2009-05-06-2009-05-05-2009-06-30

Acquired 13,200 acres in Fuhrman-Mascho Field in Permian Basin in Andrews Co., TX, gaining 15.3 MMBOE proved, 15.5 MMcfe/d.

Alabama-based Energen Corp., Birmingham, (NYSE: EGN) via E&P subsidiary Energen Resources Corp., has closed its acquisition of interests in Fuhrman-Mascho Field in the Permian Basin of West Texas from Range Resources Corp., Fort Worth, Texas, (NYSE: RRC) for $182 million. The assets include Range's interests in 445 producing wells and 54 water injection wells on approximately 13,200 acres in Andrews County. Net daily production from the properties averaged 15.5 million cubic feet equivalent in the first quarter (2,131 barrels of oil; 2.7 million cubic feet of gas) from the Grayburg-San Andres formation at depths of 4,000 feet to 4,800 feet. Energen estimates total proved reserves of 15.3 million barrels of oil equivalent (91.9 billion cubic feet equivalent; 70% proved developed producing; 76% oil) and represent 90% of the purchase price with 3.6 million barrels equivalent of proved undeveloped (PUD) reserves accounting for 10%. Energen estimates that future development costs associated with identified PUD reserves will be approximately $57 million for drilling 90 new wells, bringing the all-in reserve acquisition cost to approximately $16.30 per barrel of oil equivalent. The properties are part of a field that was discovered in the late 1930s and acquired by Range in 1996. Range increased production from the properties by almost seven times, utilizing waterflood rejuvenation and tighter well spacing. In 2005, Oil and Gas Investor magazine awarded Range the "Best Field Rejuvenation Award" for its redevelopment of the field. Energen says an estimated 15.6 million barrels equivalent of probable and possible reserves offer significant upside potential, with 10.6 billion barrels of probable reserves generating a drilling of approximately 290 locations. An estimated 5 million barrels of possible reserves relate primarily to extension of waterflood operations. The field is surrounded by other Energen assets in the Permian. "This acquisition is an excellent fit for Energen," says James McManus, Energen chairman and chief executive. "It is exactly what we were looking for. This acquisition meets our rate-of-return criteria on proved reserves and offers significant upside potential as oil prices rebound." He adds, "In addition, its location in the heart of the Permian Basin allows for seamless integration into our existing operations and gives us another excellent opportunity to capitalize on our expertise in the region." McManus says the company has hedged a substantial portion of production through 2013 to lock in near-term returns. "Given the uncertainty in the commodity markets today, we opted to hedge beyond our typical one to three years." Proceeds were used to pay debt. At June 30, Range had approximately $400 million outstanding on its credit facility, providing the company with $1.1 billion of borrowing-base capacity. Range chairman and chief executive John Pinkerton says, "We believe the Fuhrman property still holds excellent development potential, and its sale represents a win-win situation for Range and Energen. We are now directing most of our capital into the Barnett, Nora and Marcellus shale plays. Given that Fuhrman's development cost and lease operating costs per unit of production are substantially higher than our Barnett, Nora and Marcellus shale properties, our further development of Furhman would likely have been delayed several years." He adds, "Several years ago we made the decision to begin selling our noncore properties and redirecting the proceeds to higher-return projects. Since then, we have generated more than $500 million of sales proceeds that we have used to help fund our growth projects. Today, Range has the strongest balance sheet in its history. We are in an excellent position to seize opportunities and to continue our strategy of driving up production and reserves, while maintaining one of the lowest cost structures in the industry." The effective date is May 1. Range earlier said it plans to monetize certain oil hedges associated with the properties with a current mark-to-market value of approximately $8 million. Pro forma, Energen holds approximately 3.6 trillion cubic feet equivalent of proved, probable and possible reserves in the San Juan, Permian and Black Warrior basins. Its subsidiary, Alabama Gas Corp., is the largest distributor of natural gas in Alabama. Stifel, Nicolaus & Co. Inc. analyst Michael Hall values the deal at $1.98 per proved Mcfe and $11,742 per daily Mcfe. The deal high-grades Range's asset base, he says. "Strategically, the deal sheds a noncore, higher-cost asset which makes plenty of sense to us," as the proceeds will help to maintain its balance sheet and fund capex. Analysts at Tudor, Pickering, Holt & Co. Securities Inc. call the deal "nice" for Energen and value it at $8.80 per barrel of oil equivalent proved based on Range's estimate of 20.7 million barrels, and $66,000 per flowing barrel based on 2,600 barrels equivalent per day. The transaction is "right up EGN's alley, buy core area properties cheap, hedge the risk and goose returns via behind-pipe exploitation." Pritchard Capital Partners LLC analysts estimate deal value at $11.90 per proved barrel and $70,000 per daily flowing barrel, "a very healthy number in our view."