Two gas-rich western independents, Black Hills Corp. and Mallon Resources Corp., announced Tuesday a merger estimated at $52 million. Under the definitive agreement entered into by Rapid City, SD-based Black Hills, it also will acquire Denver-based Mallon’s debt to Aquila Energy Capital Corp., as well as $30.5 million of its outstanding hedges.

The agreement was approved by both companies’ boards of directors and is expected to close in the first quarter of 2003. The transaction would give Mallon shareholders 0.44 of a share of Black Hills for every Mallon share they hold. Upon closing, the acquisition will increase Black Hill’s gas and oil production immediately by approximately 60%, and more than double its proven oil and gas reserves.

Current daily net production of the Mallon properties is nearly 13 MMcfe. It operates 149 of 171 total gas and oil wells, with working interests averaging 90 to 100% in most of the wells and undeveloped acreage. Mallon’s proved reserves, as of Dec. 31, 2001, were 53.3 Bcfe, but Black Hills noted that Mallon’s current proved reserves may be substantially higher based on its review, as well as current oil and gas prices. The reserves are located primarily in the Jicarilla Apache Nation in the San Juan Basin, and are comprised almost entirely of natural gas in shallow sand formations.

The oil and gas leases of the acquisition total more than 66,500 gross acres (56,000 net), most of which is contained in a contiguous block that is in the early stages of development. Black Hills expects to recover additional gas reserves from the shallow sands, and said that more gas may be recoverable from deeper horizons that have yet to be explored, but are productive elsewhere in the San Juan Basin.

“This acquisition is an outstanding strategic fit for us,” said Black Hills CEO Daniel P. Landguth. “In one transaction, we have advanced several of our long-term objectives by dramatically increasing our natural gas reserves and production. We believe that natural gas is the fuel of choice, and that U.S. gas demand will remain strong. Our integrated energy strategy seeks balance and integration among our business lines.”

Landguth noted that the Mallon properties “provide us with control over the exploration and development program, allowing flexible capital deployment as market conditions dictate.” He said Black Hills’ marketing subsidiary, Denver-based Enserco Energy, will also be able to add gas marketing and transportation expertise. “We also look forward to working in partnership with the Jicarilla Apache Nation to responsibly develop the portion of their gas resources contained beneath these leases.”

Mallon CEO George O. Mallon Jr. called the transaction “both prudent and exciting.” He said, “After pursuing several corporate strategies, we concluded that this merger with Black Hills Corp. was the most attractive for our shareholders. With Mallon’s unique fit into the Black Hills strategy, this combination will give all shareholders the opportunity to grow with a solid, well run energy company that has the desire, knowledge and financial capability to develop our significant undeveloped gas reserves in the San Juan Basin.”

Once the acquisition is closed, Black Hills plans to initiate an expanded development and exploratory drilling program on the properties, and expects to increase gas production, reserves and cash flow by late 2003. Black Hills said the acquisition would have “a nominal earnings-per-share impact until production levels can be increased.”

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