Consol Energy Inc agreed to buy Dominion Resources Inc's Appalachian natural gas properties for $3.48 billion in cash, giving Consol a leading position in the growing Marcellus Shale field.

Consol's shares fell more than 9 percent on news it plans to issue $4 billion in debt and equity to fund the purchase and development of the property.

The deal is the latest sign that energy companies are targeting faster development of natural gas resources as the fuel wins an increasing share of the global energy market.

In December, Exxon Mobil announced it would buy XTO Energy for about $30 billion in stock in a bid to expand its natural gas portfolio in North America and the Marcellus Shale.

Consol, one of the nation's top four coal producers, has been expanding its shipments of coal to Asian steel producers, but remains mainly a shipper of thermal coal to U.S. power companies.

This clearly makes them a bigger gas player, said Brett Levy, an analyst at Jefferies & Co. in Connecticut. I don't think it changes the mix between coal and gas today, maybe down the line it will.

Consol said the purchase would boost its proved reserves of gas by more than 50 percent to about 3 trillion cubic feet and double its potential reserves to about 41 trillion cubic feet.

The deal is expected to close on April 30, and is expected to account for as much as 35 percent of Consol's total revenue.

Consol also owns 83 percent of gas producer CNX Gas , and Chief Executive Officer Brett Harvey said Consol may seek to buy back the publicly traded shares it does not control. That sent shares in CNX up 17 percent to $30.62.

We have kept our powder dry to do a big deal like this and we have the balance sheet to do that, Harvey told a conference call.

Still, the Pittsburgh-based company, which listed $7.7 billion in total assets on its balance sheet for year-end 2009, saw its shares fall $4.94 to 49.39 on the New York Stock Exchange.

Shares of Dominion, which put the assets up for sale last year, were up 4 cents at $39.73 on the New York Stock Exchange.

DRILLING TO RAMP UP

Harvey said the company would ramp up drilling activity on the new properties, which together with Consol's coal properties reunites land that was once owned by John D. Rockefeller's Standard Oil empire.

The Marcellus Shale, which stretches from West Virginia across Pennsylvania and into New York, is one of the hottest natural gas fields under development, and analysts have said it may contain enough natural gas to supply the United States for a decade.

Still, some communities have protested that the hydraulic fracturing drilling used to tap the shale in the Marcellus has contaminated water supplies with toxic chemicals. Those concerns, as well as worries from other shale regions, have prompted the U.S. Congress to consider regulating the drilling technique.

Under the deal, Consol will acquire 1.46 million oil and gas acres, including 491,000 in the Marcellus, from Dominion along with more than 9,000 wells that are expected to produce more than 41 billion cubic feet equivalent in 2010, the companies said.

Consol said it plans to have two rigs drilling new wells by the end of the year, five operating next year and 10 operating by 2013. Those rigs cost about $100 million per year.

For Dominion, which owns power utilities in North Carolina and Virginia as well as a liquefied natural gas terminal in Maryland, the sale will increase its regulated utility business to about 70 percent of its operating profits next year from less than 45 percent in 2006.

Dominion expects to receive after-tax proceeds of $2.2 billion to $2.4 billion, which will meet its equity needs for 2010 and 2011, allow it to repurchase common stock and fund the revenue credits to Dominion Virginia Power customers under a rate case settlement agreement.

The sale will reduce its on-going capital expenditures by $200 million per year.

Dominion is being advised in the sale by Barclays Capital Inc. and Baker Botts L.L.P. provided legal advice.

BofA Merrill Lynch acted as lead financial adviser to CONSOL Energy and Wachtell, Lipton, Rosen & Katz and Akin Gump Strauss Hauer & Feld LLP acted as legal counsel. Stifel, Nicolaus & Company, Incorporated acted as financial adviser and provided a fairness opinion.

(Reporting by Matt Daily; Editing by Derek Caney, Dave Zimmerman)

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