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AEC Snags McMurry Oil, Gets 35% Stake in Jonah Field

AEC Snags McMurry Oil, Gets 35% Stake in Jonah Field

Alberta Energy Co. Ltd. became more U.S. than Canadian producer last week by grabbing a major foothold in the Rocky Mountain region. The company is buying all the common shares of McMurry Oil, which owns 1.2 Tcf of gas reserves and significant exploration acreage in the Jonah Field in the Green River Basin in southwestern Wyoming. It also is purchasing the 245-mile Jonah Field gas gathering system, which currently transports 320 MMcf/d of gas and is primed for an expansion to 440 MMcf/d. The transactions are valued at a total of C$1.15 billion.

"We have added a substantial new growth platform in the U.S. Rockies, something we have been looking to do for some time. It's an area that we have been exploring in and of course now our exploration programs will be expanded," said AEC CEO Gwyn Morgan. "The geology is comparable to western Alberta and it is an area that AEC can apply its core competency in deep, tight gas exploration and development to add shareholder value. We think the timing also is very good to become the fifth largest independent gas producer in North America with the third largest gas reserves base... There's no question in my mind that gas prices are going to go much higher in North America."

AEC Oil & Gas (USA) Inc. bought the proven and probable reserves for C$910 million cash. It will increase AEC's gas reserves to 5.4 Tcf, the largest ownership position in Canada. AEC paid C$0.74/Mcf for probable reserves, C$0.91/Mcfe for established reserves and C$1.19/Mcfe for proven reserves.

"We are buying these assets at a competitive cost compared to other recent transactions, but that is where the comparison ends," said Morgan. "Instead of short-life, high-decline assets where it's a scramble just to stay even, which we've seen in so many of the deals that have come along, Jonah has a 20-year reserve life and sustainable production growth and upside potential.

"Instead of scattered unfocused assets, this is operated, high-working interest production.. The netbacks are high and the recycle ratio is three times, and we believe that both will rise further as gas markets continue to tighten," he added. "We have another growth platform to add as another step in our global super-independent strategy."

Net gas production from the Jonah properties currently is 140 MMcf/d, but is expected to grow to 180 MMcf/d in 2001 and 220 MMcf/d in 2002. The acquisitions are expected to bring AEC's gas sales to 1,080 MMcf/d this year, an increase of 19% over 1999 levels. Its gas sales are expected to continue increasing in 2001 to 1,280 MMcf/d, another 19% jump. And about 58% of AEC's year 2000 total production base now will be North American gas.

In addition, AEC will acquire acreage on the play fairway of the Pinedale Anticline, which is believed to have the exploration potential for up to 1 Tcf. This brings AEC's net exploration acreage in Wyoming up to 135,000 net acres.

"Based on our detailed review, these assets are the highest quality gas assets currently available in North America," said Morgan. AEC won the deal following a bidding process conducted by privately owned McMurry, involving a few select companies. The agreement has been approved by the McMurry board but is subject to approval by shareholders. The acquisition is anticipated to take effect June 1 subject to regulatory approval.

The Jonah field is situated near the Opal gas hub, facilitating ready market access. AEC's midstream division now also has the main transportation link to the hub through its purchase of a 92.5% stake in the Green River Pipeline LLC, which owns the Jonah Gas Gathering Co. It also has offered to acquire the remaining 7.5%. The total cost of the pipeline transactions is C$240 million which amounts to about five times pretax cash flow for the pipeline, AEC said. The pipeline is expected to contribute approximately C$45 million of annual operating cash flow in 2001.

"Control and operatorship of the pipeline system ensures market access for AEC gas and puts AEC in control of capacity growth," said Morgan. This pipeline system currently transports gas under contracts with 14 producers in the region and is in the process of expanding.

AEC said most of the current employees of McMurry and the pipeline companies will be offered employment with AEC Oil & Gas (USA) Inc.

"This is a franchise quality asset which not only provides a growth position in a world class field, but also a regional operating platform to explore for more 'Jonahs' from our newly established Denver-based business unit," Morgan added. He said the acquisition is expected to provide both immediate and long-term growth in AEC's cash flow and earnings per share. Based on current Nymex gas prices, the acquisition is expected to be accretive to cash flow by $0.45 per share for the remaining seven months in 2000, and $1 per share in 2001. It is expected to increase AEC's earnings per share by $0.05 in 2000, and to contribute $0.20 to earnings per share in 2001.

Rocco Canonica

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