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
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.
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