Hess Corporation (HES) has agreed to jointly explore and develop 200,000 acreage of CONSOL Energy Inc. (CNX) in the Utica Shale play in eastern Ohio. The transaction is expected to be completed next month, pending customary closing conditions.
Under the terms of the deal, Hess will acquire 50% of CONSOL’s interests in the Ohio Utica Shale acreage for an aggregate consideration of $593 million. Upon closure, New York-based Hess will pay $59 million, while the balance $534 million will be expended in the form of a 50% drilling interest obligation over a five-year span.
Notably, the contract calls for Hess to operate roughly 80,000 acres in Jefferson, Harrison, Guernsey and Belmont counties out of the total CONSOL acreage. On the other hand, CONSOL will have control over the remaining 120,000 acres elsewhere in eastern Ohio, including Portage, Tuscarawas, Mahoning and Noble counties. The deal excludes CONSOL’s shallow rights in Ohio or its remaining Utica shale acreage in Pennsylvania and West Virginia.
The companies expect to average two rigs next year, three and a half rigs in 2013, and eventually plateau at an average of five rigs in 2015 following the commencement of an appraisal drilling operation in the fourth quarter.
The Utica shale –– located approximately 3,000 to 7,000 feet below the Marcellus shale formation –– stretches southwest from New York and Canada to Tennessee. Utica happens to be one of the emerging shale plays in the U.S. and the oil giants remain proactive in ramping up their development activities in the region. Recently, Chesapeake Energy Corporation (CHK) unveiled that it will likely enter into a joint venture agreement next month for a portion of its Utica acreage.
We believe that the latest tie-up will prove beneficial for Hess’ for future growth in reserves as these areas have high liquids content. The partnership with CONSOL, which has significant operational record in the Appalachian basin, is expected to be profitable and deliver important economic benefits for the residents of eastern Ohio.
We continue to see an upstream momentum for Hess on the back of its large inventory of exploration and development projects. Nevertheless, we see limited upside potential for the shares considering Hess’ sensitivity to gas/oil price volatility, as well as drilling results, costs, geo-political risks and project timing delays.
We are maintaining our long-term Neutral recommendation for Hess, which holds a Zacks #3 Rank (short-term Hold rating).
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