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XTO Picks Up Peak Energy, Grows Barnett Shale Presence

Some producers circle the globe looking for reserves, but Fort Worth-based XTO Energy Inc. has found one of the hottest gas plays going right in its own backyard.

Last week XTO said that it agreed to buy privately held Peak Energy Resources Inc., a Barnett Shale producer, for equity consideration of 2.555 million shares of XTO common stock, valued at $105 million.

The acquisition grows XTO's reserves and leasehold acreage in the Tier 1 and Tier 2 regions of the Barnett Shale play, predominantly in Hood, Parker and eastern Erath counties of Texas. XTO Energy's internal engineers estimate proved reserves to be 64 Bcf of natural gas, 14% proved developed. Additional potential is more than 200 Bcf. Proved reserves estimates are based on the ownership of about 37,000 gross acres (33,000 net) with new well locations spaced at 100 acres. Development costs for the proved undeveloped reserves are estimated at $1.30/Mcf. XTO expects reserves of 1.0-1.5 Bcf for each new well at a cost of about $1.6 million. Production from the properties is expected to reach 10 MMcf/d by the end of 2006 and more than 25 MMcf/d in 2007.

"Our strategy for investment in the Barnett Shale reflects our commitment to low operational risk and healthy economic returns. Peak Energy offers XTO the opportunity to invest in the best noncore areas of the play where we anticipate the greatest potential," said CEO Bob R. Simpson. "About 30% of the Peak Energy acreage is held-by-production with no lease expiration risk and, in total, expands our holdings to almost 200,000 net acres across the Barnett Shale play. Importantly, we have hand-picked our properties where drilling and economic results favor long-term development."

The Barnett Shale is one of the hottest domestic plays going. Devon Energy Corp. of Oklahoma City is the 800-pound gorilla in the North Texas play, which it entered in 2002 through the acquisition of Houston-based Mitchell Energy & Development (see NGI, Aug. 20, 2001). Last week Devon CEO Larry Nichols said the company's production from the Barnett will soon be 1 Bcf/d, thanks in part to its recent acquisition of No. 2 Barnett producer Chief Oil & Gas (see NGI, May 8). Devon's net production last year in the shale was about 650 MMcf/d from 2,500 producing wells. But with its drilling success at about 98%, Nichols said producing 1 Bcf/d will come fairly soon. Devon expects to drill about 425 wells in the Barnett this year, up from 268 in 2005. "Of the 50 best wells drilled horizontally [in the Barnett], Devon has 28 of them, four times [those of] our largest competitor."

The U.S. Geological Survey completed an assessment of the Fort Worth basin Barnett Shale a few years ago. Findings were published in the American Association of Petroleum Geologists' AAPG Bulletin in February 2005. The article says the play has "multi-trillion cubic foot potential."

Indeed, how about 30 Tcf. Rich Pollastro, a USGS geologist who worked on the survey, told NGI that he and his colleagues estimate 26.2 Tcf of technically recoverable undiscovered reserves in the core and extended areas of the play (see NGI, Jan. 16). Add this to what's already been booked to reach 30 Tcf. And there could be more to come as the play is expanded and technology evolves.

XTO sees a good thing in the Barnett, too.

"As in all of our regions, we continue to build out positions based on reservoir quality, production characteristics and attractive returns. The Peak Energy purchase provides us with solid drilling acreage based on our technical assessment of well performance to date," said Keith A. Hutton, President. "The leasehold is primarily located in a thick section of the shale reservoir, ranging from 200 feet to 250 feet, and at a shallow average drilling depth of 4,600 feet. Per-well reserves may be less than those in the Core Area, but the gas composition is 25% richer, yielding price realizations $1 to $1.50 per Mcf higher than the core. A well-designed infrastructure to handle gas production and water disposal is already in place. In addition, new pipelines are under construction to accommodate future development. XTO currently plans to drill 300 wells on the Peak properties and looks to expand further with 50-acre drilling locations in select areas."

XTO signed a 10-year agreement last year with Energy Transfer Partners LP (ETP) for transportation of more than 700 MMcf/d of gas on ETP's proposed 264-mile pipeline from North Texas to East Texas, which will begin service in 2007. The agreement accommodates planned production growth from XTO Energy's Freestone Trend and Barnett Shale development projects in Texas.

El Paso Corp. recently extended until June 8 a binding open season for its Continental Connector pipeline project, which if built will move Barnett Shale production eastward (see NGI, May 29).

XTO's Peak acquisition is expected to close June 30. The booked acquisition cost will include customary noncash adjustments, including a step-up for deferred income taxes. Lehman Brothers acted as the financial advisor to Peak Energy.

Last month XTO added price hedges for gas and oil production through 2008, securing its plans to increase production growth in 2006 up to 12% and to have "at least" double-digit growth in 2007, said Simpson (see NGI, May 8). Total production volumes hedged represent about 40% of equivalent production for the rest of 2006 and about 33% of equivalent production in 2007. Between June and September, XTO locked in 260 MMcf/d at $11/06/Mcf, and between October and December, it has locked in 585 MMcf/d at $10.48. Between January and December 2007, XTO locked in 500 MMcf/d at $10.05/Mcf.

XTO is active in Texas, New Mexico, Arkansas, Oklahoma, Kansas, Wyoming, Colorado, Alaska, Utah, Louisiana and Mississippi.

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