Calgary-based Advantage Energy Income Fund and Sound Energy Trust (SET) have struck a deal to merge to create a natural gas-focused energy trust with an enterprise value of about C$2.7 billion (US$2.58 billion).

The combined entity, which would have an undeveloped land position of about 760,000 net acres, would operate under the Advantage Energy banner and be led by the existing Advantage management team. The new company would have an estimated 2007 production exit rate of 35,000-36,500 boe/d weighted 65% to gas and 35% to light oil and natural gas liquids.

Combined proved reserves total 98.7 MMboe, and proved plus probable reserves total 153.7 MMboe. The reserve life index would be about 11.8 years, based on the year-end 2006 exit rates.

In a joint statement, Advantage President Andy Mah and SET CEO Tom Stan said they were “excited by the strong synergies that the respective asset bases and combined corporate strategies will provide. Advantage’s high-quality assets have desirable long-life characteristics and plentiful drilling opportunities which, when combined with Sound’s complementary properties and operational synergies, will create a very attractive vehicle to deliver unitholder value.”

About 44% of Advantage’s gas-directed production is focused in central and southern Alberta, with 32% of its operations in northeast British Columbia and 24% in southeast Saskatchewan. Advantage, which was created in May 2001, operates 85% of its production base, which allows the fund to control the nature and timing of future capital expenditures.

SET’s reserves are concentrated in central and northern Alberta, including the Peace River Arch, and in southeast Saskatchewan. SET was created last year with the merger of NAV Energy Trust and Clear Energy Inc. SET has more than 400,000 net acres of undeveloped land and a significant development portfolio, weighted 55% to gas and 45% to liquids. About 54% of SET’s 2007 gas is hedged at a floor price of C$7.87/Mcf.

The transaction, which is expected to close in September, requires approval by at least two-thirds of SET’s unitholders. Under the plan, each SET trust unit would be exchanged for 0.30 of an Advantage trust unit or, at the election of the holder of SET units, C66 cents in cash and 0.2557 of an Advantage unit. The transaction exchange ratio reflects a premium to SET unitholders of 11.3% based on the closing prices for the trusts on July 6. The combined trust would maintain the current Advantage distribution of C15 cents/unit per month.

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