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Chief Oil, Second Largest Barnett Shale Producer, Decides on Sale

Privately held Chief Oil & Gas LLC, the second largest natural gas producer in the Barnett Shale of North Texas, will be up for sale by the end of the year, and it is expected to fetch a price of at least $1 billion. The anticipated sale already is generating interest from other Barnett players, including Devon Energy Corp., the number one producer.

The Chief sale, which was announced unexpectedly this past week, concentrates solely on the Barnett and currently produces 120 MMcf/d of gas on about 230,000 leased acres, said spokeswoman Kristi Gittins. Subsidiary Eagle Mountain Pipeline, located in Saginaw, TX, also will be sold. It currently treats about 100 MMcf/d for sale to local and regional markets.

Gittins said Wednesday the sale announcement was a complete surprise. Just two months ago, CEO Trevor Rees-Jones had "absolutely no intention" of selling the company. "This is very recent news," said Gittins. However, with high gas prices and abundant opportunities, things fell into place. The 150-member workforce was told the news first, and the producer is now looking for an investment banker to take on the sale. There is no definite timetable for the sale, Gittins added.

"By the end of the month, Chief plans to hire an investment banker, and then we'll set up a data room early next year," said Gittins. She said there have been "a lot of phone calls," but she did not know if there had been any official offers for the company. Royal Dutch Shell plc, which entered the Barnett last year, was rumored to be interested in Chief earlier this year, and last week, Devon CEO Larry Nichols said his company would "likely" make a bid.

Chip Minty, Devon's senior external communications specialist, said Friday the Chief assets would be a "simple integration for us," because most of the leases are adjacent to Devon assets. "We're going to look at this pretty closely," but he said there was no firm plan to make a bid on Chief's assets. "We obviously have a very large position there...550,000 acres," and at the end of the third quarter, he said Barnett production was 575,000 MMcf/d.

"We just about have to entertain the notion of looking at these assets," said Minty, and "that's stating the obvious." Devon "fully expects" the Chief assets to go for a top price. "The assets that we've seen acquired this year have been fairly expensive, and we fully expect the leases to be high. But this is something that we're going to be taking a look at."

From January to June 2005, Chief was the second leading producer in the Barnett, only trailing Devon, according to Ramona Nye at the Railroad Commission of Texas. Chief was the third leading producer in 2004. According to analysts, Chief could command a price of nearly $1.2 billion, or about $6,000 per acre. Nye noted the Barnett is the largest gas producer in the state, with production last year of about 370 Bcf.

Rees-Jones, who is also Chief's president, founded the company in 1994 to concentrate on the Barnett basin in the Fort Worth area. Chief does not disclose revenue, but since 1997, it has drilled more than 250 wells. All of its leases are in the North Texas in Wise, Denton, Tarrant, Parker, Johnson and Hood counties. Chief has a drilling budget of more than $100 million a year has been planning to drill more than 400 wells in the next five years.

The producer uses horizontal drilling in the shale, a process using underground pipes that allows drillers to reach gas reservoirs underneath buildings and even subdivisions. The method also allows drillers to penetrate more than one reservoir at once.

Gitten said only the assets are for sale -- Rees-Jones will keep the Chief Oil & Gas name. "He's only 54, and I expect he'll stay in the business. It's in his blood. I think he'll continue in the business."

According to RigData's 2005 list (through Oct. 3) of the top 100 domestic operators ranked by footage drilled, Chief was 61st. RigData said Chief drilled 498,700 feet of wells, or 0.3% of the total, with average drilling at 8,905 feet. It also had 56 new well starts.

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