To extend what it sees as dominance in Canada’s natural gasmarket and to boost its production by 10%, PanCanadian PetroleumLtd. yesterday agreed to purchase Montana Power Co. for $475million. The properties will extend PanCanadian’s existing shallowgas properties in southern Alberta into northern Montana, adding 94MMcf/d and 3,800 barrels of crude oil and natural gas liquids.

The acquisition will give PanCanadian properties in Alberta,Montana, Colorado, Oklahoma and Wyoming, along with three gaspipelines linking Alberta and Saskatchewan to Montana.

“We have a focus on natural gas,” said CEO David Tuer during aconference call yesterday in Calgary. “This is clearly our future.It is difficult to put any negative on this (acquisition) and it’slikely to stay valuable for the foreseeable future.”

Montana Power’s production is more than 90% natural gas andassociated liquids, and the acquisition substantially extendsPanCanadian’s land and infrastructure, allowing it to use itstechnology and operating strategies in a region that extends alongthe Alberta-Montana border.

“The Montana Power assets clearly fit our strengths and allow usto employ our expertise in developing long life reserves of shallowand medium depth natural gas,” Tuer said. “The potential in theseassets is significant, and over the next few years, we will addsubstantially to PanCanadian’s daily natural gas production.”

Tuer said that the acquisition extends the company’s dominancein shallow gas, and called Montana Power a “beautiful fit withPanCanadian’s gas strategy, land position and technologicalcapability.”

PanCanadian’s newest acquisition adds reserves of 550 Bcf and 20MM barrels of oil and natural gas liquids on a proven and one-halfprobable basis, said officials. Production and reserves account for$520 million of the purchase price, while the remainder is made upof $135 million for the midstream and marketing assets, $40 millionfor the undeveloped land (about 600,000 acres), and $7 million ofworking capital.

Tuer said the company was paying 77 cents/Mcfe of proven andon-half probable reserves. The price for daily flowing production,based on a 6:1 ration of gas to BOE is $4,450/Mcfe, or $26,710/BOE.

Along with the added Alberta and Montana properties, PanCanadianalso picks up some land in Colorado’s Denver Basin, which nowproduces about 31 MMcf/d. Other land that is part of the sale islocated in the Anadarko Basin of Oklahoma and the Green River Basinof Wyoming.

Three natural gas pipelines that cross from Montana into Albertaand Saskatchewan also are included. The pipelines allow directaccess to the U.S. markets for southern Alberta and Saskatchewangas, and serve more than 1.2 million net acres of developed andundeveloped lands, with most of it concentrated in parcels thatspan the Canada-Montana border.

Midstream assets that go to PanCanadian include a natural gasmarketing company in Butte, MT, along with a deep cut gasprocessing and fractionation plant in Colorado. The Fort Lupton, COplant processes more than 60 MMcf/d and 5,500 barrels of naturalgas liquids and condensate.

In all, the total developed and undeveloped land is roughly 1.2million net acres, or 1.7 million gross acres, said PanCanadian.

“Montana Power fit us like a glove,” Tuer said during theconference call. He said the acquisition will help PanCanadian toremain “best of class” for what it does. “It makes our sandbox thatmuch bigger.”

The acquisition, which is expected to close around Oct. 31, willincrease both PanCanadian’s net income and cash flow this year andin subsequent years, said Tuer. The added gas production willimmediately increase the company’s natural gas, as a percentage oftotal production, to 58%, based on a 6:1 ratio of gas to BOE.

About 25% of the natural gas being acquired from Montana Powernow is being sold to Montana Power utilities for $1.50 to $1.60MMcf until July 2002, and because it’s priced below the open marketofficials think future earnings will be good.

“As that contract expires, there’s a lot of potential from theprice in this transaction,” Tuer said.

And what’s to become of Montana Power? Earlier this year, the88-year-old company, headquartered in Butte, announced it woulddivest itself of four of its traditional energy businesses. Byselling its coal production, natural gas transmission anddistribution, independent power production and oil and gasexploration and production businesses, it plans to reinvest theproceeds in Touch America, a fiber optics and telecommunicationsbusiness, which is also a subsidiary of Montana Power.

“The process to determine the buyer for our oil and gas businesswas robust, and we are delighted with the result,” said MontanaPower CEO Robert P. Gannon. “We believe there will be a meshing ofbusiness strategies and that cultural synergy’s exist between thepurchased companies and Pan Canadian.” He noted that Montana Powerhas had a Canadian presence for almost 50 years.

PanCanadian purchased the entire oil and gas division, which nowemploys about 170. PanCanadian plans to maintain a regional officein Butte, invest in the acquired properties and grow daily gasproduction. There was no word on whether any jobs would be lost.

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