Houston-based El Paso Corp.'s exploration and production (E&P) subsidiary plans to pump up the volume in some of its key domestic tight gas plays with the $875 million cash purchase of Peoples Energy Production Co.

The transaction, which was announced Friday, adds more than 600 proved and probable drilling locations in the ArkLaTex, Texas Gulf Coast, San Juan and Arkoma basins, and in Mississippi.

The Houston-based Integrys Energy Group subsidiary owns an estimated 305 Bcfe of proved reserves with current production of 72 MMcfe/d. About 42% of its properties are proved developed with a 12-year reserve life. Nearly 80% of the reserves are in El Paso's core areas: 50% in the ArkLaTex region and 30% located along the Texas Gulf Coast. Integrys announced plans to sell the E&P operations earlier this year (see NGI, Feb. 26).

In the ArkLaTex, Peoples current output is 25 MMcfe/d; proven reserves are 146 Bcfe. Along the Texas Gulf Coast, production is 32 MMcfe/d and proved reserves total 98 Bcfe. The other properties produce a total of 15 MMcfe/d with 61 Bcfe of proved reserves.

"The short story is, Peoples is as near a perfect fit for El Paso as we thought we could find," CEO Doug Foshee said during a conference call Friday. In addition to the reserves, he noted that El Paso will add Peoples ' cross-town E&P staff, which should create operating synergies and help the two to share best practices.

Peoples Energy has been on the company's "target acquisition list for a long time," said Brent Smolik, president of El Paso E&P. "We're getting them at a good price," and the acquisition "is a nice offset" to the divestiture program that El Paso announced earlier this month (see NGI, Aug. 13). Most of the assets, to be sold by early next year, are located in the Gulf of Mexico and South Texas. "This gives us an immediate upgrade in the performance of our E&P program."

The capital budget for 2008 is not yet finalized, but Smolik said there will be expansion onshore, especially in tight gas development.

"With the transaction, ArkLaTex will become one of the biggest operations for us," Smolik said. Together, the ArkLaTex and the Texas Gulf Coast assets offer "the highest return programs in our portfolio today."

In the ArkLaTex, "we've got five rigs there, Peoples has four...and we can justify eight to nine, maybe 10 rigs in 2008," Smolik said. Most of the ArkLaTex growth will be in northern Louisiana, and El Paso is "likely to drill more than 150 wells in this next year. It's tight gas, and it has the best return on activity."

Along the Texas Gulf Coast, El Paso now runs a six-rig program; Peoples runs one to one-and-a-half rigs. El Paso now is targeting an eight-rig program for 2008 in the South Texas/Vicksburg area.

El Paso will temporarily finance the acquisition through general corporate liquidity, augmented by doubling the E&P subsidiary's existing revolving credit facility to $1 billion from $500 million. All or a significant portion of the purchase is expected to be permanently financed with the proceeds from El Paso's divestiture program. The transaction has an effective date of June 30 and is expected to close during the third quarter.

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