Williams Inks $258MM Deal for Additional Piceance Basin Properties
Williams has agreed to purchase additional properties in the Piceance Valley east of the company's existing assets from a private company for approximately $258 million. The parties expect the transaction to close near the end of the third quarter.
The assets, which are geologically similar to other Williams assets in the Piceance Valley, could represent an estimated 795 billion cubic feet equivalent (Bcfe) of net reserves. Of the estimated reserves, approximately 150 Bcfe are proved.
In addition, the properties contain exploration upside from deeper formations and additional potential locations. Not including the new properties, Williams currently owns approximately 190,000 net acres in the Piceance Basin.
The purchase covers 21,800 net acres and includes 28 wells currently producing 24 million cubic feet equivalent per day (MMcfe/d), related gas and water gathering facilities, 94 approved drilling permits and more than 800 drillable locations at 10-acre spacing.
"We've identified an opportunistic bolt-on acquisition that allows us to quickly add meaningful reserves, production, cash flows and earnings per share by leveraging off of the strength of our low cost structure in the Piceance Basin," said Steve Malcolm, chairman, president and chief executive officer.
"As we have consistently shown, we have developed an industry-leading presence in the Piceance through our drilling efficiencies, operations innovations, technical application, investments in new infrastructure and our commitment to environmental protection, which was again recognized this summer by Colorado's primary regulatory agency that oversees energy development.
"The anticipated production also can be an important additional supply source for our Northwest Pipeline," Malcolm said.
Williams expects after-tax cash-flow returns related to the new properties of approximately 25 percent, along with an estimated accretion in earnings of 4 cents per share in 2010 and 15 cents per share in 2011. These estimates are based on forward natural gas prices and current cost assumptions for drilling and development.
To mitigate price risk, Williams has entered into new gas price hedges at a Rockies fixed price of $5.23 for 2010 and $5.90 for 2011. The hedges represent about 80 percent of projected gas revenues from the new properties in these years after correcting for fuel and shrink and direct taxes.
With regard to development, Williams plans to incrementally add drilling rigs to its Piceance operations, with one additional rig tentatively slated for fourth quarter 2009, followed by one more in 2010 and two more in 2011. Williams is currently running a total of 8 rigs in western Colorado.
Aggregate program development capital related to the acquired areas, including the acquisition capital, is expected to total approximately $273 million in 2009, $130 million in 2010, $219 million in 2011 and additional amounts thereafter.
Williams plans to fund the $258 million acquisition investment, along with $15 million in projected 2009 development costs and $50 million of the 2010 development costs, with cash on hand. The company expects to fund the balance of the 2010 and 2011 capital requirements largely through the anticipated cash flow from these properties.
"The acquisition fits perfectly with our low-risk, high-return profile in the Piceance Basin," said Ralph Hill, president of Williams' exploration and production business.
"This is a rare find. The existing wells in the area we're acquiring are very productive, producing a third more gas than Williams' existing prolific Piceance Valley wells for a similar cost."
Williams has extensive infrastructure in place in the Piceance Basin. In addition to its natural gas drilling activities, the company is in the process of starting up the Willow Creek natural gas processing plant, and also operates the interstate Northwest Pipeline that runs through the basin.
Throughout its development activities in the U.S., Williams has earned federal and state honors for operational best practices and environmental stewardship, including two recent awards from the Colorado Oil and Gas Conservation Commission.