In its largest property purchase to date, Alabama utility and E&P company Energen Corp. said last week that it is buying about 250 Bcfe of proved San Juan Basin coalbed methane reserves for $273 million from an unnamed private company.

“The properties represent an important expansion in one of our core areas of operation, the San Juan Basin,” said Energen President James McManus. “The properties also give us an opportunity to capitalize on our extensive coalbed methane (CBM) expertise as we develop the significant amount of undeveloped reserves.”

Subsidiary Energen Resources already has substantial CBM reserves in the San Juan Basin (471 Bcfe) and in the Black Warrior Basin of Alabama (229 Bcfe). It also has substantial conventional resources in the Permian Basin (359 Bcfe), the Gulf Coast region, North Texas and in the northern Rockies.

Located in the underpressured Fruitland coal play, more than half of the San Juan proved reserves being purchased are behind pipe and undeveloped, the company said. The reserves are 80% natural gas and 20% liquids. Energen also estimates that there are up to 60 Bcfe of probable reserves for a total of 310 Bcfe proved and probable reserves.

The company is buying a large development inventory of more than 110 infill wells, which are expected to be drilled in the first two years of ownership. Assuming future development costs of $50 million, the all-in acquisition cost for proved and probable reserves is $1.04/Mcfe, Energen said. McManus said during a conference call that each new well is expected to cost about $350,000-400,000.

Production from the acquired properties is estimated to be 2.3 Bcfe from August-December, 8.6 Bcfe in 2005, and 11.7 Bcfe in 2006. Production is expected to continue to build through 2009, peaking at 12.7 Bcfe before declining gradually thereafter. The current net production rate is 14 MMcfe/d.

Energen plans to use available cash and existing lines of credit to finance the deal without having to access the capital markets. The company estimates that equity will comprise 52% of total capitalization at year-end 2004. Its five-year equity ratio target is 60%.

In order to help lock in near-term target returns from the acquisition, Energen plans to hedge the flowing gas production for the remainder of 2004 and for 2005. Strip prices for natural gas for the last five months of 2004 and for 2005 currently are higher than the prices used in the acquisition, and NGL prices are comparable to those used in the acquisition, the company noted.

Energen is maintaining its earnings guidance of $3.20-3.30 per diluted share for 2004 and $3.70-3.90 per diluted share for 2005. The estimated production of Energen Resources in 2004 is about 86 Bcfe.

Energen also is the parent company of Birmingham, AL-based utility Alagasco, which serves 460,000 gas customers in the central and northern part of the state.

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