In a move to expand its natural gas position in Alberta's Deep Basin, Canada's Peyto Exploration & Development Corp. on Tuesday agreed to buy fellow explorer Open Range Energy Corp.
Based on Peyto's C$100.2 million ($98.3 million) stock offer, as well as its assumption of close to C$70 million in debt and various transaction costs, the total offer for Open Range is valued at about C$175 million. At midday Wednesday Peyto shares were trading around C$19.33/share; Open Range shares were at about C$1.33. Open Range just one month ago had made a deal to sell itself to Canada's Cequence Energy Ltd.; Cequence indicated that the agreement had been terminated.
The Open Range purchase would be Peyto's first corporate acquisition since it was formed 13 years ago, said CEO Darren Gee.
"Our Deep Basin expertise and the Open Range assets are a great fit," said Gee. "We believe the acquisition of Open Range will realize returns that are similar to what we've achieved in the past."
Most of Peyto's wells, natural gas plants, gathering and sales pipelines are in a corridor about 200 kilometers (124.2 miles) long and 30 kilometers (18.6 miles) wide adjacent to the foothills of the Canadian Rocky Mountains about halfway between the Northwest Territories and the United States. Peyto produced 245 MMcfe/d in 1Q2012 (40,903 boe/d), which was 25% more than in 1Q2011 when it produced 189 MMcfe/d (31,531 boe/d).
The Open Range properties "are a natural fit with Peyto's Greater Sundance core area where over C$2.3 billion of capital projects over the last 13 years have resulted in the discovery of over 2.4 Tcfe of natural gas and natural gas liquids. Open Range's plant and pipeline infrastructure complements Peyto's existing core assets and bridges Peyto's existing core assets and bridges to other proven Peyto lands on the outskirts of the main Sundance area. This will allow for the accelerated development of these Peyto step-out areas."
The assets to be acquired include more than 110 net sections of land, mostly in the Sundance/Ansell area of the Deep Basin, and would add about 31 MMcf/d and 460 b/d of natural gas and liquids output to Peyto's inventory. More than 98% of the output would be operated and processed by Peyto in its facilities.
Peyto would gain control of "two strategically positioned gas plants in the Sundance/Ansell area with the option to install deep-cut processing facilities," the producer said. "These plants have approximately 25 MMcf/d of unutilized processing capacity that adds immediate value to existing and future Peyto wells."
The management team also has identified more than 100 "high rate of return drilling locations" that offer "sweet liquids-rich potential" in five main formations that the company already is developing: Cardium, Notikewin, Falher, Wilrich and Bluesky. "These will complement Peyto's existing inventory of over 900 drilling locations." Peyto also has more than 115 square miles of 3-D seismic data that cover the Open Range lands.
At least two-thirds of the shareholders of Open Range still have to approve the transaction, and a special shareholder meeting is scheduled for August, when closing is anticipated. Open Range's board of directors has given its unanimous approval and the company's directors and officers, who represent about 8.3% of the shares, agreed to vote in favor of the arrangement.
Once the transaction is completed, Peyto plans to "aggressively develop" the drilling opportunities identified on the Open Range lands by deploying two additional drilling rigs beyond the six Peyto currently is running in the Deep Basin. Up to 45 net (55 gross) wells are expected to be drilled in the Deep Basin over the next three years for a cumulative capital investment now estimated at C$245 million.
About C$50 million is to be invested into the Open Range assets after the anticipated August closing date and the end of this year, according to Peyto executives. "Based on similar capital efficiencies of C$17,500/boe/d and an expected base decline of 25%, it is anticipated that the Open Range assets will be producing 7,000 boe/d by year-end." On a post-acquisition basis, Peyto now expects production by the end of 2012 to be 57,000 boe/d.
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