CMS Buys Heritage, Takes Stake In Powder River

CMS Energy Corp. went on a shopping spree last week, taking a major stake in one of the Rocky Mountain region's hottest new producing areas, the Powder River Basin, and adding to its growing Midcontinent midstream asset base with the purchase of Heritage Gas Services, L.L.C.

The Heritage deal came only two weeks after CMS purchased Tulsa-based Continental Natural Gas, which operates 2,000 miles of Midcontinent gathering lines, 550 MMcf/d of processing and 1.4 million gallons per day of liquids production. Heritage, which also is based in Tulsa, will add another 2,000 miles of gas gathering pipe to CMS' operations, as well as one 45 MMcf/d gas processing plant in the Hugoton Basin and a gas and liquids marketing staff. Its 1997 revenues were $23 million.

William J. Haener, CEO of CMS Gas Transmission and Storage Co., said the Heritage management team will be combined with Continental into a newly-formed company called CMS Continental Natural Gas Inc. "Together, they will provide further expansion of CMS Energy's domestic energy market presence beyond our traditional midwestern base," he said.

Barry Abramson, a utility analyst with PaineWebber, noted the Midcontinent region midstream purchases and Powder River acquisition were perfect examples of CMS's strategy of making moderate to small-sized acquisitions that form the building blocks of a long-term strategy. "They're a very experienced and careful company when it comes to making acquisitions. Since they are really big in the Midwest and the Midcontinent region is a very important [supply source] for the Midwest, the Heritage and Continental deals seem appropriate," said Abramson. "They've also always indicated a desire to buy assets cheaply when they are out of favor. This would fit with that strategy. They always make long-term bets and long-term investments."

Over the next decade, the Powder River Basin is expected to be one of the Rocky Mountain region's fastest growing producing areas. CMS paid $28 million for a 50% stake in Denver-based Pennaco Energy's Powder River Basin acreage position, which, at 492,000 net acres, is one the largest in the Wyoming-Montana coalbed play.

"This is the first meaningful investment we've made in coalbed methane, but we've been looking at these types of projects very closely for 10 years," said Bill Stephens, executive vice president of CMS Oil &amp Gas Co. "There's not any coalbed methane in Michigan, but [Antrim Shale] has many similar characteristics and a lot of the technology and procedures that we've adopted in the Antrim Shale we think we can apply to this project as well."

Petrie Parkman energy analyst Stuart Wagner thinks the Powder River purchase is an excellent deal for CMS from an E&ampP perspective. "It's got some big upside potential. Some of the best coal in the country is in Gillette, WY. It's a low-risk, attractive rate-of-return (more than 60%). You just drill the coalbed, de-water them and start producing them. It's has very good economics. The play is small now, 70 MMcf/d, but it has tremendous potential." The basin holds about 30 Tcf of estimated gas reserves and about 20% of that is considered recoverable, he said.

Wagner noted several pipeline companies and producers are planning major pipeline expansions to serve the basin. KN Energy and Devon Energy are planning to build a $110 million, 126-mile gas gathering system that would extend between Gillette and Glenrock, WY, bringing up to 450 MMcf/d of new production to connections with multiple downstream pipelines during the first half of 1999. And Western Gas Resources and an affiliate of Colorado Interstate Gas have proposed a 90-mile, 20-inch diameter gathering system and a treating facility to bring 200 MMcf/d out of the basin. KN, CIG and Questar also are planning new downstream interstate pipelines and expansions that could increase access to the basin by 1.3 Bcf/d. Wagner said he would expect CMS to take a stake in one or more of those pipeline projects.

Pennaco Energy President Paul M. Rady, formerly an executive at Barrett Resources, said the CMS transaction is financially and strategically important for Pennaco, which was formed in January and went public in July. The transaction provides financial flexibility to begin a $30 million drilling program next year that will include about 600 wells. In addition, it aligns Pennaco with a company that "has the expertise, operating capability and the balance sheet strength to expand pipeline capacity both within the Powder River Basin and downstream into the interstate markets."

Rocco Canonica

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