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Gas Producers Prospecting for Oil, NGLs

Linn Energy LLC, which is almost 60% weighted to natural gas, last week agreed to pay $154.5 million to build its leasehold in the Permian and Anadarko basins -- for the oil. The news mirrors recent announcements by other gas-heavy explorers that have begun buying up property to build their oil reserves.

"This acquisition increases our exposure to oil, which offers very attractive margins in the current commodity price environment," said CEO Michael C. Linn. "The long-life, low-decline characteristics and geographic location of these properties make them an attractive addition to our asset portfolio in the Permian and Midcontinent areas."

Linn Energy in 2006 moved to become a limited partnership. At the time it was more than 65% weighted to gas, but in a prescient move, the Houston-based independent changed strategies and spent half a billion dollars to acquire properties that included a leasehold in the oil-rich Texas Panhandle (see NGI, Dec. 18, 2006).

The $454 million purchase three years ago lowered Linn Energy's dependence on gas to 58% and gave it a lot more natural gas liquids (NGL) and oil prospects. Last August the company spent another $118 million to acquire additional oil-weighted property in the Permian Basin.

The latest purchase, from an undisclosed seller, provides Linn Energy with current net output of about 1,700 boe/d, which is 73% liquids. Proved reserves are estimated at more than 12 million boe, which is 80% liquids and 80% proved developed. The reserve life is estimated at 20 years. About 100 proved infill drilling opportunities are available, the company said. The purchase is expected to be completed by the end of January.

Also last week SandRidge Energy Inc. agreed to pay Forest Oil Corp. $800 million to acquire some oil-weighted prospects in the Permian Basin. About $720 million of the purchase price is attributable to reserves and $80 million to undeveloped acreage, equipment and other assets, according to SandRidge. The 90,000 net acres hold an estimated 80 million boe (482 Bcfe) of proved reserves, weighted 65% to oil and NGLs.

"This acquisition of conventional Permian Basin assets significantly increases our ability to develop and produce oil and natural gas from our core West Texas properties," said CEO Tom Ward. "It is a rare situation to acquire legacy operated Permian assets." The play "currently generates the company's highest returns on invested capital thanks to strong oil prices and low drilling costs." The company plans to increase the number of rigs drilling in its Clear Fork development program to six in 2010, said the CEO.

"SandRidge will have an enviable base to develop gas in the Pinon Field, develop oil in the Central Basin Platform and explore for new gas fields in the West Texas Overthrust," said Ward. The properties, which are 98% operated, currently produce 7,600 boe/d (46 MMcfe/d). Estimated probable and possible reserves total more than 90 million boe, or 540 Bcfe. The transaction would increase SandRidge's leasehold in the Permian Basin to more than 130,000 net acres. The leasehold is concentrated in six operated areas with an estimated 1,200 drilling locations.

With the transaction, which is expected to close by the end of this month, oil and NGL production is expected to increase to around 26% of SandRidge's total output in 2010 from 17% this year. Additional oil hedges have been placed covering a cumulative 11 million boe (67 Bcfe) through 2012, locking in $975 million of oil revenue, said the company. About 70-75% of 2010 equivalent production is hedged at a price of $8.79/Mcfe.

Meanwhile, Triangle Petroleum Corp., a junior explorer that up to now has focused nearly all of its attention on an emerging shale gas project in Nova Scotia (see NGI, April 20), last Tuesday announced a "new strategic direction."

The Calgary producer, which replaced its CEO and added new directors to its board, has "decided to pursue several opportunities in North American unconventional oil plays. The company intends to acquire prospective acreage and to commence an appraisal and development program with the aim of producing early cash flow and a series of growth options."

Triangle noted that it can "support this new direction" because it has more than C$5 million in cash reserves, "significant" tax pools of C$32 million in the United States and C$29 million in Canada and no debt. Peter J. Hill was named CEO and joins the Triangle board along with Gardner Parker and Jonathan Samuels.

California-based Palo Alto Investors LLC, which holds 21% of Triangle's common stock, applauded the board's actions.

David Anderson, who directs energy research at Palo Alto Investors, said the "reinvigorated board and new management team are well positioned to create a positive future for Triangle Petroleum." The existing board, he said, had been "very responsive and recognize that additional resources can help the company create long-term shareholder value."

Of Triangle's existing shale holdings in Nova Scotia, Anderson said, "We still believe this has tremendous potential as the geology gets evaluated and well-completion technologies evolve, but it may take time to come to fruition. This new team has expertise that can be put to work creating value immediately."

W&T Offshore Inc. in November said it would focus more on oil and NGL prospects (see NGI, Nov. 9a). Anadarko Petroleum Corp. also last month said it sees more potential in NGLs and oil until gas prices are higher (see NGI, Nov. 9b). And EOG Resources Inc., one of the top North American gas producers, began repositioning itself early this year to focus more on oily prospects in the Barnett Shale in Texas and the Bakken Shale in North Dakota (see NGI, Nov. 9c).

EOG CEO Mark Papa said in August he was "aware that we've piqued a lot of investors' curiosity regarding the shift in our mix toward oil, but let me assure you we are making that shift because of the unique early mover opportunities currently available to us for horizontal oil resource plays and not because we are running away from North America gas" (see NGI, Aug. 10).

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