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CBM Wells Cost Less But Offer Big Returns

CBM Wells Cost Less But Offer Big Returns

What type of reserves cost comparatively little money to produce, a few days to complete, have years of production growth in areas once thought to be depleted and offer nearly instant success? If you were thinking coal-bed methane wells, collect your $200 and advance to Go.

For a few of the smaller independents in North America, the success found from coal bed methane (CBM) well drilling is giving them instant and substantial gratification. Three of the most successful, Evergreen Resources Inc., Prima Energy Corp. and Pennaco Energy shared their strategies for analysts in Houston at the Dain Rauscher Wessels Energy Conference held last week..

The all-around leader, Denver-based Evergreen Resources, ties all of its success now and into the future into its CBM drilling program in the Raton Basin of Colorado (see related story). Early last week, analysts were estimating that if only 50% of its unproved acreage in the basin proved commercial, it would have another 800 Bcf of reserves to still book. But that was before the week ended.

Last week, Evergreen announced it would pay $70 million in cash, $100 million in redeemable preferred stock and $6 million in Evergreen common stock to acquire the rights to nearly 24,000 more acres of producing CBM properties in the Raton Basin from KLT Gas Inc., a subsidiary of Kansas City Power & Light Co. Already the most active operator and largest leaseholder in the basin, Evergreen will boost its production to 88% of the total coming out of the Raton.

"We're almost exclusively in coal-bed methane production," said Evergreen CEO Mark Sexton. With some holdings in the United Kingdom, Evergreen stays primarily focused on the Raton, and keeps its holdings close to the cuff, owning the lines, installing them and drilling "where we need to" he said.

For those wondering if Evergreen's strategy is working, check the sheet: its CBM drilling success since 1993 has been 98%, and it was making money when everyone else was going bust.

What's going on with CBM? A lot. Ask any of the companies operating there. Most of them will share their own version of a happy ending.

Prima, which sees "significant coal bed potential" has now completed drilling on 110 CBM wells in Wyoming's Powder River Basin, and plans to add another 75 before the end of the year. Pennaco, which was the most active CBM operator in Powder River in 1999, drilled 473 wells last year. This year, it expects to complete about 600.

"We operate a very lightweight fleet," said Pennaco CEO Paul Rady. "We can complete a well in one to two across the grass, lay the pipe and we're in and out in a day or so." To complete a well costs around $600,000, he said. Its finding and development costs are about 24 cents. "Its terrific economics."

Prima's Richard H. Lewis said that while its historical growth has been amazing - earnings over 11 years have grown 36%, cash flow is up 33% and yearly production has grown 30%, it's only now beginning to really benefit from the groundwork. In the first six months of 2000, Lewis said that the company is "within a penny of making what we made all of last year," and its funding all of its work from cash flow alone - and tremendous success from its CBM wells. Expecting record results this year too, Lewis said that it now has $18 million in liquid assets and no debt.

"We're just beginning to ramp up for continued growth from coal bed methane production in the Powder River Basin," Lewis said, with 143,000 net acres there and 28 prospect areas.

Evergreen's Sexton put it a little more succinctly, summing up the philosophy of the CBM opportunists. "Our priority is to keep drilling."

Carolyn Davis, Houston

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