Calgary-based PrimeWest Energy Trust said last Tuesday it will acquire some complementary natural gas and crude oil properties in two regions of Alberta for C$206 million. The properties, weighted 86% to natural gas, are located in the Caroline and Peace River Arch areas.

The acquired assets currently have a production rate of approximately 6,500 boe/d, and by the end of the year production should reach 7,000 boe/d, according to PrimeWest. Several production and reserve enhancement opportunities also have been identified, which PrimeWest said will be explored in 2003 and 2004. The acquisition includes about C$15 million of midstream assets, such as the Valhalla gas processing plant located in the Peace River Arch area, which has third-party processing income of about C$3 million a year.

The Caroline assets, amounting to about 50% of the acquired production, will add to PrimeWest’s existing assets there, and will make the properties the company’s largest core operating area, with production of about 6,000 boe/d. PrimeWest will acquire a 100% interest in a 25 MMcf/d gas processing plant and related gas gathering infrastructure, in addition to liquids-rich natural gas production and reserves. Future reserves growth in this area will be enhanced by a significant farm-in opportunity on the vendor’s retained undeveloped lands held by a Canadian affiliate (Newco), including the right to purchase the Newco share of developed reserves at a future date. Also, an Area of Mutual Interest will be established with Newco to focus on low-risk, high-impact gas development drilling activities.

In the Peace River Arch area, PrimeWest will acquire properties at Pouce Coupe, Knopcik and Valhalla, which represent about 38% of the acquired production. These assets also are adjacent to other PrimeWest operations in the area. PrimeWest will acquire a 100% interest in a 30 MMcf/d gas processing plant, which has a current capacity utilization of 55% (including 8 MMcf/d of third-party custom processed volumes), as well as liquids-rich natural gas and light gravity crude oil production and reserves.

Minor properties, representing approximately 12% of the acquired production, include properties in Dawson and Crossfield, which also are complementary to existing PrimeWest core areas of operation.

Next year, PrimeWest anticipates that cash flow from the acquisitions will be about C$47 million, based on an Aeco price of C$5.38/Mcf and WTI price of US$25/bbl. The overall acquisition changes PrimeWest’s natural gas production weighting to 68%; natural gas liquids weighting to 9%; and oil weighting to 23%. The purchase will be accretive to projected 2003 cash flow per unit and production per unit.

Upon closing, PrimeWest will enter into a farm-in arrangement with Newco on 28 sections of undeveloped land in the Caroline area. Seven low-risk development drilling locations have been identified, targeting the Cardium (4) and Viking (3) formations. Initial per well gross production rates of approximately 2.0 MMcf/d to 2.5 MMcf/d of natural gas and 40 bbl/d of natural gas liquids are anticipated. Drilling of these locations is expected to begin following closing and will continue on a rolling option basis through 2004. In addition, PrimeWest and Newco, upon closing, will agree to a 250-section Area of Mutual Interest arrangement in the Caroline area.

Within the Peace River Arch area, PrimeWest and Newco, upon closing, will enter into a farm-in arrangement on three sections of undeveloped land. Two drilling locations targeting the Doig formation have been identified and are expected to be drilled in the first half of 2003. Initial gross production rates of approximately 100 bbl/d of crude oil per well are anticipated.

Following completion of the Caroline and Peace River Arch farm-in programs, PrimeWest will have the right, but not the obligation, to acquire Newco’s residual interest in the production and reserves developed. The purchase price will be based on an independent reserve evaluation report, and established reserves will be valued on the basis of the then-present value discounted at 10% using a consultant average commodity price forecast.

To protect and stabilize its prices, PrimeWest has purchased gas hedging contracts through 2003 at or near current forward gas prices. From January through March 2003, it has hedged 23.7 MMcf/d at C$5.28/Mcf. Between April and June, it has hedged 14.2 MMcf/d at C$5.28/Mcf. From July through October, 9.5 MMcf/d has been hedged at C$5.28/Mcf.

The acquisition, through a PrimeWest subsidiary, is expected to close on Dec. 31. Canadian Imperial Bank of Commerce provided an underwritten credit facility for C$490 million, which will replace PrimeWest’s existing credit facilities and fund the acquisition and provide for existing and future debt. As at Sept. 30, 2002, PrimeWest’s net debt was C$271 million, adjusted to C$166 million on a pro-forma basis to reflect the Nov. 13, 2002 equity issue, which raised net proceeds of C$104.5 million.

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