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Western Nixes Midstream MLP, Cites Permit Progress in Powder River

In a review of its corporate strategy, Western Gas Resources said last week that its board has decided not to spin off its midstream assets into a master limited partnership. After consulting with financial advisors, Western determined that a spin-off or sale would not benefit stockholders at this time. The company also announced significant progress in its Powder River Basin drilling program and said it plans to bring its expertise in unconventional gas exploration and production to the Western Canadian Sedimentary Basin (WCSB).

Western said it considered numerous strategic alternatives in deciding to retain the midstream operations, which include about 21 gas processing plants and 10,800 miles of pipeline. It considered the cash flow generated by the assets, the relatively low tax basis of the assets and the potential market valuations for the various alternatives.

Meanwhile, CEO Peter Dea said the company is in better shape today than it has been in years in terms of obtaining drilling and water discharge permits in the Powder River. "Our 2005 drilling program is making good progress. We are also very excited with the ongoing performance of the Big George coal fairway development, where Western and our co-developer are producing over 100 MMcf/d from the Big George coal."

Western said that it, along with its co-developer (Williams) has obtained 87% of the permits necessary for drilling 850 wells this year in the Powder River. It also has received permits for 180 federal wells for a 2006 drilling program. The company and its partner have received water discharge permits for 71% of the 2005 drilling program and applications for remainder are either awaiting final approval from the Wyoming Department of Environmental Quality or are making their way through the regulatory process.

Western is producing about 100 MMcf/d (gross) out of the industry's total of more than 240 MMcf/d from the Big George area in the Powder River. Gross production volumes from its four newest Big George development projects, including Kingsbury, SG Palo, Bullwhacker Creek and Schoonover Road averaged 69 MMcf/d during the second week of July, which was up 200% from levels last year. Over the last few months, early signs of gas have appeared at two other Big George fairway pilots, Western said, and it is preparing for gas sales from these later this summer.

Western said it also has participated in or is in the process of drilling 50 gross wells on the Pinedale Anticline in the Greater Green River Basin this year as well as an additional two wells in the eastern Green River Basin.

"Drilling in the Pinedale Anticline is also proceeding well," said Dea. "We are on track to meet or exceed our original estimate of participation in 80 wells."

And in the northeastern Colorado Niobrara biogenic gas play, the company is flowing 850 Mcf/d into a newly constructed sales line from nine wells. Western also said it has other drilling plans in a different undisclosed area of the Rocky Mountain region where it has amassed 500,000 net acres.

In addition, it announced plans Thursday to take its unconventional exploration and production expertise to the WCSB in Canada where it has drilled two wells so far. "In coalbed methane alone, resource estimates for gas-in-place in the U.S. Rocky Mountain basins and WCSB are comparable at several hundred trillion cubic feet of gas in each area," the company noted. "However, Western Canada represents only a few percent of the combined areas' current coal bed methane production, hence providing significant opportunities in future years."

Dea said the company has "tremendous upside potential with over 3 Tcf of proved, probable and possible reserves."

"Our integrated strategy has delivered excellent returns to our shareholders, averaging an annual shareholder return of approximately 44% over the last five years, from 2000 through 2004," he said.

"Additionally, we have positioned the company to benefit from new unconventional plays with our 1.6 million net acre leasehold in eight Rocky Mountain basins while significantly improving our balance sheet."

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