U.K.-based BG Group Plc (London: BG) is stamping its footprint in the Haynesville shale play in East Texas and North Louisiana. The international energy company has taken a 50% interest in certain holdings of Dallas-based explorer Exco Resources Inc. (NYSE: XCO) in a deal valued at US$1.3 billion.

BG Group will pay $655 million for a 50% interest in its producing and nonproducing assets in an area of mutual interest (AMI) involving approximately 120,000 net acres, and will pay 75% of Exco’s drilling and completion costs to develop the deep rights up to $400 million. In addition, BG is acquiring a 50% interest in related gas gathering and transportation assets for $249 million.

Of the $1.055 billion for upstream assets, BG Group estimates the consideration equals $0.40 per thousand cu. ft.

The deal involves most of Exco’s holdings in East Texas and North Louisiana including Oakhill, Holly, Kingston, Caspiana, Danville, Longwood/Waskom, Carthage and Minden fields. The existing assets within the AMI include some 120,000 net acres with approximately 65,000 net acres in East Texas and 55,000 net acres in Louisiana.

Approximately 84,000 net acres are prospective for Haynesville shale development in DeSoto and Caddo parishes in Louisiana and Harrison County, Texas. The companies will enter into a joint-development agreement for the Haynesville, Bossier and other deep horizons as well as the Cotton Valley, Hosston and other shallow horizons. Exco will continue as operator.

The deal excludes Exco’s Vernon Field in Jackson Parish, Louisiana, Redland Field in Bossier and Webster parishes, Louisiana, and the Gladewater and Overton fields in Gregg, Rusk and Smith counties in Texas.

Production is approximately 95 million cu. ft. per day from the Cotton Valley and other shallower horizons and approximately 60 million per day from the Haynesville shale, with 78 million net to BG Group, which expects net production to increase to 250 million per day by 2012. As of year-end 2008, the Cotton Valley and other shallow rights included approximately 414 billion cu. ft. equivalent of net proved reserves and approximately 445 billion equivalent of net probable and possible reserves.

BG Group values the Haynesville interests at $19,000 per acre. It reports the acquisition adds some 2.6 trillion cu. ft. to its resources.

The Haynesville/Bossier shale acreage is under development, and Exco estimates that its current acreage position, most of which is held by shallow production, includes some 1,600 undrilled Haynesville locations containing net potential reserves of 4 trillion cu. ft to 6 trillion, with significant additional potential in the Bossier shale. Exco and BG Group plan an aggressive development program, particularly in the Haynesville shale, for the remainder of 2009 and in future years. To date, Exco has completed eight horizontal wells in DeSoto Parish with an average initial production rate of 23 million cu. ft. per day on restricted chokes. Exco plans to drill an additional 34 horizontal Haynesville wells in 2009, of which 27 will be operated.

The $400-million drilling-and-completion-cost commitment by BG Group is expected to be satisfied in 2011 or 2012. The companies will share equally in additional leasehold and asset acquisitions within the AMI.

In addition, BG Group will acquire a 50% interest in Exco’s midstream business, exclusive of Vernon Field midstream assets, in the area for $249 million in cash. The companies plan to jointly develop and grow the midstream business as well. Exco currently owns more than 700 miles of pipeline and gathering assets in the area and is constructing a 29-mile, 36-inch header system to transport its Haynesville gas production. Throughput in the midstream business to be contributed to the joint venture is approximately 440 million cu. ft. per day of which approximately 50% is Exco gas and 50% is third-party gas.

Exco says upfront cash of $904 million will be used to repay a $300-million senior unsecured loan with the remainder applied to credit facilities.

BG currently markets approximately 3.5 billion cu. ft. per day through 66 major interstate and intrastate pipelines serving markets throughout the Midwest and eastern U.S.

Closing is expected in the third quarter. The effective date is Jan. 1, 2009. Goldman, Sachs & Co. is advisor to Exco. Deutsche Bank is advisor to BG Group.