Apache Adds $490 Million in Canadian Assets from Phillips
Since its reintroduction to the north country in 1995, Apache Corp.
continues on its steadfast course of absorbing Canadian real estate at
a fever pitch. Almost a month after Phillips Petroleum put its Canadian
assets in the Zama area of northwest Alberta on the market, the company
reported that it has entered into a definitive agreement in which Apache
will acquire the oil and gas assets for $490 million. The properties included
have proved reserves of 71.6 million boe, of which 59% is natural gas (see
NGI, Nov. 27).
Current production on the Zama properties is approximately 70 MMcf/d
of natural gas and 6,000 b/d of liquid hydrocarbons. The properties are
comprised of about 212,000 net developed acres and 275,000 net undeveloped
acres. The location is especially appealing because there is room for expansion
with an additional 1.5 million acres of Crown land available in the immediate
Phillips' financial advisor, Waterous & Co. of Calgary, said the
Zama properties are the single largest Canadian asset ever made available
in a public offering.
The sale includes three sour gas plants with a total capacity of 150
MMcf/d, 13 compressor stations and 150 miles of owned and operated gas
gathering lines, 786 square miles of proprietary 3-D seismic and 4,155
miles of 2-D seismic. The Zama area is expected to have an 11-year reserve
Production for 2001 for the properties is expected to average 72 MMcf/d
of gas and 5,800 barrels of liquid hydrocarbons. In previous estimates,
Phillips anticipated that cash flow for the Zama property in 2000 would
be C$155 million.
"Including the pending Phillips and Fletcher Challenge transactions,
since re-entering Canada in 1995 via a merger with DeKalb, Apache will
have acquired approximately 338 million boe of reserves at an average price
of $5.66 per boe," said G. Steven Farris, president of Apache. He
said the Phillips properties have extensive upside potential, "both
in terms of exploitation and exploration. We have identified approximately
228 new exploration and development drilling locations and re-entries at
present, plus numerous recompletion and production enhancement opportunities."
Apache announced on Oct. 9 a joint bid with Royal Dutch/Shell Group's
Overseas Holdings to buy New Zealand-based Fletcher Challenge Energy Ltd.
Apache's $600 million share would mainly be in Canadian assets that would
add 713 Bcfe of natural gas to Apache's proved reserves, or about 12% to
its current proven reserve base (see NGI, Oct.
16). Apache expects to close the Fletcher acquisition by March 31,
"Based on current production and forward prices, the two Canadian
transactions bring us the equivalent of two years' production at a cost
of only six months' cash flow," Farris said. The company expects 2001
production from the Fletcher acquisition to average 130 MMcf/d and 12,200
b/d of oil.
Apache said the Zama transaction will be effective on Dec. 29, has been
approved by both companies' boards and is expected to close as soon as
regulatory approval is obtained, possibly by mid-January. Because the company's
balance sheet is so strong, Apache plans to fund the acquisition with cash
on hand and commercial paper, which would bring its debt-to-capitalization
ratio to approximately 38% upon completion of the deal.
"We expect this transaction [Zama] will add somewhere around 35
cents earnings per share, and $1.10 or so to cash flow," said Roger
Plank, executive vice president for Apache. "2001 will be another
year of record production with oil production up over 20%, gas production
will be up over 30%, and by holding our share count down, production per
share will also grow meaningfully while our balance sheet grows stronger."
Since Apache re-entered the Canadian production scene, it has acquired
approximately $1.9 billion worth of assets and currently holds 2.5 million
undeveloped, and 1.5 million developed acres in the country.
Phillips, which purchased the Zama properties in 1997 from Pennzoil
and Gulf Canada for $320 million, expects to realize about $470 million
in after-tax proceeds from the sale to Apache, resulting in a gain of approximately
$110 million to net income. Assuming the sale is completed before the end
of the year, Phillips anticipates its year-end debt to capital ratio to
be about 52%, a sizeable reduction from the 61% mark following the company's
acquisition of Arco's 36.5% interest in the Prudhoe Bay Alaska field in
April. Phillips spokeswoman Kristi DesJarlais pointed out that the Zama
sale does not mark an exit for Phillips from Canada. She said the company
plans to keep properties it holds interests in but does not operate.
"This sale is part of Phillips' ongoing effort to rationalize our
exploration and production portfolio, focusing on legacy assets and divesting
properties that are not core to our business," said Bill Parker, executive
vice president of production and operations. "An added benefit is
a reduction in debt and a strengthened financial position."