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Financial Turmoil Cuts into Antero's Marcellus Shale Plans

The financial market turmoil forced the hand of privately held producer Antero Resources last week, which agreed to accept less drilling acreage in the Marcellus Shale from Dominion but pay more money per acre.

Antero in June agreed to buy 205,000 acres in the shale from Dominion for $552 million, or around $2,700/acre (see NGI, July 7). However, Antero's "difficulty in obtaining follow-on financing in the current market turmoil" led to the producer asking Dominion to amend its agreement.

Antero had "difficulty with follow-on financing, and they were worried that they wouldn't be able to carry out the entire drilling program," Dominion CEO Thomas Farrell said at the Merrill Lynch Power & Gas Leaders Conference Wednesday. "We agreed to downsize the transaction and increase the amount per acre."

Under the new terms, Dominion assigned Antero the drilling rights to 114,259 acres in the shale prospect for about $347 million, or about $3,037/acre. Dominion still will receive a 7.5% royalty interest on future natural gas production from the acreage, and it will retain its drilling rights in traditional formations both above and below the Marcellus Shale interval. In addition, Dominion plans to continue its conventional drilling program on the acreage.

The amended agreement is scheduled to close within a few days, Farrell said.

Antero's difficulty in raising money to pay for the Marcellus development follows Constellation Energy's financial dilemma, which led to its tentative sale to MidAmerican Energy Holdings Co. (see related story). The news also follows Chesapeake Energy Corp.'s decision to cut its capital spending by 17% because of the huge drop in gas prices since the end of June (see related story).

Dominion, which sold most of its exploration and production prospects last year to reinvigorate its regulated utility arm, retained its Appalachian Basin assets, which include drilling rights on 600,000-800,000 acres in the Marcellus Shale formation (see NGI, Aug. 20, 2007). The acreage not assigned to Antero is to be included in Dominion's plans to market additional Marcellus Shale acreage.

Antero is still one of the anchor tenants for the proposed Dominion Keystone pipeline, which would transport Marcellus Shale production to market. Dominion is negotiating binding precedent agreements with potential customers following an open season that concluded in August.

The amended agreement will have no effect on Dominion's 2008 operating earnings guidance of $3.10-3.15/share, nor on its 2009 operating earnings outlook of $3.30-3.45/share, Farrell said.

Proceeds from the Antero sale after tax are expected to be around $205 million, which Dominion intends to use initially to reduce outstanding short-term debt. Longer term, the proceeds are expected to partially offset a previously announced equity issuance in 2009. Barclays Capital Inc. acted as financial adviser to Dominion on the transaction.

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