Houston-based Rocky Mountain Energy Corp. (RMEC), which has been on a proved reserve acquisition spree since going public last year, is negotiating a merger agreement with a larger independent, according to the CEO. The process, which is currently down to two candidates, “likely” would be structured as a sale of RMEC, with its shares exchanged for the stock of the partner.

Although the company has declined to name the two most likely candidates, John N. Ehrman, CEO, said RMEC was negotiating with “certain” companies, one on the NASDAQ board and another on the American Stock Exchange. But he also noted that a merger “is not a done deal,” and that the discussions are continuing. The junior independent only went public in May 2002 and is listed on the Over the Counter (OTC) board. In mid-February, RMEC hired the investment banker Stifel, Nicholaus & Co. for merger negotiations.

“One thing is certain,” said Ehrman. “Such an exchange of shares is based on the value of the reserves and current cash flowing properties which we own and have under contract at the time of the merger announcement, not our stock price.” On Tuesday, RMEC’s share price at midday was about 20 cents in the over-the-counter market.

“Rather than speculate regarding what those whose interests are opposite to our shareholders are doing, I would rather focus on fundamentals,” he said. “We have made ourselves attractive to several NASDAQ and American Exchange companies who put a premium value on the assets, reserves and cash flows being purchased.”

Ehrman said the company had been “bombarded with e-mails telling us to get off” the OTC board. “There are only two ways that I know of to address the short-sellers,” he said, “good fundamentals which they cannot resist once market forces kick in, and a merger into a company that is not on the OTCBB.” He said RMEC had been “hard at work with an oil company in Wyoming that is on the NASDAQ. A merger here would get us off of the OTCBB. The company currently trades at $6.00 per share. We bring a great deal of potential to the merger candidate. They have some production, but our contracts greatly increase that by multiples.”

The RMEC CEO regularly updates his shareholders with “letters” posted on the company’s web site (www.rockymountain.cc), where he bashes the short sellers and reminds enthusiasts that the company is dedicated to generating cash flow. He also updates investors about potential acquisitions — and RMEC has several possibles in the pipeline.

In the past few months, RMEC has purchased several Rocky Mountain assets, including acreage in Colorado, Wyoming, New Mexico, Utah and Nebraska (see Daily GPI, Feb. 6). On Tuesday, RMEC said it has begun developing a 20-well initial program with the first of 200 wells on 16,800 acres in the field located just east of the prolific Trinidad Gas field.

The reserve estimates of the company’s position in the Trinidad field is 200 Bcf. The 20 wells to be drilled will be owned 50% by RMEC. Each well is estimated to contain 2 Bcf, or 1 Bcf net to the company’s interest.

“In beginning our development of this field, we are turning non-producing assets into cash-producing assets,” said Ehrman. “The estimated 200 Bcf in this field needs to be brought on line as soon as possible to take advantage of current gas prices, which are projected by many investment firms to stay at or above $5.50/Mcf for the remainder of the year.” Drilling is scheduled to begin April 15 to coincide with spring thaw in the Raton Pass area.

The economics of a shallow gas well to 1,200 feet are budgeted at $150,000 per well. RMEC estimated that at an average of 300 Mcf/d, with gas prices at $5.50/Mcf, “each well would pay back every four months at $40,000 per month net. There is little decline and reserves last an estimated 25 years.” Net to RMEC at current prices is anticipated to be $20,000 per month per well versus $75,000 cost per well. RMEC’s partner, Cimarron Resources LLC, will carry the remaining 50% of the development cost and operate the first 20 wells through drilling.

“We should continue drilling and turning our cash flow back into the field to develop it to full potential. The long life cycle of these reserves is the kind of production we want to build this company on,” Ehrman said.

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