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Berry Picks Plum Assets in East Texas for $640M

June 16, 2008
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The land grab continues in the emerging natural gas-rich basins of East Texas, and Berry Petroleum Co. has become the latest to join the crowd, agreeing to pay $620 million in cash to buy 4,500 net acres. With the transaction, Berry's output would increase by 32 MMcfe/d, and it would add 370 Bcfe to reserves.

The agreement, with a consortium of private sellers that includes privately held O'Brien Energy Co., would give Berry producing properties in Limestone and Harrison counties, TX, where 100 wells are now producing. Ryder Scott Co.'s proved reserve estimates, adjusted for additional interests purchased by Berry, are 335 Bcfe, 29% of which are proved developed reserves. More than 100 additional drilling locations have been identified in various productive zones that include the Pettit, Travis Peak, Cotton Valley, James Lime and Bossier sands. About 75 recompletion opportunities also have been identified.

"This is a tremendous opportunity for Berry to establish a new core area with another long-lived, low geologic-risk natural gas asset with a growing production profile," said CEO Robert Heinemann. "We believe this is an excellent entry into the price-favored East Texas basin given the concentrated asset base, identified drilling inventory with attractive economics and upside potential including the Haynesville and Bossier shale."

Heinemann, who presided over a conference call with energy analysts Wednesday, noted that the acquisition would add a new core business unit to Berry's operations. Up to now, the company, weighted to crude oil, has focused its exploration efforts in the San Joaquin Valley in California and in the Rockies' Piceance, Uinta and Denver-Julesburg basins. With the East Texas purchase, Berry's reserves would be equally weighted to gas and oil, with 43% of the reserve base in California, 34% in the Rockies and 23% in East Texas.

With the addition of the East Texas acreage, Berry expects its 2008 production would be 32,000-34,000 boe/d, or 19-26% higher than in 2007. Proved reserves at year's end are expected to be 235-245 million boe. Berry would be the operator of 100% of the acquired properties, and it would establish an East Texas-focused asset team based in Dallas to manage the properties. Berry also executed a services agreement for the sellers to operate the properties during the transition period.

"We certainly have horizontal aspirations here," Heinemann said, giving a nod to the rush by other gas producers that are building or increasing their stakes in the region.

Berry would be joining some heavy hitters in East Texas, including EnCana Corp., Anadarko Petroleum Corp. and Chesapeake Energy Corp. XTO Energy Inc. decided last year to spend more money to develop its East Texas acreage, and Tuesday, the company agreed to pay $4.2 billion for Hunt Petroleum Corp., which has extensive acreage across the region (see related story). Cabot Oil & Gas Corp. earlier this month agreed to pay $603 million for some East Texas and northern Louisiana assets (see NGI, June 9). And Penn Virginia Corp. recently touted the success of a horizontal test well in Harrison County, which is expected to ramp-up at an initial rate of 10-15 MMcf/d (see NGI, June 2).

Berry now is testing two vertical wells drilled in the Bossier Shale in Limestone County and three vertical wells drilled in the Haynesville Shale in Harrison County. Also included in the acquisition is a gathering system valued at $20 million that is expected to gather all current and future production from the acquired properties.

The California-based producer will up its 2008 capital budget by $75 million as part of a longer range plan to spend $425 million in East Texas to develop the proved undeveloped and probable reserves. Full-life finding and development costs were estimated at $2.77/Mcfe. Five rigs currently are dedicated to the project.

"It's only day one," Heinemann said to analysts who wanted more specifics about what type of production Berry is forecasting in the coming years or whether it plans to add even more acreage. However, the CEO said once management has the opportunity to review the data, Berry likely "will pursue more deals" in the East Texas area.

The effective date of the transaction is Feb. 1, 2008, and closing is expected by mid-July. Initially the purchase is to be funded by borrowing from a new $1.5 billion senior secured credit facility with a $1 billion borrowing base. The company also is considering an equity offering.

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