A little-known exploration and production (E&P) subsidiary of Constellation Energy Group Inc. on Friday raised the number of units it will offer in a planned initial public offering (IPO) to extend its coalbed methane (CBM) holdings in Alabama’s Black Warrior Basin. Following the IPO, the Baltimore-based power company would own 58% of Constellation Energy Resources LLC.

In June, Constellation Energy Resources filed with the Securities and Exchange Commission (SEC) to sell 6.05 million shares for an IPO to raise an estimated $110 million. An amended filing Friday indicated the company now plans to sell 6.28 million shares. Citigroup and Lehman Brothers, acting as underwriters, would be provided 941,250 shares to cover over-allotments. Once the IPO is launched, the E&P plans to enter into a management agreement with another Constellation subsidiary, Constellation Energy Resources Management, which would provide bookkeeping and legal services.

Constellation Energy Resources was formed as a limited liability company in February 2005, and in June 2005, the E&P paid $161 million to acquire natural gas reserves and equipment from Everlast Energy LLC. By the end of 2005, it owned a working interest in 436 producing natural gas wells in Robinson’s Bend Field in the Black Warrior Basin. It drilled 18 wells in which it had an interest last year, and it plans to drill 20 more wells by the end of September.

“Constellation views us as an integral component of the growth strategy for its upstream oil and natural gas business and intends to use us as its primary vehicle to develop a portfolio of long-lived, proved producing E&P properties,” the company said in the SEC filing. “In order to sustain or grow our production in the long term, we will have to acquire or develop other producing E&P properties, which will likely increase our costs.”

Constellation Energy Resources’ strategy, explained in its SEC filing, indicates it plans to acquire “from third parties and Constellation long–lived properties with a high percentage of proved producing reserves, moderate production decline rates and with reserve development and exploitation potential, such as is found in coalbed methane, shale and tight sands properties, and associated midstream assets, like gathering systems, compression, dehydrating and treating facilities and other similar facilities…While we are currently focused on the Black Warrior Basin, we will continue to assess opportunities in other areas in the United States that provide long–lived reserves and may expand into those areas if attractive opportunities become available.”

Alabama’s Black Warrior Basin is one of the oldest and most prolific CBM basins in the country, with more than 2,750 producing CBM wells and an estimated 4.4 Tcf of remaining recoverable gas as of 2002, the most recent estimation date. The multi-seam vertical wells range from 500 to 3,700 feet deep, with coal seams averaging a total of 25-30 feet of net pay per well.

In 2005, Constellation Energy Resources earned $760,000 on revenues of $23.5 million, as adjusted for the Everlast deal, according to the SEC filing. The subsidiary, also based in Baltimore, has 24 employees at its Robinson’s Bend Field operations in Tuscaloosa, AL. The E&P is headed by Felix J. Dawson, 38, who has been with Constellation since 2001 and who previously worked in Goldman Sachs’ fixed income and commodities division.

Constellation Energy Resources’ estimated proved reserves at year-end 2005 were approximately 112.0 Bcf, 80% of which were classified as proved developed producing. The reserves have estimated future net revenues, discounted at 10% (the standardized measure), of about $295.4 million. Average proved reserve-to-production ratio is about 25 years.

The E&P said before the IPO closes, it plans to implement a commodity price risk management program to reduce the volatility in revenues because of price changes. “Under that program, we plan to adopt a policy that contemplates hedging the sales prices for approximately 80% of our expected production from currently producing wells for a period of up to five years, as appropriate, based primarily on our intent to stabilize cash flows and our view of prevailing and expected market conditions for natural gas.”

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