Cabot Oil & Gas' $603 million bolt-on acquisition surrounding its East Texas Minden Field is "a little uncharacteristic" for Cabot, says president and CEO Dan Dinges, considering it hasn't done a deal in seven years. "Cabot is not very active in the M&A space," he notes. But the proximity to Minden and the Haynesville/Bossier fruit was just too juicy not to reach out and grab. So it did, gaining an additional 24,250 net acres (some contiguous), an extra 32 MMcfe/d and some 176 Bcfe proved reserves---none of which are attributed to the deeper formations. "That's upside," says Dinges. Cabot is experienced in Minden, located in Rusk and Panola counties, having drilled 77 wells since 2003, all successful. Drilled to the Cotton Valley trend, the wells average 1.2-1.4 Bcfe per well. Since, the company has deepened 11 of those wells and were successful in eight at a cost of an extra $200,000 to $400,000 per well and gaining an incremental 0.2 to 1.5 Bcfe in reserves. Of the acquired acreage, 80% remains undeveloped on the shallower formations. 100% is undeveloped deeper. Cabot has identified 400 drilling locations on 40-acre spacing with plans to downspace to 20. Dinges believes an additional 80-90 Bcfe of reserves lie in the PUDs. He says, "We have a lot of confidence in those probable reserves due to our 100% success rate in similar wells in Minden." He suggests to expect a much higher upside than was used in the company's analysis Cabot has four rigs running at Minden and plans to add another in 2009. Thus far all wells have been vertical with one Haynesville online for three months. It's initial production rate was 2.3 MMcf/d, now producing 750,000 daily. Cabot is gearing up to test horizontal and expects the majority of its future wells will be horizontal drilled to the Haynesville. J.P. Morgan Securities Inc. analyst Ronny Eisemann makes this evaluation of the deal: "If we value the acquired proved reserves at $2/Mcfe, the 176 Bcfe of proved reserves are worth just above $350MM. After deducting the $350MM value of the proved reserves and the $26MM infrastructure from the $603MM acquisition price, it appears Cabot is paying around $225MM for the Haynesville and for any unbooked potential in other formations. Thus, it seems COG is paying more than $9,000 for the Haynesville acreage. This value is in line with and lower than some of the values we are hearing about for Haynesville acreage. If the Haynesville works on all of this acreage and yields 4 Bcfe wells for $6MM, the value of the Haynesville potential alone could be more than $700MM (using $7.50 gas and assuming 80-acre spacing). "In fact, the value that COG is paying implies that only 27% of the acreage will work for the Haynesville. If the wells yield 5 Bcfe/well, the value could be more than $1B. "The acquisition metrics look fine. COG paid total price/proved reserves of $3.43/Mcfe or, deducting the $26 MM value of the infrastructure, COG paid $3.28/Mcfe. On a 'flowing barrel' basis, COG paid over $18,800/Mcfe. For comparison, Cabot is trading at $3.70/Mcfe of proved reserves and the group is trading at around $4.25/Mcfe. On a production basis, COG trades at over $22,000/Mcfepd and the group trades over $16,000/Mcfepd." Says Dinges: "It's a nice place to have a reason to drill a well." Steve Toon, Editor, A&D Watch; Contributing Editor, Oil and Gas Investor; www.OilandGasInvestor.com; email@example.com
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