CMS Energy Corp. went on a shopping spree last week, taking amajor stake in one of the Rocky Mountain region’s hottest newproducing areas, the Powder River Basin, and adding to its growingMidcontinent midstream asset base with the purchase of Heritage GasServices, L.L.C.

The Heritage deal came only two weeks after CMS purchasedTulsa-based Continental Natural Gas, which operates 2,000 miles ofMidcontinent gathering lines, 550 MMcf/d of processing and 1.4million gallons per day of liquids production. Heritage, which alsois based in Tulsa, will add another 2,000 miles of gas gatheringpipe to CMS’ operations, as well as one 45 MMcf/d gas processingplant 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 Continentalinto a newly-formed company called CMS Continental Natural Gas Inc.”Together, they will provide further expansion of CMS Energy’sdomestic energy market presence beyond our traditional midwesternbase,” he said.

Barry Abramson, a utility analyst with PaineWebber, noted theMidcontinent region midstream purchases and Powder Riveracquisition were perfect examples of CMS’s strategy of makingmoderate to small-sized acquisitions that form the building blocksof a long-term strategy. “They’re a very experienced and carefulcompany when it comes to making acquisitions. Since they are reallybig in the Midwest and the Midcontinent region is a very important[supply source] for the Midwest, the Heritage and Continental dealsseem appropriate,” said Abramson. “They’ve also always indicated adesire to buy assets cheaply when they are out of favor. This wouldfit with that strategy. They always make long-term bets andlong-term investments.”

Over the next decade, the Powder River Basin is expected to beone of the Rocky Mountain region’s fastest growing producing areas.CMS paid $28 million for a 50% stake in Denver-based PennacoEnergy’s Powder River Basin acreage position, which, at 492,000 netacres, is one the largest in the Wyoming-Montana coalbed play.

“This is the first meaningful investment we’ve made in coalbedmethane, but we’ve been looking at these types of projects veryclosely for 10 years,” said Bill Stephens, executive vice presidentof CMS Oil &amp Gas Co. “There’s not any coalbed methane inMichigan, but [Antrim Shale] has many similar characteristics and alot of the technology and procedures that we’ve adopted in theAntrim Shale we think we can apply to this project as well.”

Petrie Parkman energy analyst Stuart Wagner thinks the PowderRiver purchase is an excellent deal for CMS from an E&ampPperspective. “It’s got some big upside potential. Some of the bestcoal in the country is in Gillette, WY. It’s a low-risk, attractiverate-of-return (more than 60%). You just drill the coalbed,de-water them and start producing them. It’s has very goodeconomics. The play is small now, 70 MMcf/d, but it has tremendouspotential.” The basin holds about 30 Tcf of estimated gas reservesand about 20% of that is considered recoverable, he said.

Wagner noted several pipeline companies and producers areplanning major pipeline expansions to serve the basin. KN Energyand Devon Energy are planning to build a $110 million, 126-mile gasgathering system that would extend between Gillette and Glenrock,WY, bringing up to 450 MMcf/d of new production to connections withmultiple downstream pipelines during the first half of 1999. AndWestern Gas Resources and an affiliate of Colorado Interstate Gashave proposed a 90-mile, 20-inch diameter gathering system and atreating facility to bring 200 MMcf/d out of the basin. KN, CIG andQuestar also are planning new downstream interstate pipelines andexpansions 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 ofthose pipeline projects.

Pennaco Energy President Paul M. Rady, formerly an executive atBarrett Resources, said the CMS transaction is financially andstrategically important for Pennaco, which was formed in Januaryand went public in July. The transaction provides financialflexibility to begin a $30 million drilling program next year thatwill include about 600 wells. In addition, it aligns Pennaco with acompany that “has the expertise, operating capability and thebalance sheet strength to expand pipeline capacity both within thePowder River Basin and downstream into the interstate markets.”

Rocco Canonica

©Copyright 1998 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.