Southwestern Goes for Broke in New Brunswick

OTTAWA (Dow Jones), Mar. 30, 2010

Southwestern Energy Co. bought oil and gas exploration rights to a large chunk of land in the Canadian province of New Brunswick, targeting potential shale gas basins in the largest land rights purchase the province has ever seen.

The Houston natural gas company said Sunday it will invest $46.9 million over three years in exploring 2.5 million acres in New Brunswick. It will be Southwestern's first venture outside of the U.S.

"We have identified a large area, which we believe is prospective for oil and natural gas," Southwestern Chief Executive Steve Mueller said in a release.

"There is a significant amount of data yet to be collected in order to confirm its economic merit, but if our testing yields positive results, we expect that our activity in the area could increase substantially over the next several years," he said. "This could be the beginning of an exciting new chapter in our company's history."

Southwestern is a leading independent producer of natural gas in the U.S. and the largest producer of unconventional shale gas from Arkansas' Fayetteville shale reservoir. The size of the exploration rights it bought in New Brunswick is nearly three times the size of its position in the Fayetteville.

The purchase marks a major foray into Canadian unconventional gas for Southwestern, RBC Capital Markets analyst Scott Hanold said. He compared it to Southwestern's early move into the Fayetteville at low upfront costs.

"The lease interests come with a low royalty (likely 10% or less) and are located close to the northeast US, which provides premium natural gas pricing," Hanold said in a note to clients. "This should provide good economics with success."

Shale gas exploration combining hydraulic fracturing and horizontal drilling techniques has unlocked huge gas supplies in the U.S. but is still in a relatively early stage in Canada, with the most activity in British Columbia in the west.

New Brunswick shale exploration is in an even earlier stage. A joint-venture partnership between Corridor Resources Inc. and Potash Corp. of Saskatchewan Inc. was one of the earliest players there, estimating 412 billion cubic feet of proven-plus-probable gas in place in its land on the McCully field near Sussex.

Southwestern was the highest bidder for two large parcels of land auctioned by the New Brunswick government. A lower competing bid for the smaller parcel was put forward by a partnership between Windsor Energy Group and a Canadian unit of Spain's Repsol-YPF S.A.

Shares of Southwestern Energy rose 8.1% to $40.74 in recent trading in New York, boosted in part by an upgrade from analysts at Goldman Sachs earlier Monday.

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