The acquisition involves the legacy oil and gas assets of an eastern coal company which date back almost a century. The properties include 417,000 acres located primarily in Virginia and West Virginia. On 373,000 mineral acres, the interests include a royalty and a working interest. Approximately 30% of the current proved reserves are derived from royalty interests, which bear no operating costs. Of the 1,872 producing wells being acquired, Range will own a royalty interest in 1,317 wells, a royalty and working interest in 516 wells and a working interest in 39 wells. A total of 1,550 drilling locations have been identified to date, of which 790 have been classified as proven. In 90% of these locations, Range will own a 12.5% royalty as well as a 50% working interest.
Production from the properties currently approximates 14.8 Mmcfe net per day, of which 40% is royalty gas. Approximately 70% of the current production is coalbed methane, with the remainder coming from tight sand reservoirs. Operating costs on the working interests currently average $0.58 per mcfe. With the royalty interests bearing no operating costs, the operating cost on the overall production stream averages $0.36 per mcfe. The coalbed methane is produced from depths of 1,200 to 2,500 feet, while the tight gas production is from depths of 4,500 to 5,500 feet. As the rights to all depths are being acquired, deeper potential on the properties has yet to be evaluated. Range anticipates that between 100 and 150 new wells will be drilled on the acquired properties in 2005. Through ongoing development, production from the properties is projected to increase 10% to 15% a year for at least the next eight years.
As a result of the recent Great Lakes acquisition and this purchase, Range's Appalachian production and reserves will have more than tripled during 2004. The Company's acreage position in Appalachia will exceed 1.9 (1.7 net) million acres. Closing of the transaction, which is subject to standard conditions, is anticipated by year-end. The purchase will be financed through a combination of bank borrowings and the possible offering of equity and/or subordinated debt.
Commenting, John H. Pinkerton, Range's President stated, "This is a unique acquisition opportunity. A significant portion of the value involves royalty interests which command a substantial premium. Just as important, the properties are comprised of high-margin, long-life gas reserves, that have predictable, multi-year growth potential driven by large concentrated acreage positions. The properties fit well with our existing Appalachian operations and greatly expand our exposure to coalbed methane. Finally, we believe the acquisition's cost metrics are outstanding. Without any allocation of purchase price to acreage, the proved reserves are being acquired for $1.07 per mcfe ($1.52 per mcfe fully developed). This is particularly significant as we can manage the properties with only a modest increase in overhead given our technical and operating staff in the basin. We now anticipate that Company-wide production will increase by more than 20% in 2005 assuming the acquisition closes."
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