Consol to Sell Five Coal Mines to Murray Energy for $3.5 Billion

150-Year-Old Firm Aims to Take Advantage of U.S. Gas Boom

Consol Energy agreed to sell five Appalachian coal mines to Murray Energy, in a deal valued at $3.5 billion, its biggest step yet in shifting the focus of its business toward natural gas and away from coal.

By John W. Miller, Kris Maher

PITTSBURGH—Consol Energy Inc. has agreed to sell five Appalachian coal mines to Murray Energy Corp., in a deal valued at $3.5 billion, its biggest step yet in shifting the focus of its business toward natural gas and away from coal.

Consol executives are restructuring their 150-year-old firm to take advantage of the U.S. gas boom, and to steer investment away from coal destined for U.S. coal-fired power plants, which are under pressure to reduce emissions of pollutants and to compete with inexpensive gas.

Murray will pay $850 million in cash, and take over the McElroy and Shoemaker mines on the Ohio River, and three mines inland, Loveridge, Robinson Run and Blacksville. The five, representing about half of Consol’s coal, primarily supply the U.S. domestic power market. “That business is very stable, but it has low prospects for growth,” Consol president Nick DeIuliis said in an interview. Gas, he said, is the growth story.

In addition to paying cash, Murray will also take on $2.4 billion in labor and environmental liabilities, including $2.1 billion in post retirement payments. Consol will also receive an estimated $184 million in future royalty payments for shipping coal out of its terminal in Baltimore.

Mr. DeIuliis and other Consol executives argue their stock has been undervalued for as long as five years because of the company is perceived as a coal miner. “It’s an emotional decision,” he said. However, Consol will continue to operate seven mines mainly destined for exports and making steel.

The five mines being sold are unionized and employ between 3,000 and 3,500 workers, Consol said. They are represented by the United Mine Workers of America. Union consent wasn’t required to approve the deal. However, Murray will have to respect the terms of the existing collective bargaining agreement.
Murray is also buying Consol’s river transport business, and will assume environmental and labor liabilities for the five mines.

Consol received calls from “dozens” of interested buyers, said Mr. DeIuliis. In the end, only two to five were serious, all U.S. companies. The final deal was signed this past weekend at Consol headquarters in Canonsburg, PA.

This deal will double the current size of Murray’s operations. Founded in 1988, the Ohio-based firm is the biggest private coal company in the U.S., with production of around 30 million tons per year. It employs roughly 3,000 people.
Consol will retain roughly half its coal capacity, mainly destined for exports market and making steel, such as the Buchanan mine in Mavisdale, Va., which last year produced 3.5 million tons of metallurgical coal.

Consol has invested heavily in the natural gas market in recent years, including a $3.5 billion purchase of Dominion Resources’ Appalachian gas business to take advantage of the shale gas boom.

The recent success of the initial public offering of Antero Resources Corp., which has similar gas assets to Consol, has underscored Consol’s undervaluation for some analysts.

The sale marks something of a historic shift for the company, which started mining coal during the Civil War. It also echoes the larger national trend toward greater reliance on cheaper, cleaner-burning natural gas.

Consol Energy was the fifth largest U.S. coal producer last year, mining 56 million tons of coal. It had net income of $388 million last year on $5.4 billion in revenue.
Between 2008 and 2012, its coal production slipped nearly 14%, while its natural-gas production grew more than doubled to 156.3 billion cubic feet of gas equivalent. Said Mr. DeIuliis, “we are going from a coal company that does [gas] to a [gas] company that also does coal.”

Coal accounted for approximately 80% of Consol’s revenue in 2012, while natural gas accounted for roughly 15%.

The company first entered the gas business in the 1980s as a way to make its mines safer, by drawing off underground methane from coal seams before mining, which can reduce the risk of an explosion during mining.

More recently Consol began producing gas from unconventional wells in Appalachia. In 2010, it took a big leap into the emerging shale-gas boom when it acquired the Appalachian business of natural gas producer Dominion Resources, which gave it reserves in the Marcellus and Utica shale formations.

Then in 2011, Consol announced two joint ventures to accelerate its drilling capacity, with Noble Energy Inc. and with a Hess Corp. subsidiary. It has 4 trillion cubic feet of gas reserves.

Last year, 56% of its gas production came from coal seams, 23% from Marcellus Shale, 19% from shallow oil and gas sites, and 2% from other unconventional sites. Earlier this year, Consol said it has 15,000 gas wells, comprising 8% of all wells in Appalachia, as well as 4,500 miles of gathering pipelines.

Its sales of Marcellus gas comprised 19% of gas revenues last year, and it completed 51 Marcellus wells last year.