2010-01-07-2009-12-16-2009-12-16

Bought AK assets, gaining 13.2 MMBO/15.5 Bcf proved, 600,000 undeveloped acres.

Huntsville, Tenn.-based Miller Petroleum Inc. (dba Miller Energy Resources) (OTCBB: MILL) has acquired troubled Alaskan assets formerly held by Long Beach, Calif.-based Pacific Energy Resources Ltd. via a bankruptcy proceeding for $2.25 million, essentially the same assets Pacific Energy bought from Forest Oil Corp., Denver, (NYSE: FST) in 2007 for some $464 million.

The assets include total proved reserves of 5.6 million barrels of oil and 3.7 billion cubic feet of gas (13.2 million barrels of oil and 15.5 billion cubic feet of total proved reserves). The primary assets include the West McArthur River Unit, the Redoubt Unit, Kustatan Field, the Kustatan production facility, West Foreland Field, Three Mile Creek Field, Sabre Field and Valkyrie Field in the Cook Inlet region.

Miller is the largest producer in Tennessee targeting the Chattanooga shale, but until this acquisition held no interests outside of the state.

The company estimates the PV10 value of the Alaskan reserves is $325 million, including $119 million of proved reserves, $185 million of probable reserves and $23 million in possible reserves.

In addition, Miller has acquired onshore and offshore production and processing facilities, an offshore energy platform, more than 600,000 net acres of land with thousands of acres of 3-D geologic seismic data, roads, pads and facilities that originally cost some $300 million to build and install.

Miller will operate the facilities through its 100% owned subsidiary, Cook Inlet Energy LLC, which it acquired as part of the deal and involves the operating team that has been with the assets since Forest owned them. Miller paid an additional $2.22 million for contract cure payments, bonds and other local, federal and State of Alaska requirements to operate the facilities.

Miller chief executive Scott M. Boruff says, "The good news just keeps coming at Miller. In the past year our shareholders have seen an increase of over 140% on their stock, (and) this new acquisition should continue the strong improvement in Miller's value for our shareholders. Miller is very pleased to have been able to acquire these high-value Alaska energy assets at an extremely attractive value."

The company estimates it paid $0.36 per proved barrel equivalent and $0.024 per thousand cubic feet for total reserves.

Following the collapse of commodity prices in Fall 2008, the properties became uneconomic. Additionally, volcanic and seismic activity in the region resulted in the only pipeline to market being temporarily shut, eliminating any revenues from the properties. Pacific Energy subsequently filed for Chapter 11 bankruptcy protection in March in the Chapter 11 in the U.S. Bankruptcy Court for the District of Delaware.

Rhett Campbell, an oil and gas bankruptcy attorney with Thompson & Knight LLC, says, "These properties are subject to a lot of problems that were not well understood at the time of the Forest sale to Pacific Energy." He says it is difficult to operate these properties at a profit with current pricing. Also, substantial plugging and abandonment reserve liabilities weighed on operating costs, he says.

In April, Pacific Energy hired Lazard and Albrecht & Associates Inc. as financial advisors but were unable to find buyers for the package of Alaskan assets. Facing $30- to $60 million in decommissioning costs, the company filed for and was granted the right to abandon the assets in September. Miller stepped in following abandonment and negotiated to buy all but certain higher-risk assets and assume all liabilities.

Boruff, who became Miller CEO in August 2008, believes Miller can operate the assets at lower cost than previous operators. Initial production is estimated to be 280 barrels of oil a day, with a three-month target of 800 barrels a day and exceeding 1,100 barrels daily by the fourth-quarter 2010, which would generate more than $30 million annually in gross revenue for Miller.

He says the company will spend $5- to $10 million in the next six to nine months on the properties and $20- to $40 million more beyond that. Much of the development costs will be offset through joint-venture arrangements, he says, which will keep debt low, a stated objective.

Miller is backed by private-equity firm Vulcan Capital Management based in Delaware (although not the same as the Washington State-based Vulcan Capital Management formed by Microsoft's Paul Allen).

The acquisition increases Miller's total reserves 32 times, from 504,000 barrels of oil equivalent to 16.33 million barrels equivalent.

Boruff says he believes that the company has, through its investment partners, the necessary capital to build out its assets without incurring significant risk. "We also believe that based on our capital raise, just concluded, that we have additional financial capital available to us should we need it to expand out our operations. Beyond our development of our Alaska and Tennessee assets, we will also continue to be opportunistic about additional energy opportunities as they present themselves."

Vulcan Capital Corp. was financial advisor for Miller. Sullivan, Hazeltine, Allinson LLC was legal advisor.