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XTO Sets Sights on Appalachian Shale with $600M Purchase

XTO Energy Inc.'s natural gas exploration prowess expanded into the Appalachian Basin last week after the independent agreed to pay Linn Energy LLC $600 million to acquire 152,000 net acres, which are spread across the Marcellus Shale in western Pennsylvania and West Virginia.

The transaction, expected to close by July 1, includes producing properties and a leasehold that is 99% weighted to gas. Proved reserves are estimated to be 145 Bcfe from the shallow Mississippian and Devonian reservoirs, with 75% proved developed, according to XTO. Upon closing, the acquisition would add 25 MMcfe/d net to XTO's production base. The pipeline and gathering infrastructure included in the purchase is valued at about $50 million.

"This acquisition provides XTO an ideal opportunity to stake a foothold in the emerging Marcellus Shale play of the Appalachian region," said CEO Bob R. Simpson. "The expansive leasehold is anchored in the right locations, where we anticipate prolific shale potential."

The producing properties, he said, generate free cash flow that XTO would deploy across all of its shale development programs, which include the Barnett and Fayetteville shales. "Also, the operational team already in place brings the experience, expertise and manpower to support XTO's long-term commitment to the basin."

XTO's "confidence in the Marcellus Shale is based on several key factors: a rigorous evaluation of the geology and its associated resource, the horizontal and vertical well results from multiple operators and our ability to expedite the pipeline infrastructure needed to redevelop the region," said President Keith A. Hutton. "From our technical perspective, the Marcellus Shale resembles the Fayetteville Shale, containing similar natural gas in place potential and comparable producing metrics."

Using horizontal drilling and completion techniques, "we anticipate average well reserves to be greater than 2 Bcfe with initial producing rates of 2 to 3 MMcfe/d," said Hutton. "Given this framework, the properties could hold 2 to 4 Tcfe of resource potential."

The Appalachian Basin acreage represents about 10% of Linn Energy's total reserves. The master limited partnership (MLP) purchased its West Virginia holdings less than two years ago, paying a private producer about $39 million for the assets (see NGI, Dec. 18, 2006). Earlier in 2006 Linn Energy launched an initial public offering in its transition to becoming an MLP.

Linn Energy now operates 90% of its Appalachian Basin wells and gathers 90% of the production through a gathering system that is more than 1,000 miles long. The Houston-based producer earlier had identified 1,100-plus drilling locations in the play and had estimated at least 10 years of drilling inventory.

CEO Michael Linn suggested that the MLP did not have enough resources to take advantage of the emerging gas play.

"Linn Energy's core strategy is to focus on low-risk development opportunities, and recent enthusiasm regarding the prospective Marcellus Shale play provided the incentive for us to evaluate our holdings in Appalachia and determine their fit within our strategy and MLP structure," said the CEO. "A delineation of opportunities in the Marcellus will take time, and successful exploration and development will require significant capital investment. We believe that monetizing our Appalachian assets has created significant value for our unitholders and that the sale represents full value for our Marcellus acreage and Appalachian proved reserves."

Pro forma for the sale, Linn Energy would have a credit facility of about $700 million. It plans to use the proceeds from the XTO sale to reduce its debt. It also plans to issue revised guidance with its first quarter earnings release, but it does not expect the sale to materially alter its previously issued earnings guidance. The sale also is not expected to impact its ability to earn and pay its distribution at the current annualized rate of $2.52/unit.

Once the Appalachian Basin sale is completed, Linn Energy still would have a considerable amount of oil and natural gas assets to develop. In the Midcontinent region, where it has about 78% of its total reserves (56% weighted to gas), the core operations are in the Texas Panhandle's Granite Wash play. It also explores and develops assets in Oklahoma and Kansas. In California, the producer has a leasehold in the Brea Olinda Field in the Los Angeles Basin, which is 94% weighted to crude oil.

Lehman Brothers Inc. acted as financial adviser to Linn Energy and conducted a multi-party auction process for the transaction. XTO said funding is expected to be provided through a combination of cash flow, commercial paper and other borrowings.

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