Exco Resources Inc., Dallas, (NYSE: XCO) and BG Group Plc (London: BG) have entered into a joint venture to form a 50-50 operating company to develop Exco’s assets in Appalachia, specifically in the Marcellus shale play, for $950 million.

Exco estimates that the Marcellus position includes more than 5,000 undrilled locations.

The total transaction value consists of $800 million in upfront cash and a $150-million drilling carry, the costs commitment of which is expected to be satisfied in 2011 and 2012.

BG will acquire assets involving membership interests in companies that hold 50% of Exco’s producing and nonproducing assets in the Appalachian Basin, primarily in Pennsylvania and West Virginia, and will increase its estimated net gas resources by 2.4 trillion cu. ft.

As of year-end 2009, the existing assets comprised 654,000 net acres, with approximately 186,000 prospective net acres in the Marcellus shale; net production of 35 million cu. ft. equivalent per day from primarily shallower conventional horizons; and roughly 265 billion cu. ft. equivalent of net proved reserves.

Exco and BG’s jointly owned operating company will retain operatorship of the properties; the Marcellus acreage is currently being developed with one rig. Through a newly formed, 50-50 midstream joint-venture company, Exco and BG will pursue the construction and expansion of gathering systems, pipelines and treating and processing facilities.

Moreover, the Exco-BG joint venture will pursue additional acreage in Appalachia, where the companies will accelerate the ongoing development program for the remainder of 2010.
In conjunction with the deal, Exco will receive approximately $2,905 per acre, based on 327,000 net acres, and $10,215 per acre in the Marcellus play, based on 93,000 net acres.
Goldman, Sachs & Co. is advisor to Exco.

Given the current gas-price environment, analyst Jack Aydin at KeyBanc Capital Markets believes Exco has received an “excellent” price. With approximately 84.2% in upfront cash, the transaction is “in line” with the recently announced joint venture between Atlas Energy Inc., Pittsburgh, (Nasdaq: ATLS) and Reliance Industries Ltd., India, valued by KeyBanc Capital Markets at approximately $10,800 per acre.

However, analysts at Tudor, Pickering, Holt & Co. Securities Inc. have rated the transaction of approximately $10,000 per acre for 186,000 Marcellus acres as “below” recent Marcellus joint-venture metrics. Specifically, the Atlas-Reliance joint venture valued at $1.7 billion consisted of $14,000 per acre for 120,000 net acres, while the $1.4-billion joint venture between Anadarko Petroleum Corp., Houston (NYSE: APC) and Mitsui & Co. Ltd., Japan, (Nasdaq: MITSY) was valued at $14,000 per acre for 98,000 net acres.

According to TPH, the median price for transactions in the Marcellus play over the past two years was $3,500 per acre.

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