Alberta Energy Co. Ltd. became more U.S. than Canadian producerlast week by grabbing a major foothold in the Rocky Mountainregion. The company is buying all the common shares of McMurry Oil,which owns 1.2 Tcf of gas reserves and significant explorationacreage in the Jonah Field in the Green River Basin in southwesternWyoming. It also is purchasing the 245-mile Jonah Field gasgathering system, which currently transports 320 MMcf/d of gas andis primed for an expansion to 440 MMcf/d. The transactions arevalued at a total of C$1.15 billion.

“We have added a substantial new growth platform in the U.S.Rockies, something we have been looking to do for some time. It’san area that we have been exploring in and of course now ourexploration programs will be expanded,” said AEC CEO Gwyn Morgan.”The geology is comparable to western Alberta and it is an areathat AEC can apply its core competency in deep, tight gasexploration and development to add shareholder value. We think thetiming also is very good to become the fifth largest independentgas producer in North America with the third largest gas reservesbase… There’s no question in my mind that gas prices are going togo much higher in North America.”

AEC Oil & Gas (USA) Inc. bought the proven and probablereserves for C$910 million cash. It will increase AEC’s gasreserves to 5.4 Tcf, the largest ownership position in Canada. AECpaid C$0.74/Mcf for probable reserves, C$0.91/Mcfe for establishedreserves and C$1.19/Mcfe for proven reserves.

“We are buying these assets at a competitive cost compared toother recent transactions, but that is where the comparison ends,”said Morgan. “Instead of short-life, high-decline assets where it’sa scramble just to stay even, which we’ve seen in so many of thedeals that have come along, Jonah has a 20-year reserve life andsustainable production growth and upside potential.

“Instead of scattered unfocused assets, this is operated,high-working interest production.. The netbacks are high and therecycle ratio is three times, and we believe that both will risefurther as gas markets continue to tighten,” he added. “We haveanother growth platform to add as another step in our globalsuper-independent strategy.”

Net gas production from the Jonah properties currently is 140MMcf/d, but is expected to grow to 180 MMcf/d in 2001 and 220MMcf/d in 2002. The acquisitions are expected to bring AEC’s gassales to 1,080 MMcf/d this year, an increase of 19% over 1999levels. Its gas sales are expected to continue increasing in 2001to 1,280 MMcf/d, another 19% jump. And about 58% of AEC’s year 2000total production base now will be North American gas.

In addition, AEC will acquire acreage on the play fairway of thePinedale Anticline, which is believed to have the explorationpotential for up to 1 Tcf. This brings AEC’s net explorationacreage in Wyoming up to 135,000 net acres.

“Based on our detailed review, these assets are the highestquality gas assets currently available in North America,” saidMorgan. AEC won the deal following a bidding process conducted byprivately owned McMurry, involving a few select companies. Theagreement has been approved by the McMurry board but is subject toapproval by shareholders. The acquisition is anticipated to takeeffect June 1 subject to regulatory approval.

The Jonah field is situated near the Opal gas hub, facilitatingready market access. AEC’s midstream division now also has the maintransportation link to the hub through its purchase of a 92.5%stake in the Green River Pipeline LLC, which owns the Jonah GasGathering Co. It also has offered to acquire the remaining 7.5%.The total cost of the pipeline transactions is C$240 million whichamounts to about five times pretax cash flow for the pipeline, AECsaid. The pipeline is expected to contribute approximately C$45million of annual operating cash flow in 2001.

“Control and operatorship of the pipeline system ensures marketaccess for AEC gas and puts AEC in control of capacity growth,”said Morgan. This pipeline system currently transports gas undercontracts with 14 producers in the region and is in the process ofexpanding.

AEC said most of the current employees of McMurry and thepipeline companies will be offered employment with AEC Oil &Gas (USA) Inc.

“This is a franchise quality asset which not only provides agrowth position in a world class field, but also a regionaloperating platform to explore for more ‘Jonahs’ from our newlyestablished Denver-based business unit,” Morgan added. He said theacquisition is expected to provide both immediate and long-termgrowth in AEC’s cash flow and earnings per share. Based on currentNymex gas prices, the acquisition is expected to be accretive tocash flow by $0.45 per share for the remaining seven months in2000, and $1 per share in 2001. It is expected to increase AEC’searnings per share by $0.05 in 2000, and to contribute $0.20 toearnings per share in 2001.

Rocco Canonica

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