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PanCanadian Says Montana Power Purchase 'Beautiful Fit'

PanCanadian Says Montana Power Purchase 'Beautiful Fit'

To extend what it sees as dominance in Canada's natural gas market and to boost its production by 10%, PanCanadian Petroleum Ltd. last week agreed to purchase Montana Power Co. for $475 million. The properties will extend PanCanadian's existing shallow gas properties in southern Alberta into northern Montana, adding 94 MMcf/d and 3,800 barrels of crude oil and natural gas liquids.

The acquisition will give PanCanadian properties in Alberta, Montana, Colorado, Oklahoma and Wyoming, along with three gas pipelines linking Alberta and Saskatchewan to Montana.

"We have a focus on natural gas," said CEO David Tuer during a conference call last week in Calgary. "This is clearly our future. It is difficult to put any negative on this (acquisition) and it's likely to stay valuable for the foreseeable future."

Montana Power's production is more than 90% natural gas and associated liquids, and the acquisition substantially extends PanCanadian's land and infrastructure, allowing it to use its technology and operating strategies in a region that extends along the Alberta-Montana border.

"The Montana Power assets clearly fit our strengths and allow us to employ our expertise in developing long life reserves of shallow and medium depth natural gas," Tuer said. "The potential in these assets is significant, and over the next few years, we will add substantially to PanCanadian's daily natural gas production."

Tuer said that the acquisition extends the company's dominance in shallow gas, and called Montana Power a "beautiful fit with PanCanadian's gas strategy, land position and technological capability."

PanCanadian's newest acquisition adds reserves of 550 Bcf and 20 MM barrels of oil and natural gas liquids on a proven and one-half probable basis, said officials. Production and reserves account for $520 million of the purchase price, while the remainder is made up of $135 million for the midstream and marketing assets, $40 million for the undeveloped land (about 600,000 acres), and $7 million of working capital.

Tuer said the company was paying 77 cents/Mcfe of proven and on-half probable reserves. The price for daily flowing production, based on a 6:1 ration of gas to BOE is $4,450/Mcfe, or $26,710/BOE.

Along with the added Alberta and Montana properties, PanCanadian also picks up some land in Colorado's Denver Basin, which now produces about 31 MMcf/d. Other land that is part of the sale is located in the Anadarko Basin of Oklahoma and the Green River Basin of Wyoming.

Three natural gas pipelines that cross from Montana into Alberta and Saskatchewan also are included. The pipelines allow direct access to the U.S. markets for southern Alberta and Saskatchewan gas, and serve more than 1.2 million net acres of developed and undeveloped lands, with most of it concentrated in parcels that span the Canada-Montana border.

Midstream assets that go to PanCanadian include a natural gas marketing company in Butte, MT, along with a deep cut gas processing and fractionation plant in Colorado. The Fort Lupton, CO plant processes more than 60 MMcf/d and 5,500 barrels of natural gas liquids and condensate.

In all, the total developed and undeveloped land is roughly 1.2 million net acres, or 1.7 million gross acres, said PanCanadian.

"Montana Power fit us like a glove," Tuer said during the conference call. He said the acquisition will help PanCanadian to remain "best of class" for what it does. "It makes our sandbox that much bigger."

The acquisition, which is expected to close around Oct. 31, will increase both PanCanadian's net income and cash flow this year and in subsequent years, said Tuer. The added gas production will immediately increase the company's natural gas, as a percentage of total production, to 58%, based on a 6:1 ratio of gas to BOE.

About 25% of the natural gas being acquired from Montana Power now is being sold to Montana Power utilities for $1.50 to $1.60 MMcf until July 2002, and because it's priced below the open market officials think future earnings will be good.

"As that contract expires, there's a lot of potential from the price in this transaction," Tuer said.

And what's to become of Montana Power? Earlier this year, the 88-year-old company, headquartered in Butte, announced it would divest itself of four of its traditional energy businesses. By selling its coal production, natural gas transmission and distribution, independent power production and oil and gas exploration and production businesses, it plans to reinvest the proceeds in Touch America, a fiber optics and telecommunications business, which is also a subsidiary of Montana Power.

"The process to determine the buyer for our oil and gas business was robust, and we are delighted with the result," said Montana Power CEO Robert P. Gannon. "We believe there will be a meshing of business strategies and that cultural synergy's exist between the purchased companies and Pan Canadian." He noted that Montana Power has had a Canadian presence for almost 50 years.

PanCanadian purchased the entire oil and gas division, which now employs about 170. PanCanadian plans to maintain a regional office in Butte, invest in the acquired properties and grow daily gas production. There was no word on whether any jobs would be lost.

Carolyn Davis, Houston

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