Weighed down by misplaced hedges and long term fixed pricecontracts, Beau Canada Exploration Ltd. has sold out to Murphy OilCorp., one of its partners in the development of the hot Ladyfernprospect in northern Alberta and British Columbia, for a totalprice of US$255 million.

Murphy has offered C$2.15 per share and will assume US$123million of debt, the companies said in an announcement last week.With the acquisition Murphy expects to increase natural gasproduction from about 70 MMcf/d to at least 150 MMcf/d next year, a”conservative” estimate, according to Murphy President ClaiborneDeming. Almost a third of the total will be new production fromareas currently under development. Murphy currently is producingabout 70 MMcf/d and Beau Canada production is about 37 MMcf/d.

The transaction is expected to be completed in mid-November andMurphy will set between four and five wells drilling on northernprospects Dec. 1, the start of the winter drilling season innorthern Canada. Deming declined to detail drilling results in thehot northern play, but a third drilling partner, Apache Corp., saidearlier this year that a Ladyfern discovery well had flowed 31MMcf/d. Additional information about the discovery area surfacedlast month in a battle before the National Energy Board over whogets to build a pipeline to connect the new reserves.

Beau Canada represents a “very targeted niche acquisition thatallows us to significantly expand our Canadian gas exposure inareas we know well and like a lot,” Deming said. The acquisitionwill about double Murphy’s Canadian production and exposure. Thepurchase includes proved, plus probable risked reserves of 48.2million barrels of oil equivalent, which is about 74% natural gas.

Responding to questioning at a briefing on the acquisitionDeming acknowledged that at 7,000 feet the Ladyfern prospect is notdifficult drilling; wells can be completed in about a month; thereshould be no processing or transport problems; and he expects tosee increased cash flow fairly quickly. Three of four wells alreadyhave been successful in the area, Deming said, and productioncurrently is about 60 MMcf/d. The company expects to fullydelineate the prospect this winter, with offset and stepout wellsand additional exploration.

Beau Canada was forced into selling by some fixed price hedgesand fixed price downstream contracts going out to 2008. Deming saidin the short term Murphy could mitigate the impact of the contractsby making deliveries from its own production. Longer term, asmarket conditions change, he expects there will be opportunities tocash out of the contracts. “We plan to aggressively manage thesecontracts.”

The contracts involve about 50 MMcf/d of gas next year,declining to 15 MMcf/d in 2008. They include a transportationdifferential, set when capacity was tight, of between 75 and 95cents between Chicago and AECO C, considerably above the current 40cent differential. “If it weren’t for these contracts, [BeauCanada] would be going and growing. The contracts extended way toofar out. It’s a good object lesson.” Deming expects differentialsto become more favorable as new capacity fills up. “This is asnarrow as it’s likely to get. If you’ve got staying power for acouple years you can ride it out.” As it was, the situationrepresented an opportunity for Murphy. “Those contracts knocked $1off the share price of the company,” Deming said. He expects theacquisition to add about 40 cents/share to Murphy’s earnings nextyear and 2.00 a share to cash flow.

Ellen Beswick

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