Denver-based natural gas explorer Double Eagle Petroleum Co. said Tuesday it agreed to buy Petrosearch Energy Corp., based in Houston, in a $9.3 million stock deal to diversify its onshore assets and to provide a financial cushion.

Double Eagle is a gas-weighted producer that explores and develops projects in the Rocky Mountains. Current operations are focused in the Green River and Washakie basins, with a portfolio of projects in the Atlantic Rim and the Pinedale Anticline. Petrosearch, which is traded over the counter, had net proved reserves of around 2.2 million boe at year-end 2007. Petrosearch currently is developing a waterflood project in the Anadarko Basin of the Texas Panhandle, which it owns and operates.

Besides increasing its reserves, the transaction would add $8.75 million to Double Eagle’s working capital base.

“This is the kind of deal I think will become more sought after in a low gas price environment,” Double Eagle spokesman John Campbell told NGI. “Petrosearch has no debt, and [it has] cash that a rapidly growing company like Double Eagle can use to shore up its balance sheet during this period of low prices. They also have the upside in their waterflood project, though it is not proved yet.”

Double Eagle “is almost 100% natural gas that is nearly 100% in the Rockies,” Campbell noted. “If the Petrosearch merger goes through, it will get us into oil while its price is depressed, and if the Petrosearch waterflood is successful, it will lessen our reliance on Rockies gas prices. In short, the merger will provide us with commodity price and geological diversification.”

Under the terms of the merger agreement, which was executed on Monday, Petrosearch shareholders would receive 0.0433 shares of Double Eagle common stock for each share of Petrosearch common stock they own, or a total of about 1.74 million shares. Once the merger is completed, Double Eagle’s shareholders would own about 84% of the company; Petrosearch shareholders would own the remaining stake.

“From the Petrosearch shareholders viewpoint, they are getting stock in our company at a very good price,” said Campbell. “We have 9 Mcfe of proved reserves per share of common stock, and the last I looked, all-in finding costs these days are around $5/Mcf for the industry. So they are getting our proved reserves at about 50 cents/Mcf.

“Of course, they are taking the risk that gas prices might stay low for an extended period, but we are still one of the lowest-cost producers in the industry, and our positions on the Atlantic Rim and Pinedale are very much development drilling with many years of low-risk drilling ahead of us once gas prices recover,” he said. “In the meantime, we do have hedges in place that will at least partially protect our revenues from these miserable gas prices.”

Double Eagle CEO Richard Dole, who also serves as chairman and CEO of Petrosearch, would continue at the helm. He was not involved in “any capacity in initiating, evaluating, negotiating or voting” for anything related to the transaction, Double Eagle said.

The transaction is subject to Petrosearch shareholder approval and other customary closing conditions. Closing is expected before the end of September. All members of the Petrosearch board and all of the company’s executive officers voted in favor of the merger. If approved, the Double Eagle board of directors would consist of four existing directors and a future director designated by Petrosearch.

Double Eagle, as the surviving parent company of the merger, said it expected to establish as its primary near-term goal “deploying capital sparingly during this economic downturn and maintaining its financial strength, thereby allowing it to be poised for growth once there has been a turnaround in the market.”

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