Apache Corp. dramatically grew its asset base and shiftedattention away from its poor first quarter financial performancelast week by buying 22 fields in the Outer Continental Shelf of theGulf of Mexico (GOM) from Shell for $715 million and one millioncommon shares of stock. The acquisition will go into effectretroactive to March.

“The deal is just huge,” said Bill Mintz, an Apache spokesman.”It nearly doubles our offshore gas production and increases ouroil production nearly five-fold.” In March, Apache’s averageproduction was 140 MMcf/d of gas and 5,000 barrels of oil.

The transaction paid immediate dividends for Apache. Its stockskyrocketed up $3.06 to $31.69 in early Thursday afternoon tradingbefore sliding back down Friday.

“I think I can speak for everyone on the Apache side when I saywe are more excited about this transaction from the perspective ofasset quality and financial impact than perhaps any other deal wehave ever done,” said Bob Dye, Apache’s vice president of investorrelations, in a conference call on Thursday. The deal had been inthe making for over a year, Dye added.

Apache expects the transaction to add 20 cents/share of value in1999. “The transaction is expected to add significantly toearnings/share and cash flow/share,” said Apache President G.Steven Farris. “In addition, while service costs are appropriate,we intend to accelerate production and reduce costs to addshareholder value through a program of recompletions, workovers anddrilling.”

Apache will operate 18 of the 22 acquired fields. In February,the properties recorded average net production of 24,900 barrels ofoil and 125 MMcf/d. The fields’ production and reserve mix is 54%oil and 46% natural gas. All the properties are in water depths ofless than 700 feet. The deal also includes 16 undeveloped blocksand access to 3-D seismic data covering more than 1,000 blocksthroughout the Gulf.

One industry analyst, who wished to remain anonymous, said anApache move had been expected for some time. “This is their firstbig move in about four years. We were expecting them to dosomething, and this something is a good deal. It isn’t diluted andthe price and timing were right. There is room to grow thesefields, and Apache seems prepared to do so.”

Apache made the announcement on the heels of a poor 1Q99earnings report. It accrued a first quarter loss of $3.6 million,or 4 cents/share as a result of low oil and gas prices. Apachereported net income of $17.4 million, or 18 cents/share, in 1Q98.The company realized $1.69/Mcf of gas, compared with $1.98/Mcf inthe year-earlier period. Gas production dropped to 572 MMcf/d from611 MMcf/d.

The analyst said the earnings report was in line with the restof the industry. “They weren’t hurt more than anybody else. Withthis Shell deal, they have a good chance of having a very goodsecond quarter.”

For Shell, the sale represents an opportunity to revise itsgrandiose GOM portfolio. “This adjustment of our portfolio in theGulf of Mexico will allow for better allocation and focus of ourstaff and capital,” commented Walter van de Vijver, ShellExploration &amp Production’s president and chief executiveofficer. “Given the high level of activity in Shell’s deep-waterand newer Shelf fields, coupled with capital expenditurepriorities, our intent is to focus our activities in those areaswith longer term strategic value.”

The sale involves half of Shell’s producing properties inshallow waters of the GOM, but only one-fourth of Shell’s dailygross production from those waters. Both companies said the dealwill close within 30 days.

“I’m glad to see it,” said Kate Warne, an analyst at AG Edwards.”It demonstrates that [Shell] is serious about their strategy torebalance their GOM portfolio. The move tells me that they are nolonger spreading themselves too wide open in that area of theiroperations.”

John Norris

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