HOUSTON (Reuters) - Consol Energy"s $3.5 billion purchase of shale gas assets from Dominion Resources this week could be a precursor to other coal companies diversifying toward cleaner energy sources.
U.S. coal companies, which a few years ago enjoyed a boom in coal-fired power plant development, must diversify as concern about climate change grows.
Utilities are shutting old coal plants and replacing them with generators fueled by natural gas, which when burned emits 50 percent less greenhouse gas than coal.
Other coal companies could follow Consol"s lead. Massey Energy has expressed interest in gas production. Alpha Natural Resources has formed a joint venture to produce gas. And Walter Energy for years has used wells to remove potentially explosive gas from its mines.
On the supply side, environmental advocates and the government are pushing to limit the practice of leveling mountains to recover thinning seams in the U.S. coal heartland, Appalachia.
Analysts are uncertain, however, how many coal companies actually will get into the gas business, even though a lot of natural gas is found near coal seams and a number of companies already drill wells to de-gas mines.
"You may see some smaller investments like this, but Consol is in a somewhat unique situation as the company already had a decent size and growing position in natural gas," said analyst Jim Rollyson of Raymond James Associates Inc.
Traditionally, there have been barriers to coal companies investing heavily in natural gas exploration and production.
Finding and producing gas requires a different skill set. The gas business is capital-intensive, and until recently coal companies lacked the heft. Adding a different business makes it harder for Wall Street to value a company, which in turn makes it harder to raise money by selling stock.
"You need a more sophisticated investor who understands both," said analyst Dave Khani of FBR Capital Markets. "It"s a narrow community. Wider than it was eight, 10 years ago, but narrower than if you"re just coal or just gas."
INVESTORS IN COAL, OIL-GAS INCREASINGLY OVERLAP
Unlike many major coal producers, Consol has been in the natural gas business for years and in 2005 formed a unit, CNX Gas, to explore for and produce the stuff. CNX Gas trades publicly as CXG on the New York Stock Exchange.
And the energy sector is changing.
Analyst Kevin Book of ClearView Energy argued that Consol"s move adds value by broadening the company"s footing away from a fuel considered "dirty" and into one widely seen as "clean."
Book compared it to oil refiner Valero Energy Corp buying bankrupt ethanol producer VeraSun Energy Corp, adding renewable fuel to Valero"s fossil-based portfolio.
"It reflects economic fundamentals but also includes carbon optionality as an upside," Book said.
In a venture similar to but smaller than the model followed by Consol, Alpha acquired Marcellus shale gas acreage in its 2009 merger with Foundation Coal and is moving to develop it in a joint venture with Pennsylvania-based Rice Energy LLC.
Alpha and Rice, as Alpha Shale Resources LP, plan to drill four wells this year and as many as 100 eventually, depending on demand, pipeline availability and drilling results, Alpha spokesman Ted Pile said.
"It"s not a huge undertaking at this point," Pile said. He did not offer a detailed development timeline.
Production from the four Alpha wells in 2010 is projected at no more than 1.3 billion cubic feet per year compared with 92 billion cubic feet CNX produced in 2009. And Consol"s output is a fraction of traditional oil and gas producers" flow.
Massey Chairman Don Blankenship said in a conference call Wednesday that his company has been looking at gas properties and remains interested even after spending nearly $1 billion to buy miner Cumberland Resources this week.
"We are still looking at gas, but we haven"t found anything," Blankenship told analysts.
(Additional reporting by Eileen O"Grady in Houston and Steve James in New York; Editing by David Gregorio)
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