Gas Driller Hits Its Mark In Rocky Mountains
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It's shaping up to be an old-fashioned land rush out in the Rocky Mountains.
Local natural gas exploration companies are getting plucked for billions of dollars as larger players look to tap productive properties.
Last month Kerr-McGee Corp. spent $3.4 billion for Denver-based Westport Resources. A week later, EnCana ponied up $2.7 billion for Tom Brown Inc.
The deal making continued this month, with Pioneer Natural Resources announcing plans to buy Evergreen Resources for $2.1 billion.
Who's next?
One candidate is Denver-based Prima Energy, (NasdaqNM:PENG - News)which has stakes in big plays in Colorado and in Wyoming's Powder River basin.
Those assets are attractive, analysts say.
"The one thing (Prima has) in common with (recent) takeover targets is a large concentration of properties in the Rocky Mountains, with good upside potential from existing reserves and production," said analyst Joe Allman of RBC Capital Markets. "From that perspective, they're a good target."
That doesn't mean it'll have any suitors, however.
"From a valuation perspective, I don't see it being a good takeover target at this point," Allman said. "The stock's overvalued."
Ode To The Rockies
Analyst David Tameron of Stifel Nicolaus says rivals such as Patina Oil & Gas and Western Gas Resources might go first.
Prima Chief Executive Richard Lewis is tight-lipped about the prospects of his firm getting bought out, choosing instead to point out the benefits of its geographic market.
"The activity we've seen points out what we've said for some time: The Rocky Mountains are a great place to be," Lewis said. "It's one of the few areas in the country that is actually growing production. We think there is a considerable amount of reserves and development left to do."
Prima holds mineral leases in more than 390,000 net acres. At the end of last year the company estimated its proven reserves at 125.8 billion cubic feet. Three-quarters of that is natural gas.
In Colorado, it operates in the Denver-Julesburg Basin. In Wyoming, it has stakes in the Powder River basin.
Those two properties hold 90% of Prima's reserves. It also has a few properties in Utah.
Prima's natural gas business got its biggest boost last year from Powder River, where production more than doubled - despite the fact that early drilling there was hampered by regulatory and environmental issues.
Most operations are now up and running.
"Their biggest upside is in the Powder River coal bed methane play," said Allman.
Several new wells there are slated to come online by the third quarter, replacing production from depleted wells in other areas.
Prima also is working in conjunction with Western Gas Resources on a gas-gathering system in Power River to get its gas to market.
Plans are afoot to get most of the wells it's working on there hooked to the pipeline in the second half of the year.
Price Sensitive
Prima's specialty is mining tight sand and coal bed methane properties. These are small, shallow wells with low outputs. They're more trickles than gushers, so high prices for oil and gas are important to profitability.
The company also drills exploratory wells at other locations that could yield new reserves later on.
Results at a property called Coyote Falls are encouraging, Lewis says. Tests continue there, and a multi-well pilot program is slated for later this year.
Prima also expects to get permits to drill at Utah's East Clear Creek Field late this year.
"They've got some exploration projects in other parts of the Rockies, but they're in very early stages," Allman said. "It's too early to say if they'll be successful or not. But they've got some exposure to upside through exploration."
Hot Fun In The Summertime
Prima saw first-quarter production volume rise 25% from the prior year. The product mix was 83% natural gas and 17% oil. Average realized gas prices rose to $3.96 per thousand cubic feet vs. $3.22 a year earlier.
Revenue gained 32% to $20.6 million. Earnings were up 37% to 52 cents a share.
First Call analysts see full-year earnings rising 11% to $1.99 a share, though 2005 profit is expected to slide back to $1.94.
Prima and other oil and gas firms saw their shares plunge on Monday. One reason: Leading OPEC producer Saudi Arabia called on the oil cartel to raise supply limits by at least 1.5 million barrels per day to prevent high crude prices derailing global economic growth.
Still, Prima should see prices spike this summer as power generation picks up, Tameron says.
Meanwhile, there's likely to be continued speculation about the firm's future as an independent. If it does stay independent, it has the financial wherewithal - no debt and around $60 million in cash - to make a buy or two itself.
"They looked at acquisition opportunities, and they got close on a few," Allman said. "But those transactions fell apart."
CEO Lewis says he's looked at a few buys, but couldn't speak to any pending deals. |
