Independent oil and gas producer Noble Energy Inc. (NBL) and diversified fuel producer CONSOL Energy Inc. (CNX) have formed a joint venture to develop CONSOL’s Marcellus Shale properties in southwest Pennsylvania and northwest West Virginia. The joint development agreement between the two companies requires payments to the tune of $3.4 billion by Noble Energy to CONSOL Energy.
Per the arrangement, Noble Energy will acquire a 50% interest in CONSOL's 663,350 Marcellus Shale acres including a 50% interest in CONSOL's existing Marcellus Shale wells.
Noble Energy’s payment of $3.4 billion will comprise $1.07 billion for a 50% interest in CONSOL’s Marcellus Shale acres, payable in three equal installments; $2.13 billion funding in the form of CONSOL's future drilling and completion costs, extending over an eight-year period and limited to one-third of CONSOL's drilling and completion costs with an annual cap of $400 million; $160 million for CONSOL's existing Marcellus Shale wells with proved developed reserves of 89 billion cubic feet (net to Noble); and $59 million to acquire a 50% interest in Marcellus gathering assets.
Noble Energy expects to fund the payments from cash on hand and its currently undrawn revolving credit facility.
The joint development plan calls for the drilling activity in Marcellus to expand from the current 4 drilling rigs in the region to 16 rigs in 2015. The agreement emphasizes the sharing of operations between the two partners with Noble Energy initially responsible for developing the wet gas portion of the acreage.
CONSOL will focus on operating the dry gas areas of the acreage, while Noble Energy will operate the wet gas acreage, comprising nearly 20% of the acreage. Noble Energy is expected to operate a portion of the dry gas area after the wet gas area has been fully developed.
Pursuant to the discussions of the agreement terms, CONSOL Energy reconfirmed its 2015 production target of 350 billion cubic feet, net to the company, despite the agreement with Noble Energy. The company said the incremental drilling that is expected to occur as a result of the development plan allows it to maintain its original production goal set forth at the time of the Dominion acquisition.
As a result of the partnership, Noble Energy estimates the acquired acreage to contain 7.4 trillion cubic feet equivalent (Tcfe) risked resources net to Noble Energy's interest, of which 400 billion cubic feet equivalent (Bcfe) were proven reserves at year-end 2010. The company expects net production from its acquired interest in the Marcellus Shale to reach 600 MMcfe/d in 2015 and is expected to continue growing into the next decade.
The companies expect the transaction to be completed by the end of September 2011, subject to customary adjustments and conditions. The effective date of the transaction is July 1, 2011.
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