CONSOL Energy Lands Dominion's Gas Properties for $3.48 billion

Considering that CONSOL Energy (CNX) has a market cap of $9 billion, its purchase of Dominion Resources' (D) Appalachian natural gas properties on Monday is a big deal. The price tag comes to hefty $3.48 billion.

To pull off the deal (which CONSUL expects to close at the end of April), CONSOL will need to raise $4 billion through debt and equity offerings. As a result, investors are somewhat skittish, pushing the company's shares down 9% so far in today's trading.

Dominion will net anywhere from $2.2 billion to $2.4 billion (when accounting for the tax bite). This will enable it cut $200 million from annual expenditures. Also, Dominion's primary focus will be on its regulated utility business, which will account for 70% of revenues. For 2010, the company reaffirmed its operating earnings projection of $3.20 to $3.40 per share.

Energy Boost

The deal with Dominion will give CONSOL an additional 1.46 million oil and gas acres and 9,000 producing wells. The upshot will be a 50% increase in natural gas reserves to roughly 3 trillion cubic feet. In fact, the potential reserve base is 41 trillion cubic feet.

For the most part, the big attraction is the Marcellus Shale, a geologic formation that goes through West Virginia, Pennsylvania and New York. Not only is it rich in natural gas but it's inexpensive to extract -- which is certainly important as finding new energy sources gets tougher. The Marcellus Shale by some estimates may hold enough natural gas to provide energy in the U.S. for a decade.

Despite the sell-off on the news of the Dominion deal, CONSOL shares are still up an impressive 70% for the past year. So, it makes sense to capitalize on this strength by making a transformative deal. Roughly 35% of CONSUL's future revenues will come from Dominion's properties.

True, the price tag is steep, but this is expected as dealmaking heats up in the energy sector. And CONSOL is definitely picking up choice assets that are likely to provide nice returns for the long haul. What's more, the deal will help to diversify CONSOL's business, making it less reliant on coal.