Bob, this will be of interest (from a Pescod/Watford interview just after the announcement of the Ultra/Pendaries deal. David Pescod is the publisher of the Canadian newsletter, Late Edition):
<<An interview with Michael D. Watford on the Ultra/Pendaries merger
Does this transaction change the management structure of Ultra?
No, our current management team will remain at the helm, with the addition
of some personnel from Pendaries.
Will the company still be called Ultra Petroleum, and will new share
certificates be issued? What will be the amount of issued stock following
the transaction with the Pendaries shareholders? Will Ultra get a U.S.
listing?
The company will still be named Ultra Petroleum. At closing, we will issue
15 million Ultra shares to the shareholders of Pendaries. Existing Ultra
shareholders dont have to do anything with their share certificates.
Pendaries is currently listed on the American Stock Exchange. Under the
terms of the transaction, Ultra has applied to be listed on the American
Stock Exchange.
Who are Ultras industry peers in this area? Who will Ultra be partnered
with in the drilling program?
Kerr McGee, a major U.S. company, is the operator of the Pendaries Blocks.
Newfield Exploration, a highly successful U.S. exploration company, is a
partner in the 05/36 Block. In addition to Kerr McGee and Newfield, Texaco,
Chevron, Phillips and Apache are active in the Bohai Bay play.
Are there any concerns regarding doing business in a country with Chinas
political structure?
There are always concerns going into a new country. As you may have seen,
China recently received Permanent Normal Trade Relations status with the
U.S. and is scheduled to join the WTO shortly. The Chinese have made
significant strides in opening their economy and joining the world
community. Our contracts are with the China National Offshore Oil Company,
which is planning a U.S. IPO early next year. In fact, Shell has already
committed to buy $400 million of that IPO. The contracts clearly spell out
the rights and obligations of the parties and provide for international
arbitration rules to apply in case of disputes. These facts, plus the
strength of our peers in the area, give us comfort that our business in
China wont involve any unnecessary risk.
How much capital will be required to participate in this project over the
next 2 years? Will cash flow and the existing senior credit facility be
sufficient to meet the capital budget?
The current estimates for 2001 expenditures in China net to Pendaries
interest are US$12.5 million. Estimates for 2002 are not complete yet as
they depend on the level of success we have in our 2001 exploration program
combined with development capital for the already discovered fields. We are
confident that we can fund both China and Wyoming activities from cash flow
and our credit facility.
What will this do to Ultras discretionary cash flow and earnings from the
Wyoming area for the next 2 3 years?
The acquisition will not help cash flow and earnings in 2001 but would add
to them once production in China starts up.
How deep are these wells, and how long does it take to drill and test? What
does a typical well cost (total, and net to Ultra)?
There are two distinct plays on the China Blocks: the shallow Tertiary play
on the Haizhong High, where the Chinese drilled all of their wells in the
early 1970s and the deeper play off of the high, where some of the western
companies have had significant successes recently. Two of the three fields
discovered to date are on the High and one is in the deeper play. On the
High, the wells are only about 5,000 feet deep and can be drilled in less
than a couple of weeks. These wells cost about $2.5 million to drill and
another $1.5 million to test, gross. Once Pendaries moves to field
development, both the drilling and testing costs will fall to about $2.3
million total. Pendaries share of the exploration wells is 15-18.2% and of
development costs 7.35-8.9%.
In the deeper play, the wells are up to 13,000 feet deep and take
correspondingly longer to drill. These wells cost about $6-7 million to
drill and test. Pendaries share of them is the same as on the High. Of
the prospects Pendaries hopes to test over the next several years, about
half are on the High and the rest are deeper plays.
How long will it be before revenue will be realized from the China project?
The current plan is for production to start in mid to late 2002 from the
existing discoveries and future discoveries will come on as soon after that
as possible.
Where is the oil sold, at what prices compared to world markets, and are
there any existing or anticipated concerns regarding transportation to
market?
Currently, oil similar in quality to whats been discovered on the Blocks in
Bohai Bay is selling for about $1 less than WTI. The contract allows for
sale of the oil into the world market at world price. China is a net
importer of oil currently, so the obvious market would be to sell it to the
refineries at Tanggu, just to the west of our fields. All payments would be
in US dollars at world prices. Pendaries will have offshore storage
facilities for the project, so transportation wont be an issue.
Does this mean Ultra will be less aggressive in the Green River Basin?
The limit on how aggressively we can develop our Wyoming assets is due to
the restrictions in the EIS that prevent drilling access to a large portion
of the Pinedale Anticline from December to May. These restrictions, coupled
with our growing cash flow from the success in drilling Jonah and Anticline
wells and the growing bank line means we wont be able to drill fast enough
to utilize all of our capital availability. That is one of the reasons that
this deal makes sense. We can redeploy Ultras capital in additional
projects that yield exceptional rates of return and significantly increase
shareholder value.
How does a Chinese offshore oil play blend with a Rocky Mountain long life
natural gas play?
Thats a logical question. The answer is that both the China assets and
Wyoming assets are high growth assets with real potential to end up a multip
le of their current size. We expect that the year end 1999 proved plus
probable reserves of 18.6 million barrels or 112 bcfe will be the downside,
especially given the successful wells drilled on the new structure during
2000. Additionally, the China assets increase the value of Ultra
immediately. This deal is accretive on a PV-10 per share basis today. We
essentially bought the reserves and got the upside thrown-in the deal.
Why are you so excited about the potential of the China assets?
Let me give you an example of one of the prospects weve identified. There
is a structure on the southern edge of the block, the CFD 16-2 structure,
that has a vintage Chinese well drilled on the flank that tested 70 barrels
of light oil per day on natural flow from the upper 15 meters of a 90 meter
sand. In other wells, where there were flow tests from Chinese wells, oil
was tested on pump at rates up to 20 times the natural flow rate. If the
structure is filled down to the old Chinese well, then it could enclose
10,800 acres. And that doesnt count the 13 other sands that the Chinese
well had shows in. This test well will be 60 meters high to that well.
Also, this structure appears similar to the Phillips discovery to the south
that is reported to have around 800 million barrels of reserves. If this
one structure is successful, it could triple the reserves from this
acquisition and there are still at least a dozen structures that are
similarly encouraging.
Why would Pendaries want to do this deal with Ultra?
Pendaries needed capital. They analyzed their alternatives and decided
that the opportunity not only to be able to participate in the upside in
China but also to get to benefit from our Wyoming properties and our
experienced management team was their best choice.
Why is this a positive move for Ultra shareholders?
There are four major reasons. First, as I stated before, it adds significant
asset value per share immediately. The pro forma PV-10 per share of proved
and probable reserves increases meaningfully based on Pendaries year-end
1999 reserve report and theyve drilled 3 successful wells since then, two
on a untapped structure that will add to reserves when the next report is
issued. Were confident that by year-end, the PV-10 per share for the
combined company will be significantly higher than our current trading
range. Secondly, the potential of the blocks is just as exciting as our
Wyoming properties. We legitimately have the potential to add a multiple to
our reserves within the next 24 months. Thirdly, when the China properties
come on-stream, our production and financial measures will increase
significantly. Our ability to grow at an extraordinary rate is greatly
enhanced by this acquisition. And finally, it gives us more size, which is
appealing to the capital markets. Mid-cap companies have historically
traded at a premium multiple as compared to small-cap companies. The
typical cut-off to be mid-cap is about US$250 million, and often as you
approach that threshold, your valuation multiples expand. So getting Ultra
into the mid-cap group should be very beneficial to our shareholders. And
remember, as part of this deal, we have applied for a listing on the AMEX.>> |
