Oklahoma City-based Quest Resource Corp. Monday announced it has terminated its agreement to acquire independent producer Pinnacle Gas Resources Inc. in a stock-for-stock transaction. At the same time Quest said it has taken action to step up its development of the potentially prolific Marcellus Shale play in Pennsylvania.
Either party had the right to terminate the merger agreement if the terms and conditions of the proposed merger were not agreed to and completed by May 16 of this year. No termination fee is payable by Quest as a result of its decision to terminate the merger deal, the company said.
In October 2007 Quest announced that it had agreed to purchase Pinnacle in an all stock deal valued at $207 million (see Daily GPI, Oct. 17, 2007). The combined equity market capitalization of the newly merged company was expected to be approximately $450 million. But since then share prices, particularly of Pinnacle, have slid, leaving the estimated equity market capitalizations of the two companies at about $313 million (see Daily GPI, Feb. 8).
Pinnacle shares fell to $3.15 following the news of the merger termination, down from a 52-week high of $8.74, while Quest stock rose to $9.45 after Monday’s announcement, down from a 52-week high of $12.58.
Under terms of the deal, Sheridan, WY-based Pinnacle, a developer of coalbed methane (CBM), was to become a wholly owned subsidiary of Quest. Pinnacle focuses on the development of CBM properties in the Rocky Mountain region. It holds CBM acreage in the Powder River Basin in northeastern Wyoming and southern Montana, as well as in the Green River Basin in southern Wyoming. Pinnacle owned natural gas and oil leasehold interests in approximately 478,000 gross (332,000 net) acres, 94% of which were undeveloped, as of mid-year 2007.
Quest is the largest producer of natural gas in the Cherokee Basin, which is located in southeast Kansas and northeast Oklahoma. The company operates more than 1,800 producing wells, with production flowing into its 1,800-mile-plus gathering pipeline system. Quest said it currently has more than 1,700 locations in its drilling inventory.
“We are disappointed that some of the conditions to closing our proposed merger with Pinnacle were not satisfied as of May 16, 2008. After much consideration, our board of directors determined it was in the company’s best interest to pursue other opportunities at this time. We are excited about the potential our experienced technical team has identified on our growing acreage position in the Marcellus Shale play, and we look forward to developing that acreage,” said Quest CEO Jerry Cash.
Quest announced Monday that its wholly owned New Ventures group has signed a letter of intent with a private company to enter into a farm-out agreement that would give it the right to develop approximately 30,000 net acres in Pennsylvania for a one-year period. All of the acreage is within the recognized fairway of the Marcellus Shale play, Quest said.
Quest said it plans to fund the $4 million initial cost of the agreement with existing cash balances and is formulating plans to begin drilling on the acreage in the second half of the year assuming the acquisition is consummated. At the end of the farm-out period, Quest said, it has the option to acquire all of the acreage for an additional payment of $6.5 million. If Quest does not exercise the purchase option, it noted it would be entitled to keep any acreage that was developed during the farm-out period.
With the agreement, Quest said it will own the right to develop approximately 52,000 net undeveloped acres that management believes to be prospective for the Marcellus Shale. The New Ventures group has drilled, completed and is testing the first well on the company’s existing 22,000 net acres in the play. Based on early test results, Quest said it is working to connect the well to a pipeline.
The Marcellus Shale formation, which is about 6,000-8,000 feet deep, spans 600 miles of the Appalachian Basin, running across portions of New York, Ohio, Pennsylvania and West Virginia. (By comparison, the Barnett Shale of Texas has a linear extent totaling about 120 miles.) Gas reserves in the Marcellus are anybody’s guess. The U.S. Geological Survey in 2002 estimated that the Marcellus contains an estimated 1.9 Tcf. Pennsylvania State University’s Terry Engelder has estimated Marcellus reserves at 168 Tcf — but his figures are unconfirmed (see Daily GPI, April 3).
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