Apache Corp. stormed into the Gulf of Mexico (GOM) last week with two transactions that together are worth more than $3 billion and give the producer a portfolio of deepwater and Outer Continental Shelf projects.

Apache whet the appetite of merger and acquisition watchers in the first transaction, announced last Monday, in which Apache agreed to pay $1.05 billion to acquire Devon Energy Corp.’s GOM Shelf properties. Three days later Apache followed with a cash-and-stock offer worth an estimated $2.7 billion to merge with Mariner Energy Inc., which has 85% of its exploration properties offshore.

Once the two transactions are completed, North American natural gas would make up about one-third (31%) of Apache’s commodity mix while oil and liquids would comprise almost half (49%). International gas projects would make up the remaining 20% of the portfolio.

Apache CEO Steve Farris said during a conference call with energy analysts that the last acquisition to offer “such a strategic opportunity” as Mariner was in 1996, when the company acquired assets in Egypt.

Farris said the Mariner purchase is “not a knee jerk decision.” Apache, he noted, already operates around the world in several deepwater regions in addition to the GOM. “Over the last several months we’ve been building our organization for this step, and with the added expertise of the Mariner team, I’m excited about the capabilities…”

The Mariner merger offers Apache “significant” growth potential in the GOM and because of a build-out in deepwater infrastructure over the past several years, full-cycle development costs would be reduced, said the CEO.

At the end of 2009 Mariner had interests in about 240 blocks on the Shelf and 100 blocks in deepwater. Mariner’s deepwater developments include Geauxpher, in which it partners with Apache, as well as Bass Lite and Northwest Hansen. Mariner, which is based in Houston like Apache, also has seven GOM discoveries in development — including interests in Lucius and Heidelberg — and more than 50 prospects.

Onshore Mariner’s portfolio is concentrated in the Permian Basin and Gulf Coast, which comprise more than half of nearly 1.1 Tcfe in proved reserves. At the end of 2009 Mariner held net interests in more than 185,000 acres. Operations are focused on infill drilling and exploration, with the company holding more than 1,000 potential drilling locations.

“This is a strategic step and a natural extension into the deepwater Gulf for Apache,” said Farris. “Mariner provides an exciting new platform for growth in the deepwater and complements our strengths in the Gulf Shelf and the Permian Basin. Based on our experience working with the Mariner team, we also believe the two companies will make an excellent cultural fit.”

Under the agreement, Mariner shareholders would receive, in aggregate, 0.17043 of a share of Apache common stock and $7.80 in cash for each outstanding share of Mariner’s common stock. Based on Apache’s closing stock price of $108.06 on Wednesday, the transaction values Mariner’s shares at $26.22/share or about $2.7 billion. Apache also would assume Mariner’s debt, estimated at $1.2 billion.

“The combination with Apache is an excellent outcome for Mariner’s stakeholders,” said Mariner CEO Scott D. Josey. “Our shareholders will be rewarded for their faith and support in our company with the opportunity to further benefit from the upside provided from the merger. Our partners will work with a world-class company with the financial and technical resources to fully exploit our assets. Our employees will benefit from the opportunities provided in a large company with values similar to Mariner’s.”

In February Mariner produced an estimated 63,000 boe/d from the GOM Shelf and deepwater, the Permian Basin and unconventional onshore plays. At the end of 2009 Mariner had estimated proved reserves of 181 million boe (47% liquid hydrocarbons) as well as unbooked resource potential of 2 billion boe.

“We have considered extending our Gulf of Mexico operations into the deepwater for a number of years,” Farris said. “This is the right set of assets and the right time for Apache to expand its deepwater presence.

“Mariner brings an inventory of developments and prospects that will jump-start our position in the deepwater Gulf; Apache’s financial resources will maximize the value of the portfolio,” he said. “It’s the right time because recent advances in seismic technology and continued enhancements in facilities design have reduced the risks in one of the world’s most prolific oil exploration basins.”

Apache and Mariner teamed up in the 2008 deepwater Geauxpher discovery and development at Garden Banks 462 (see NGI, June 1, 2009). “Mariner’s skilled, experienced professionals share our values and sense of urgency,” Farris said.

Mariner also has more than 240 blocks on the GOM Shelf and more than 200,000 net acres across several emerging onshore plays. “Mariner’s Gulf Shelf and Permian assets are both excellent fits with our existing core areas,” Farris said. “These fields provide strong cash flow, drilling inventory and upside potential.”

The transaction, which is scheduled to be completed in 3Q2010, is subject to Mariner shareholder and customary regulatory approvals.

Apache’s transaction with Devon would add production of about 19,000 boe/d with year-end 2009 estimated proved and probable reserves of 83 million boe across 158 blocks offshore. Devon’s Shelf assets are along the Texas, Louisiana and Alabama coasts.

The shallow water assets, which Devon put up for sale last year, hold an estimated 83 million boe of net proved and probable reserves and are projected to produce a net 55 MMcf/d of natural gas and 9,500 b/d of liquid hydrocarbons. Liquid hydrocarbons would contribute more than 70% of the projected revenues from the acquired properties; the estimated proved reserves are split nearly evenly between natural gas, and oil and natural gas liquids, Apache said.

Devon last year began restructuring and said it would sell its GOM and international assets to train its focus on North America’s unconventional resources onshore (see NGI, Nov. 23, 2009). In March all of its deepwater GOM, Brazil and Azerbaijan assets were sold to BP plc for $7 billion (see NGI, March 15).

“When we first announced our plans to reposition Devon, we expected total after-tax proceeds of between $4.5 and $7.5 billion,” said Devon CEO Larry Nichols. “This sale of the remaining Gulf of Mexico assets, combined with our previously announced divestitures of $8.3 billion, ensures that we will exceed the upper end of that range. Furthermore, we are pleased to have a single purchaser for the Shelf assets with the financial strength and experience of Apache.”

Jon Jeppesen, who runs Apache’s Gulf Coast Region division, said, “Many of these properties are geologically complex fields that contain large structures with multiple pay intervals that we believe are underexploited. The prospect inventory includes high-potential trend exploration opportunities in the Norphlet play and highly prospective exploratory acreage off the Texas coast.”

From Devon’s acquired assets alone projected production through the rest of 2010 was to equal 3% of Apache’s 4Q2009 worldwide daily production.

Apache already was the GOM’s largest held-by-production acreage owner and the second-largest producer in waters less than 1,200 feet deep. Seven major field areas acquired from Devon hold 90% of the proved reserves, and Devon now operates 75% of the production. Based on initial evaluation, Apache said it has identified 79 recompletion opportunities and 26 drilling prospects across the acquired assets.

The Devon transaction, which became effective Jan. 1, is expected to be completed in early June. Devon said it now has completed the sale of most of the assets it put up for sale. Data rooms for the remaining international assets are open; the divestitures are slated to be completed by year’s end.

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