Constellation Energy Corp.'s newly formed exploration and production partnership has signed an agreement to acquire coalbed methane (CBM) properties in the Cherokee Basin from EnergyQuest Resources LP for $115 million. The transaction by Constellation Energy Partners LLC (CEP) includes more than 500 miles of pipeline gathering systems.
According to CEP, the properties, which are located in Kansas and Oklahoma, have 49 Bcf of estimated proved reserves and a reserve life of 17 years. Current net production is 7.9 Bcfe/d. More than 550 wells are producing, with Bullseye Operating LLC operating on average 75%. CEP said it also has identified more than 800 drilling and completion "opportunities" on 96,000 gross acres.
"The support of our sponsor, Constellation Energy, was instrumental in making this acquisition," said CEO Fred Dawson. "We believe that our relationship with Constellation Energy will continue to help us achieve our growth objectives."
The master limited partnership (MLP) was formed last year and is 54% owned by Constellation Energy (see Daily GPI, Nov. 16, 2006). Most of CEG's assets now consist primarily of CBM, which are located in the Robinson's Bend Field in the Black Warrior Basin of Alabama (see Daily GPI, Aug. 14).
In connection with the transaction, CEP entered into a unit purchase agreement to sell in a private placement more than 2.2 million common units for $26.12/unit and 90,376 newly created Class E units for $25.84/unit to third party investors, for aggregate cash proceeds of $60 million. The proceeds from the equity private placement, together with funds available under the company's revolving credit facility, will fully fund the acquisition, CEP said.
Dawson said CEP expects the acquisition to be immediately accretive to distributable cash. Adjusted earnings in the first year are estimated at $14-16 million, and in year two, CEP estimates adjusted earnings of $20-25 million. CEP said cash flow stability is expected to be achieved with "significant" hedging through 2010.
The private placement investor group was led by GPS Partners LLC and included Lehman Brothers MLP Partners LP and ZLP Fund LP. Simmons & Co. International and Griffis & Associates LLC acted as financial advisors to EnergyQuest Resources LP in the acquisition.
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