XTO Buys Marcellus Shale Stake

XTO EnergyXTO announced Tuesday that it will acquire 152,000 net acres of leasehold in the Appalachian basin from Linn Energy LINE for $600 million.

The deal marks XTO's move into the white-hot Marcellus Shale play stretching from West Virginia through Pennsylvania to the outskirts of New York City. Some geologists say the Marcellus could produce more than 50 trillion cubic feet of natural gas. The potential windfall has ignited a land-rush that the domestic oil and gas industry hasn't seen the likes of in years.

Through the acquisition, XTO joins the ranks of companies such as Chesapeake Energy CHK, Range Resources RRC, EOG Resources EOG, Cabot Oil & Gas COG and Anadarko PetroleumAPC, all of whom are vying for position in the region.

The deal covers 99,000 leasehold acres in West Virginia and 53,000 acres in Pennsylvania, plus Linn's portfolio of existing wells in the region, with daily gas production of 25 million cubic feet and 145 billion cubic feet of proved reserves.

XTO engineers estimate the Marcellus zone the company is acquiring contains between 2 trillion and 4 trillion cubic feet of natural gas. A find of that size could be worth billions of dollars. Also included in the deal is a pipeline collection and distribution system that XTO says is valued at $50 million.

XTO is seeking 80- to 100-acre well spacing. That would allow the company to drill as many as 1,900 natural gas wells. Estimated finding and development costs for new wells in the space are $1.50 per thousand cubic feet, according to Gary Simpson, senior vice president for investor relations.

The company will fund the acquisition through new bank loans, the issuance of new commercial paper and existing cash flows. Linn energy will use the proceeds from the sale to reduce debt.

"This acquisition provides XTO an ideal opportunity to stake a foothold in the emerging Marcellus Shale play of the Appalachian region," stated XTO Chief Executive Bob Simpson in a prepared statement. "The expansive leasehold is anchored in the right locations, where we anticipate prolific shale potential. The producing properties generate free cash flow which we will deploy in our shale development campaign."

XTO currently produces roughly 1.8 billion cubic feet of natural gas per day in Texas, New Mexico, Arkansas, Oklahoma, Kansas, Wyoming, Colorado, Alaska, Utah, Louisiana, Mississippi and Montana. It has a long track-record of success in other major shale plays, including the Barnett Shale in northeast Texas and the Fayetteville Shale in Arkansas. The company is betting that its experience in these other shales will lead to success in the Marcellus.

XTO believes that it can capture the most gas in the Marcellus through horizontal drilling. "By applying our horizontal drilling and completion techniques, we anticipate average well reserves to be greater than 2 billion cubic feet equivalent, with initial producing rates of 2 to 3 million cubic feet per day," said XTO President Keith Hutton. "Given this framework, the properties could hold 2 to 4 trillion cubic feet of resource potential."

Shares of XTO rose 55 cents to $65.29, while Linn was down 17 cents at $23.63.