NGI The Weekly Gas Market Report
HS Resources, based in San Francisco, is further growing itsposition in the Wattenberg Field area of the Denver-Julesberg Basinby buying Houston-based Kinder Morgan’s gathering system therealong with its interests in the Amoco-BP Wattenberg Gas ProcessingPlant and KN Wattenberg LLC, which owns the Wattenberg transmissionsystem, in a phased transaction.
Wattenberg’s gathering and processing assets were identified forpotential divestiture by Kinder Morgan last September when thecompany announced a back-to-basics strategy and said it would sellnon-core assets to improve financial performance and de-leveragethe balance sheet.
“We continue to make progress with our divestiture program,”said CEO Richard D. Kinder. “Through this transaction, we willretain cash flow from Wattenberg’s operations in 2000 and 2001, andwe expect to realize nearly $30 million in value upon the finalclosing, which is expected to occur on or before Dec. 15, 2001.”
HS Resources, the largest producer in the area, last week beganoperating both the gathering and transmission assets. Under theagreements, HS Resources will operate the assets to providegathering and transmission services to numerous producers in theWattenberg area. HS Resources currently operates about 3,000 wells,accounting for some 65% of the Wattenberg System’s daily throughputof 200 MMcf/d.
The Wattenberg System includes low-pressure gathering andhigh-pressure transmission assets. The low-pressure system consistsof 1,500 miles of gathering pipe and 3,000 horsepower ofcompression in five northeastern Colorado counties. Gas isdelivered to the inlet of the high-pressure transmission system,which consists of nearly 60 miles of pipeline and almost 40,000horsepower of compression, which transports the gas from thegathering system to the Amoco Plant.
HS management expects the deal to be accretive to earnings andcash flow starting in 1999. HS also acquired from Kinder Morgan aright of first refusal to buy the BP Amoco processing plant that isthe delivery point for most of the gas gathered and transported bythe Wattenberg System.
The deal is currently worth about $72.5 million to KinderMorgan. Of that amount, $1 million has been paid in cash; $23million will be paid by assumption of an operating lease; and thebalance of $48.5 million will be paid to Kinder Morgan between nowand Jan. 1, 2002 through the payment of system revenues (includingpayments by HS at its current gathering rate) plus the payment ofincremental fees by HS of $4.3 million in each of years 2000 and2001, and a closing payment of $7 million. Although the deal has afinal closing date of Jan. 1, 2002, due to its structure and natureof its obligations, HS will book the transaction as a purchaseeffective Oct. 1, 1999.
“Acquiring the Wattenberg System represents the next logicalstep for HS in consolidating its interests in the Wattenberg Fieldarea,” said HS CEO Nick Sutton. “We now are in a much betterposition to take an integrated approach to matching gatheringcapacity to production volumes, which should benefit all producersconnected to the system, not just HS. We also expect to achieve,over time, additional operating efficiencies through thiscoordinated, ‘total systems’ approach. The importance of this totalsystems approach is demonstrated by the fact that HS was fullyprepared to construct an alternative gathering system to transportcertain gas volumes that were scheduled to come off an existinggathering contract in June 2000. Undertaking this acquisition wasthe preferable alternative for both HS and KMI.”
In September, HS Resources and Patina Oil & Gas announcedthe exchange of certain properties in the D-J Basin in a dealeffective July 1. No cash changed hands. Primarily as a result ofHS’s December 1997 purchase of Amoco Production Co.’s D-J Basin oiland gas properties, HS and Patina have identified properties thatenhance the value of each company’s Wattenberg assets through moreefficient ownership in the multiple-pay formations found throughoutthe Wattenberg field area.
Also in September, HS Resources announced the closing of twodeals that rationalize non-core, non-strategic assets and cut debt.HS sold small ownership interests in certain D-J Basin propertiesand divested its interest in the Blue Forest Unit (BFU) inSweetwater County, WY. The deals generated proceeds of $5 millionfor a pre-tax gain of $3.4 million in the third quarter.
Joe Fisher, Houston
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