Utility and coal player Consol Energy Inc.’s bid to re-roll up coalbed-methane producer CNX Gas Corp. may represent a new U.S. gas M&A trend, and further pressure on gas-acquisition prices. Anticipation of new carbon-constraint U.S. energy policy is driving it, Consol reports.

But a big bonus is greatly in play as well: New estimates of CNX’s Appalachian shale potential, including in the hot-topic Marcellus, and in the Chattanooga and Huron.

Consol rolled CNX out in a 144A offering in 2005 to explore and develop gas potential in Consol’s existing coalfield acreage in Appalachia. The stock began trading in January 2006 at about $22 a share, and has jumped from some $28 this January prior to the Consol news to an all-time high of $38 at press time.

Nick DeIuliis, CNX president and chief executive, says, “As recently as two and a half years ago, we didn’t fully appreciate the significance of our shale opportunities. Today, we estimate our Appalachian shale resources alone could range from 1.3 to nearly 5.2 Tcf (trillion cubic feet).”

The company’s total coalbed-methane reserves are some 2.3 Tcf. CNX estimates its company-wide recoverable reserves and net unrisked resource potential is 3.6 to 7.4 Tcf in Appalachia and the Illinois Basin.

He adds, “(The company total) could be higher once we begin to analyze the Trenton Black River formation, the tight sands in our Virginia field, and our conventional oil and gas potential….”

CNX has drilled one horizontal well in the Chattanooga shale, testing 3.9 million cubic feet per day. Its first Marcellus vertical attempt in southwestern Pennsylvania in January was stopped short of Marcellus when encountering 1.2 million per day and was completed there. The company plans to go after the Marcellus elsewhere this year.

CNX also holds 300,000 acres in the New Albany shale, which is prospective for oil. In the Rockies, it has a holding in the Powder River Basin it is considering selling, and in the Bakken shale in North Dakota, it has contributed its acreage to a venture with Marathon Oil Co.

Its proved reserves are 1.3 Tcf (99% gas; 46% proved developed producing; 50% undeveloped). Its 2007 reserve-replacement cost was $1.25 per thousand cubic feet. Fourth-quarter production averaged 159 million cubic feet per day. J. Brett Harvey, Consol president and chief executive, says the bid for CNX is to diversify Consol’s portfolio of coal with gas, and he agrees with DeIuliis that much has changed since 2005.

“Two years ago, financial markets did not understand or properly value the gas assets and operations of Consol Energy,” Harvey says. “(Since then, CNX’s) visibility and transparency have improved, and financial markets appear to have a greater appreciation for its value….”

Harvey expects energy markets during the next 10 years to be affected increasingly by U.S. and global environmental policy. “It is becoming increasingly apparent that carbon constraints will become a part of energy regulation in the U.S. Such constraints pose challenges for all fossil fuels, but would affect gas to a lesser extent than coal or petroleum... “Increasing gas in our energy portfolio is a prudent step to manage the risk associated with carbon controls, because, with its lower emissions, gas will become more valuable in the near term.”

Standard & Poor’s Ratings Services analyst John Whitlock says that what to do about coal is among the Top 10 credit-capacity issues facing U.S. electric utilities, along with regulatory and legislative backlash. Rainforest Action Network reports it is pressuring banks to end their coal investments.

Dan Pickering, lead analyst with Tudor, Pickering, Holt & Co. Securities Inc., says it would be difficult for another bidder for CNX to close a deal, as Consol owns a voting 82% of CNX, the offer is structured as tax-free, CNX operates in Consol’s coalfields, and Consol says it has no interest in selling its existing shareholding. (For deal details, see “Company Briefs” in this issue.)

Michael Bodino, lead analyst with Coker & Palmer Investment Securities, says the Consol offer gives little value to CNX’s undeveloped acreage. “This offer comes at a time when CNX is kicking off a long-awaited exploration program to evaluate some of its additional resource potential, particularly Appalachian shale…With Appalachian shale garnering tremendous industry buzz, CNX is set to benefit from its increased activity, as well as from activity by other operators.”