the deal closes in October and invest an additional $534 million in the operation over the next five years.

The companies said they plan to start drilling in the next few weeks, with a plan for two drilling rigs in 2012, 3.5 rigs in 2013, and eventually five rigs in 2015.

From the CONSOL press announcement:

CONSOL Energy Inc. announced today that it has entered into an agreement with Hess Corporation for the joint exploration and development of CONSOL’s nearly 200,000 Utica Shale acres in Ohio for aggregate consideration to CONSOL of approximately $593 million.

"We are very pleased to have Hess Corporation as our partner in the Utica Shale," commented J. Brett Harvey, CONSOL’s chairman and chief executive officer. "Hess Corporation is a global integrated energy company that shares CONSOL’s dedication to safety and compliance, and they bring strong technical and operational shale expertise to this joint venture. Those skill sets coupled with CONSOL’s deep footprint and history in northern Appalachia result in a powerful combination that will benefit the eastern Ohio economy, strengthen the communities in which we operate, and provide more opportunity for our employees, and our respective companies. Together we will explore and delineate what could be a significant resource in a safe, efficient, and economical manner."

"Of the nearly 200,000 Utica Shale acres in Ohio, approximately 80,000 acres were acquired decades ago by CONSOL, while the remaining 120,000 acres were acquired last year as part of the Dominion E&P acquisition. Today’s transaction with Hess helps CONSOL’s shareholders to realize value from some of our legacy assets, as well as from assets that were acquired just 15 months ago," continued Mr. Harvey. "We expect a pre-tax gain on the transaction, before fees, of $59 million."

"We are delighted with our entry into the Utica Shale, which enables us to build a strategic acreage position in an emerging unconventional play in the United States," said John Hess, Chairman and CEO of Hess Corporation. "We believe that this acquisition offers significant potential for future growth in reserves and production with most of the land either owned in fee or held by production with high net revenue interests. We are honored to partner with CONSOL, which has a long history and an excellent safety and operating record in the Appalachian basin. We believe that together our companies will build a profitable business and deliver important economic benefits for the residents of eastern Ohio."

The total aggregate consideration to be paid by Hess for an undivided 50% of CONSOL’s fee and leased mineral interests in the Utica shale acres in Ohio is approximately $593 million, or $6,000 per net acre. Hess Corporation will pay approximately $59 million at closing. CONSOL and Hess will also enter into a joint development agreement pursuant to which Hess has agreed to pay 50% of CONSOL’s working interest obligations relating to certain drilling and completion costs, up to total payments of approximately $534 million, as the acreage is developed. With this joint venture, CONSOL Energy will be able to explore and delineate its Ohio Utica Shale acreage for twenty-five cents on the dollar, while still retaining a 50 percent interest. It’s a very low-risk form of exploration.

CONSOL’s and Hess’ plan of jointly developing the Utica Shale assets calls for Hess to generally operate in the liquids-rich window, which contains approximately 80,000 acres in Belmont, Harrison, Guernsey and Jeffersoncounties, and CONSOL to generally operate elsewhere in eastern Ohio, including Portage, Tuscarawas,Mahoning counties, in the oil window, as well as in Noble County. CONSOL and Hess anticipate commencing initial drilling operations in a few weeks, and will thereafter average 2 rigs in 2012, 3.5 rigs in 2013, and eventually plateau at an average of 5 rigs in 2015. The carry is expected to be fully utilized by year-end 2016.

CONSOL Energy reconfirms its 2015 production target of 350 billion cubic feet, net to the company. Any success in the Utica Shale will be additive.

The transaction, which is subject to customary adjustments and conditions, including customary adjustments to the aggregate consideration payable by Hess, is expected to close by October 21, 2011. The transaction excludes CONSOL’s shallow rights in Ohio and its remaining Utica shale acreage in Pennsylvania and West Virginia.*

*CONSOL Press Release (Sep 7, 2011) – CONSOL Energy and Hess Corporation Enter into a Joint Venture for CONSOL’s Utica Shale Acreage in Ohio