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Cherokee Basin Player Forms Gathering MLP

Oklahoma City-based Quest Resource Corp., the largest operating company in the Cherokee Basin, formed Quest Midstream Partners LP, a master limited partnership (MLP) that owns and operates a gas gathering system in the Cherokee Basin.

The partnership has completed a private placement of equity with net proceeds to Quest expected to be $82 million. Approximately $45 million will be used to repay debt, and the remainder will be used for development and acquisition within the Cherokee Basin.

"Formation of Quest Midstream Partners has created a vehicle for Quest to realize significant value for our midstream assets," said Quest CEO Jerry Cash. "The private placement of approximately 49% of the common units in the partnership provides capital to Quest to immediately reduce leverage and underpin the funding of our 2007 capital program, which is concentrated on our large inventory of identified, low-risk development projects on our existing undeveloped acreage within the Cherokee Basin."

The private placement investor group was led by Alerian Capital Management LLC and co-led by Swank Capital LLC. The private placement consisted of 4,864,866 common units, representing an approximate 48.65% limited partner interest in the partnership at a purchase price of $18.50 per unit. In addition, certain of the investors received an aggregate 15% interest in the general partner. Friedman, Billings, Ramsey & Co., Inc. acted as financial advisor to Quest.

When Quest said last month that it intended to form an MLP, it anticipated raising $65-75 million of proceeds from institutional investors, expected to represent 35-40% of the partnership interests without taking into account the incentive distribution rights of the general partner. Also in November Quest said it expected capital spending for 2006 to total $175 million with 55% anticipated to be allocated to drilling, completing and connecting wells; 40% on gas gathering, hook-ups and other infrastructure; and 5% on acreage.

Quest Resource is the largest producer of natural gas in the Cherokee Basin, which is located in southeastern Kansas and northeastern Oklahoma. The company operates more than 1,500 producing wells, which produce into the more than 1,500-mile gathering and transportation pipeline system owned and operated by Quest. Quest currently has 1,700 locations in its drilling inventory.

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