Marathon Oil Corp. (NYSE: MRO) is selling its E&P interests in western Canada to Husky Energy Inc. (Toronto: HSE) for US$588 million, and Husky will sell some of these assets to EOG Resources Inc. (NYSE: EOG) for US$320 million. The sale will remove a chunk of high-cost production from Marathon's portfolio, according to UBS Warburg analysts. Based on an SEC filing, the assets' production costs exceeded $6 per barrel of oil equivalent. The assets include booked reserves of approximately 69 million BOE and average net production of approximately 21,000 BOE per day. Marathon says the sale price is about $8.50 per BOE of reserves. Husky plans to retain the assets in northern and southern Alberta and northeastern British Columbia. The acquisition will add approximately 19,500 BOE to its daily production, consisting of 90 million cu. ft. a day of gas and 4,500 bbl. per day of oil and gas liquids. Husky's share of the acquisition will also add proven reserves of 39.8 million BOE, consisting of 183 billion cu. ft. of gas and 9.2 million bbl. of liquids. Husky is funding the purchase with cash flow and available debt facilities. Standard & Poor's Ratings Services says the deal will not affect its Triple-B rating or positive outlook. "The net acquisition price is in line with current trends and the acquired assets will complement Husky's existing operations in western Canada," S&P reports. "Although the acquired assets will have a marginal effect on the company's 2003 production, the gas-producing assets will increase Husky's 2004 daily production by about 6% and shift its liquids and natural gas product mix to about 60% and 40%, respectively." Assets Husky plans to sell to EOG include gas properties in the Wintering Hills, Drumheller East and Twining areas of southeast Alberta. The properties are essentially adjacent to existing EOG operations or are properties in which the company already has a working interest. "Consistent with EOG's growth-through-the-drillbit philosophy, this acquisition is a natural fit because it allows us to continue expanding our Canadian program by adding a significant number of shallow-gas-drilling locations," says Mark G. Papa, chairman and chief executive officer. "The acquisition gives us at least 600 infill drilling locations and 380 recompletions." EOG will operate the properties, which produce about 34 million cu. ft. of gas equivalent per day and have approximately 275 billion cu. ft. equivalent of proved reserves, net to EOG. Based on the company's 2002 year-end figures, the acquisition will increase its Canadian proved reserves 33% and production 20%. The purchase is expected to be funded from internally available cash and short term commercial paper. S&P says its ratings and outlook on EOG will not change. For Marathon, the sale is part of its 2003 asset rationalization program. Upon closing, Marathon will have sold a total of more than 95 million BOE in proved reserves and average daily production of approximately 30,000 BOE, generating proceeds of more than $745 million. Proceeds are being used to strengthen its balance sheet and invest in other opportunities, such as the recent acquisition of Khanty Mansiysk Oil Corp., and its reserves and production in Russia, for $282 million including assumed debt. Other U.S. E&P companies selling western Canadian assets this summer include Vintage Petroleum Inc. (NYSE: VPI) and Murphy Oil Corp. (NYSE: MUR). -Jodi Wetuski