Williams plans to incrementally add drilling rigs to its Piceance Basin operations beginning late this year once it completes a bolt-on acquisition from a private company, the company said Monday. The properties, which Williams will buy for $258 million, hold an estimated 795 Bcfe of net reserves.

The new leasehold covers 21,800 net acres and includes 28 wells currently producing 24 MMcfe/d, related gas and water gathering facilities, 94 approved drilling permits and more than 800 drillable locations at 10-acre spacing. The purchase is slated to be completed by the end of September.

“The acquisition fits perfectly with our low-risk, high-return profile in the Piceance Basin,” said Ralph Hill, president of Williams’ exploration and production business. “This is a rare find. The existing wells in the area we’re acquiring are very productive, producing a third more gas than Williams’ existing prolific Piceance Valley wells for a similar cost.”

Williams tentatively plans to add one drilling rig in the last three months of the year, followed by one more in 2010 and two more in 2011. The company is currently running eight natural gas rigs in western Colorado.

“We’ve identified an opportunistic bolt-on acquisition that allows us to quickly add meaningful reserves, production, cash flows and earnings per share by leveraging off of the strength of our low cost structure in the Piceance Basin,” said CEO Steve Malcolm.

Of the estimated reserves, about 150 Bcfe are proved. In addition, the properties contain “exploration upside” from deeper formations and additional potential locations. Not including the new properties, Williams owns around 190,000 net acres in the Piceance Basin.

“As we have consistently shown, we have developed an industry-leading presence in the Piceance through our drilling efficiencies, operations innovations, technical application, investments in new infrastructure and our commitment to environmental protection, which was again recognized this summer by Colorado’s primary regulatory agency that oversees energy development.

“The anticipated production also can be an important additional supply source for our Northwest Pipeline,” Malcolm said.

Northwest Pipeline in May filed an application at the Federal Energy Regulatory Commission for the Sundance Trail Expansion Project, which would more provide more capacity from the Piceance Basin to the Opal Hub in Wyoming (see Daily GPI, May 21). Sundance would provide an incremental 150,000 Dth/d of firm transportation capacity from the Greasewood and Meeker/White River hubs in Rio Blanco County, CO, to Opal.

After-tax cash-flow returns related to the new Piceance properties will be around 25%, with an estimated accretion in earnings of 4 cents/share in 2010 and 15 cents/share in 2011, Williams said. The estimates are based on forward natural gas prices and current cost assumptions for drilling and development, the Tulsa-based company said.

To mitigate price risk, Williams entered into new gas price hedges at a Rockies fixed price of $5.23/Mcf for 2010 and $5.90 for 2011. The hedges represent about 80% of projected gas revenues from the new properties in 2010 and 2010 after correcting for fuel and shrink and direct taxes.

Aggregate program development capital related to the acquired areas, including the acquisition capital, is expected to total around $273 million in 2009, $130 million in 2010 and $219 million in 2011.

Williams plans to fund the acquisition, along with $35 million in projected 2009-2010 development costs, with cash on hand. The balance of the 2010 and 2011 capital requirements is to be funded “largely through the anticipated cash flow” from the new properties, the company said.

Williams has extensive infrastructure in place in the Piceance Basin. In addition to its gas drilling activities and its interstate Northwest Pipeline, Williams is in the process of starting up the Willow Creek natural gas processing plant. In July Northwest reported activating the Willow Creek delivery point, which has capacity of 100,000 Dth/d, on its Parachute Lateral in Rio Blanco County (see Daily GPI, July 23).

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