2009-09-24-2009-08-20-2009-09-01

To buy 21.5% nonop WI in 116,000 net acres in PA, WV, MD.

Canadian royalty trust Enerplus Resources Fund, Calgary, (NYSE: ERF; Toronto: ERF.UN) has closed its acquisition of Marcellus shale interests via a joint venture with Trevor Rees Jones' Chief Oil & Gas LLC and a limited partnership managed by Fort Worth, Texas-based investment firm Tug Hill Inc. in a deal valued at US$411 million. The deal involves a 21.5% nonoperated working interest (82% average net revenue interest) in approximately 540,000 gross acres (116,000 net) primarily in Pennsylvania, concentrated in the northeastern and southwestern areas of the state, with additional acreage in West Virginia and Maryland. Much of the acreage is contiguous with an average primary lease term of approximately five years with the majority allowing five-year extensions. Chief owned an average 72% working interest in the holdings prior to the deal and will continue as operator. Enerplus paid US$164.4 million in cash and committed US$246.6 million as a carry of 50% of drilling and completion costs in the Marcellus, which it expects will be invested over the next four years. Enerplus also entered into an area of mutual interest with Chief for additional acquisitions in the Marcellus. Enerplus estimates it paid approximately US$3,500 per net acre. The acquisition is the first entry by Enerplus into the U.S. shale-gas plays. Since 2007, Chief has drilled 31 Marcellus shale wells, 10 vertical and 21 horizontal. Current total production is approximately 8.7 million cubic feet equivalent per day gross (1.8 million per day net to Enerplus). Enerplus estimates it is acquiring approximately 8 billion cubic feet of gross proved plus probable reserves based on forward prices and costs as of June 8. Enerplus president and chief executive Gordon Kerr says, "Enerplus has gained an entry point into one of the premier shale-gas resource plays in North America, consistent with our strategic direction, with an experienced partner who has a proven track record in shale-gas development. With the play in the early stages of development, we believe there is tremendous opportunity for future production, reserves and value growth." Trevor Rees-Jones, Chief president and CEO, says the deal will allow the company to accelerate its drilling and development plans. "The alliance with Enerplus will help us expand our operations throughout the Marcellus shale region. Chief is committed to being a major part of the growth of the Marcellus. Our partnership with Enerplus will help us reach those goals." Rees-Jones sold his Barnett shale portfolio, some 20 years in the making, to Devon Energy Corp. and Crosstex Energy in 2006 for $2.6 billion, and rolled some of the proceeds into making a portfolio of Marcellus shale. Enerplus expects to participate in the drilling of approximately 750 gross wells over the next five years with production volumes expected to increase to approximately 100 million cubic feet per day of gas to Enerplus before royalties. Enerplus has also entered a long-term agreement with Chief Gathering LLC, an affiliate of Chief Oil & Gas, for the gathering, dehydration and compression of Enerplus' share of production. Enerplus also estimates contingent resources of approximately 1.4 trillion cubic feet equivalent of gas net effective July 1, based on a drilling density of four to six wells per 640-acre spacing which would result in more than 2,400 gross wells. The estimate assumes only 55% of the land will be developed. "As development plans move forward, we believe a greater percentage of the land could be drilled or drilling densities increased thereby increasing the reserves and potentially the resource estimates over time," the company reports. During the remainder of 2009, Enerplus plans to spend approximately US$27 million on the acquired interests to drill 15 gross wells. Chief currently has three drilling rigs contracted with 10 expected by 2012. For the period from 2010 to 2014, Enerplus anticipates investing approximately US$800 million in development capital, including the vendor-carry obligations. Enerplus expects the average well costs to be between US$3.5 million to US$4 million per horizontal well, with an average drilling time of 30 days or less. The development program will utilize horizontal drilling with multi-stage, slickwater fracs. Production rates of 3.5 million to 4 million cubic feet per day is anticipated with expected ultimate recovery of approximately 3 billion to 3.5 billion cubic feet of gas gross per well. RBC Capital Markets and Tudor Pickering Holt & Co. were financial advisors to Enerplus. Bank of America Merrill Lynch was advisor to Chief and Tug Hill. The effective date is May 1. Jack Aydin, senior managing director of KeyBanc Capital Markets Inc., says Enerplus paid approximately $2,452 per acre, "a very nice price, in our opinion."