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Southwestern Sells Bit of Fayetteville, to Exit Permian Basin

April 7, 2008
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Southwestern Energy Co., the largest operator in the natural gas-rich Fayetteville Shale, agreed to sell 6% of its holdings in the play to XTO Energy Inc. for about $530 million. The purchase expands XTO's position in the play to more than 300,000 net acres and reduces Southwestern's position to around 906,650 net acres.

Southwestern also is planning to sell its leasehold in the Permian Basin.

Fort Worth, TX-based XTO, which has focused its exploration on onshore unconventional gas plays across the Midcontinent, also acquired gathering infrastructure in the deal.

"This acquisition expands our visible growth potential in the Fayetteville Shale," said XTO President Keith A. Hutton. "Given our engineering assessment, we expect the acreage, which is contiguous to our core development footprint, to hold resource potential in excess of 1 Tcfe. With the pipeline infrastructure already in place, our immediate plans include using four drilling rigs in 2008 and at least six rigs in 2009."

XTO expects the proved reserves attributable to the acquisition "to grow to 160 Bcfe this year and at least 325 Bcfe by year-end 2009," said Hutton. "Overall, our operational teams are dedicated to making XTO a top producer and value creator in the Fayetteville Shale."

The sale includes 55,631 net acres of Southwestern's total 906,700 net acres in the play as of year-end 2007. Included is about 10.5 MMcf/d of output from the Fayetteville Shale as of March 17. The acreage is located in the southeast portion of the company's focus area.

"The sale of this acreage is in keeping with our focus on present value and our strategy of rationalizing our assets to fund our capital program," said Southwestern CEO Harold M. Korell. "Results have been improving in recent quarters in the Fayetteville Shale project; our James Lime drilling [in East Texas] looks promising, and we are now drilling our first Marcellus Shale test" in the Appalachian Basin. "This sale, along with our planned utility and potential Permian sales, will meet our 2008 capital needs and position us well as we move into 2009."

The acquisition, which XTO expects to fund with a combination of cash and debt, is scheduled to close by May 5. Merrill Lynch was Southwestern's financial adviser in the transaction.

XTO has been active in the Fayetteville since 2005 and has participated in several wells with Southwestern, which is headquartered in Houston. Earlier this year, XTO purchased 32,000 net acres in the field, which at the time increased its position in the shale to 240,000 net acres (see NGI, Feb. 18).

"The sale price of $520 million implies a transaction value of $3.25/Mcfe and roughly $9,300/acre," said energy analysts with SunTrust Robinson Humphrey/the Gerdes Group.

BMO Capital Markets analyst Ray Deacon noted that XTO "usually [does] a nice job" with its acquisitions. XTO, he said, should be able to recover more in the Fayetteville properties "beyond initial estimates."

In addition to selling some of its Fayetteville Shale holdings, Southwestern has retained the Oil & Gas Asset Clearinghouse to sell its Permian Basin properties in Texas and New Mexico, which will mark an exit from the region. Operated and nonoperated properties would be included in the sale. No purchase price was indicated.

The Texas leases to be sold are located in Crane, Martin and Scurry counties; the New Mexico leases are in Eddy and Lea counties. The package includes a 6-100% working interest (5-83% net revenue interest) in 10 fields, five of which are operated. Net production is 1,000 b/d of oil and 3.5 MMcf/d of natural gas from the Strawn/Wolfberry, Delaware and Devonian trends. Net cash flow is $2.8 million a month, Southwestern said. The data room is scheduled to open April 23.

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