CMS Buys Heritage, Takes Stake In Powder River
CMS Energy Corp. went on a shopping spree last week, taking a
major stake in one of the Rocky Mountain region's hottest new
producing areas, the Powder River Basin, and adding to its growing
Midcontinent midstream asset base with the purchase of Heritage Gas
The Heritage deal came only two weeks after CMS purchased
Tulsa-based Continental Natural Gas, which operates 2,000 miles of
Midcontinent gathering lines, 550 MMcf/d of processing and 1.4
million gallons per day of liquids production. Heritage, which also
is based in Tulsa, will add another 2,000 miles of gas gathering
pipe to CMS' operations, as well as one 45 MMcf/d gas processing
plant in the Hugoton Basin and a gas and liquids marketing staff.
Its 1997 revenues were $23 million.
William J. Haener, CEO of CMS Gas Transmission and Storage Co.,
said the Heritage management team will be combined with Continental
into a newly-formed company called CMS Continental Natural Gas Inc.
"Together, they will provide further expansion of CMS Energy's
domestic energy market presence beyond our traditional midwestern
base," he said.
Barry Abramson, a utility analyst with PaineWebber, noted the
Midcontinent region midstream purchases and Powder River
acquisition were perfect examples of CMS's strategy of making
moderate to small-sized acquisitions that form the building blocks
of a long-term strategy. "They're a very experienced and careful
company when it comes to making acquisitions. Since they are really
big in the Midwest and the Midcontinent region is a very important
[supply source] for the Midwest, the Heritage and Continental deals
seem appropriate," said Abramson. "They've also always indicated a
desire to buy assets cheaply when they are out of favor. This would
fit with that strategy. They always make long-term bets and
Over the next decade, the Powder River Basin is expected to be
one of the Rocky Mountain region's fastest growing producing areas.
CMS paid $28 million for a 50% stake in Denver-based Pennaco
Energy's Powder River Basin acreage position, which, at 492,000 net
acres, is one the largest in the Wyoming-Montana coalbed play.
"This is the first meaningful investment we've made in coalbed
methane, but we've been looking at these types of projects very
closely for 10 years," said Bill Stephens, executive vice president
of CMS Oil & Gas Co. "There's not any coalbed methane in
Michigan, but [Antrim Shale] has many similar characteristics and a
lot of the technology and procedures that we've adopted in the
Antrim Shale we think we can apply to this project as well."
Petrie Parkman energy analyst Stuart Wagner thinks the Powder
River purchase is an excellent deal for CMS from an E&P
perspective. "It's got some big upside potential. Some of the best
coal in the country is in Gillette, WY. It's a low-risk, attractive
rate-of-return (more than 60%). You just drill the coalbed,
de-water them and start producing them. It's has very good
economics. The play is small now, 70 MMcf/d, but it has tremendous
potential." The basin holds about 30 Tcf of estimated gas reserves
and about 20% of that is considered recoverable, he said.
Wagner noted several pipeline companies and producers are
planning major pipeline expansions to serve the basin. KN Energy
and Devon Energy are planning to build a $110 million, 126-mile gas
gathering system that would extend between Gillette and Glenrock,
WY, bringing up to 450 MMcf/d of new production to connections with
multiple downstream pipelines during the first half of 1999. And
Western Gas Resources and an affiliate of Colorado Interstate Gas
have proposed a 90-mile, 20-inch diameter gathering system and a
treating facility to bring 200 MMcf/d out of the basin. KN, CIG and
Questar also are planning new downstream interstate pipelines and
expansions that could increase access to the basin by 1.3 Bcf/d.
Wagner said he would expect CMS to take a stake in one or more of
those pipeline projects.
Pennaco Energy President Paul M. Rady, formerly an executive at
Barrett Resources, said the CMS transaction is financially and
strategically important for Pennaco, which was formed in January
and went public in July. The transaction provides financial
flexibility to begin a $30 million drilling program next year that
will include about 600 wells. In addition, it aligns Pennaco with a
company that "has the expertise, operating capability and the
balance sheet strength to expand pipeline capacity both within the
Powder River Basin and downstream into the interstate markets."