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Pinnacle Gas Squeezed by Limited Funds, Low Prices

Limited capital resources and low Rocky Mountain natural gas index prices are squeezing Pinnacle Gas Resources Inc., a junior explorer focused on the Powder River Basin. Several coalbed methane (CBM) wells already are shut in, the company has substantially curtailed all new drilling for 2008 and it may reduce drilling through the first half of 2009.

The Sheridan, WY-based producer has come under scrutiny by energy analysts in recent days because it acknowledged in its third quarter earnings announcement that it was pressured by low Colorado Interstate Gas (CIG) index prices and by a lack of access to funds.

"For 2008 we entered the year with $8 million in cash; in addition, we have drawn $7.5 million on our credit facility through Sept. 30," said CEO Peter G. Shoonmaker recently. "Based on our current market capitalization we are less than 30% leveraged as of Sept. 30...We are currently reviewing our 2009 plan while aggressively reducing costs, which will allow us to focus on our core asset areas such as Cabin Creek" in the Powder River Basin.

Pinnacle's share price began to fall earlier this year, well before the credit crisis, after Oklahoma City-based Quest Resource Corp. terminated a stock-for-stock merger agreement (see NGI, Oct. 22, 2007).

The CEO said during a quarterly earnings call in November that Pinnacle had set a total capital expenditure budget of $30.1 million for 2008 and had expected to drill 146 gross (110 net) wells this year. "However, due to low CIG index prices and limited capital resources, we have reduced our capital expenditure budget from $30.1 million to$26.6 million."

Through the end of 2008, "we expect to drill only one gross (0.9 net) well," the CEO said. Pinnacle's production rate as it exited 3Q2008 was 13.4 MMcf/d, 35% higher than in 3Q2007 and 8% higher sequentially from 2Q2008. In the last quarter Pinnacle had 764 gross producing wells (433 net). The company drilled 37 gross (26 net) producing wells in 3Q2008, and it hooked up 41 gross wells.

Because of Pinnacle's limited resources, FBR Capital analysts lowered their target price on the company to $1/share from $4. A lack of funds "will impede the company's ability to grow production and to monetize its undeveloped resource potential," said analysts Amir Arif and Mitesh Thakkar.

Pinnacle "mentioned that it has essentially used up its entire credit facility and, as a result, will essentially stop drilling," wrote the duo. "This increases the risk of the company not being able to monetize its underlying asset value, and, although the company did mention that it will consider asset sales, the market appetite for the company's asset base will most likely be weak, given the current market environment, low gas prices, high differentials and asset quality."

Pinnacle was formed in June 2003 through a contribution of property by CCBM Inc., a subsidiary of Carrizo Oil & Gas Inc.; Rocky Mountain Gas Inc., a subsidiary of U.S. Energy Inc.; and a capital contribution by Credit Suisse First Boston (see NGI, June 30, 2003). Pinnacle holds a total of around 454,000 gross (316,000 net) acres, most of them in the Powder River Basin, along with some property in the Green River Basin, where it acquired a stake in 2006.

"We have a strong leasehold position with less than 10,000 acres of the 316,000 net acres expiring in 2009," Shoonmaker said last week. "We still believe we are positioned for strong growth going forward."

Storm Cat Energy Inc.'s U.S. subsidiaries, which explore for gas in, among other places, the Powder River Basin, blamed low energy prices when it filed for Chapter 11 bankruptcy protection in October. It now is negotiating with its existing lenders to secure enough financing, and it expects to continue to operate.

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