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Long Term Contract Losses Spur Beau Canada Merger with Murphy

Long Term Contract Losses Spur Beau Canada Merger with Murphy

Weighed down by misplaced hedges and long term fixed price contracts, Beau Canada Exploration Ltd. has sold out to Murphy Oil Corp., one of its partners in the development of the hot Ladyfern prospect in northern Alberta and British Columbia, for a total price of US$255 million.

Murphy has offered C$2.15 per share and will assume US$123 million of debt, the companies said in an announcement last week. With the acquisition Murphy expects to increase natural gas production from about 70 MMcf/d to at least 150 MMcf/d next year, a "conservative" estimate, according to Murphy President Claiborne Deming. Almost a third of the total will be new production from areas currently under development. Murphy currently is producing about 70 MMcf/d and Beau Canada production is about 37 MMcf/d.

The transaction is expected to be completed in mid-November and Murphy will set between four and five wells drilling on northern prospects Dec. 1, the start of the winter drilling season in northern Canada. Deming declined to detail drilling results in the hot northern play, but a third drilling partner, Apache Corp., said earlier this year that a Ladyfern discovery well had flowed 31 MMcf/d. Additional information about the discovery area surfaced last month in a battle before the National Energy Board over who gets to build a pipeline to connect the new reserves.

Beau Canada represents a "very targeted niche acquisition that allows us to significantly expand our Canadian gas exposure in areas we know well and like a lot," Deming said. The acquisition will about double Murphy's Canadian production and exposure. The purchase includes proved, plus probable risked reserves of 48.2 million barrels of oil equivalent, which is about 74% natural gas.

Responding to questioning at a briefing on the acquisition Deming acknowledged that at 7,000 feet the Ladyfern prospect is not difficult drilling; wells can be completed in about a month; there should be no processing or transport problems; and he expects to see increased cash flow fairly quickly. Three of four wells already have been successful in the area, Deming said, and production currently is about 60 MMcf/d. The company expects to fully delineate the prospect this winter, with offset and stepout wells and additional exploration.

Beau Canada was forced into selling by some fixed price hedges and fixed price downstream contracts going out to 2008. Deming said in the short term Murphy could mitigate the impact of the contracts by making deliveries from its own production. Longer term, as market conditions change, he expects there will be opportunities to cash out of the contracts. "We plan to aggressively manage these contracts."

The contracts involve about 50 MMcf/d of gas next year, declining to 15 MMcf/d in 2008. They include a transportation differential, set when capacity was tight, of between 75 and 95 cents between Chicago and AECO C, considerably above the current 40 cent differential. "If it weren't for these contracts, [Beau Canada] would be going and growing. The contracts extended way too far out. It's a good object lesson." Deming expects differentials to become more favorable as new capacity fills up. "This is as narrow as it's likely to get. If you've got staying power for a couple years you can ride it out." As it was, the situation represented an opportunity for Murphy. "Those contracts knocked $1 off the share price of the company," Deming said. He expects the acquisition to add about 40 cents/share to Murphy's earnings next year and 2.00 a share to cash flow.

Ellen Beswick

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