Southern Pacific buys remaining 20% of McKay for $33 million

Southern Pacific (STP-V) has signed a deal to increase its stake in the McKay oilsands project 45 km northwest of Fort McMurray, Alta., from 80% to 100%.

Southern Pacific has agreed to pay $33 million for 59 sections of land from Bounty Development. The land being acquired includes the company’s STP-McKay steam assisted gravity drainage project.

The company will also acquire a 20% interest in Bounty’s 32 sections of land next to and near its 100%-ownwed Mackenzie block. The land ipackage is known as Ells, and was formerly operated by Patch International.

The Ells land includes 12 sections that have been drilled and have a contingent resource estimate.

The land will also provide Southern Pacific with important technical data and allow for lower cost exploration around its MacKenzie block, which it has not yet explored.

At McKay, Southern Pacific will gain reserves of 27.1 million barrels of oil (3P Reserves plus high estimate contingent) for a total of 124.9 million barrels. Ells comes with resources of 50.8 million barrels of oil (high P10 estimate contingent resources).

Southern Pacific will pay for the reserves, resources and land using 20% equity and 80% cash, amounting to 6.47 million shares at $1.02 each and $26.4 million in cash.

This new land adds to the 269 sections, or 583 sq. km, of land the company already held.

The STP-McKay project is a 12,000 barrel per day in-situ thermal project that is in the application approval process.

Southern Pacific submitted an application to Alberta Environment and the Alberta Energy Resources Conservation Board in May 2009.

The company expects to receive an approval to go ahead with the project in the second half of 2010 with construction starting in the fall.

Although this acquisition means Southern Pacific will have to foot the entire bill for the project – about $383.8 million from $307 million – the company says it’s confident that with the strengthening markets and cash flow from its STP-Senlac thermal SAGD project in Saskatchewan, the company will have no problem with funding.

Southern Pacific acquired Senlac in November 2009 from $89.6 million. The project has the capacity to treat 6,500 barrels per day and includes three steam generators that can produce 9,900 barrels per day of dry steam. It came with a pipeline connected to oil shipping and diluent return pipelines, a water source and water disposal wells.

The agreement with Bounty is expected to close at the beginning of June.