Apache Corp. last week did what had been expected, that is, buy a big chunk of BP plc’s North American portfolio, and not on the fringe in Alaska as had been rumored, but in the heart of mainstream plays where all the action is.
The Houston producer agreed to pay $7 billion — its largest transaction ever — for a set of BP’s assets in the Permian Basin, nearly all of the oil major’s upstream natural gas business in western Alberta and British Columbia, and property in Egypt’s Western Desert.
Net production from the properties in the first six months of this year was 28,000 b/d of liquid hydrocarbons and 331 MMcf/d, or around 83,000 boe/d. By comparison, in April, May and June Apache produced 646,866 boe/d. The transaction also adds 2.4 million net acres to Apache’s global portfolio.
“This is a rare opportunity to acquire legacy positions from a major oil company, with oil and gas production, acreage, infrastructure, seismic data, field studies, exploration prospects and other essential aspects of our business,” said CEO G. Steven Farris. “We seldom have an opportunity like this in one of our core areas, let alone three. This is a step change that will add muscle, enabling Apache to add value for decades to come through our demonstrated exploitation capabilities and exploration drilling.”
The effective date of the transaction is July 1 and will require regulatory approvals in the United States, Canada, Egypt and the European Union. Each transaction is separate; approval or disapproval of one deal would not impact the others.
As a part of the acquisition, Apache is advancing BP $5 billion of the purchase price by next Friday (July 30), well ahead of the anticipated closing. The advance is to be returned to Apache or applied to the purchase price. Funding will be done with a combination of debt and equity, and cash on hand. A $5 billion bridge loan facility would backstop any financing requirements.
Farris, in a conference call late Tuesday, led off with a nod to Apache’s strong earnings report for 2Q2010, demonstrating to investors that the company is well heeled and able to take on its third big acquisition this year. This year the producer already has agreed to spend more than $4 billion in two transactions: to acquire Gulf of Mexico assets from Devon Energy Corp. and to acquire Mariner Energy Inc. (see NGI, April 19).
“Apache had a hell of a quarter this quarter,” said the CEO. “Apache earnings were up 22% from the prior quarter, and production was up a little over 10%…Cash flow was up 17%, and importantly, on the cash balance sheet, we have $1.8 billion, and the [debt-to-capitalization] is 22%.”
Second quarter net income climbed to $860 million ($2.53/share), nearly double the $443 million ($1.31) earned in the year-ago period. Production in the latest period totaled 646,866 boe/d, with liquids output up 19% and gas production increasing to 1.79 Bcf/d, or 1% from the year-ago period and 5% higher sequentially.
With the BP transactions, “we are really buying individual businesses,” Farris noted. “This is a complete exit by BP from these areas…Apache has made a living off of the sales packages of majors. But this is the first time in our history that we’ve had the opportunity to take a major out of three core areas that are going businesses…”
The CEO admitted that Apache and BP were able to keep the negotiations out of the public eye and away from the media, which had concluded that the two producers were negotiating a massive Prudhoe Bay deal. An Alaska transaction could be in the future, said Farris, but it won’t be anytime soon.
The transactions include not only substantial production but also “field studies, seismic…a tremendous amount of acreage…a number of development projects,” he said. “We do get some midstream assets with these that add to the value and play to Apache’s core competencies.”
In the Permian Basin, Apache is acquiring 10 field areas with estimated proved reserves of 141 million boe (65% liquids), first-half 2010 net production of 15,110 b/d of liquids and 81 MMcf/d of gas, and two operated gas processing plants.
“These are under-exploited assets with 1.7 million gross acres — including 405,000 net mineral and fee acres — in prospective areas of the basin with substantial opportunities for new drilling,” Farris said.
In 2Q2010 Apache produced 42,287 b/d of liquids and 86 MMcf/d net in the Permian Basin. At the end of last year Apache’s proved reserves in the Permian Basin totaled 469 million boe on 961,000 gross acres.
The Canadian assets include resource-rich acreage in Western Canada with estimated proved reserves of 224 million boe, 94% weighted to gas. Production in the first six months of this year totaled 6,529 boe/d of liquids and 240 MMcf/d of gas. The Canadian upstream business to be acquired excludes BP’s oilsands and natural gas liquids businesses.
“We are buying a substantial production base and 1.3 million net acres that include significant positions in several emerging unconventional plays, including the Montney, Cadomin, Doig and coalbed methane,” Farris said.
Apache’s Canadian operations in the first half of this year produced 340 MMcf/d of gas and 16,557 boe/d of liquids. At year-end 2009 Apache had 531 million boe of proved reserves and 5.6 million gross acres in Canada.
“This transaction provides a sustainable growth platform for Apache’s onshore North America operations that complements our recent transaction with Devon Energy Corp. in the Gulf of Mexico and our pending merger with Mariner Energy, as well as strategic infrastructure and exploration potential in Egypt,” Farris said. “We appreciate the opportunity and the professional manner in which BP employees conducted themselves. Their cooperation was a key ingredient for this transaction to come together.”
The transactions drew a mostly positive reaction from financial analysts, but credit ratings agencies are concerned about the number of transactions the Houston-based producer is taking on.
Moody’s Investors Service placed Apache’s ratings under review for a downgrade. However, the Moody’s team said the purchase “adds important businesses that intensify three of Apache’s existing core operating areas,” and “Apache also generated strong operating and financial results in second quarter 2010. If Apache were to be downgraded, it would be no more than one notch.”
Fitch Ratings placed Apache’s ratings on Rating Watch Negative also because of the “significantly higher leverage levels” from the acquisitions and the earlier transactions this year.
Apache also faces a “significant investment decision” about whether to commercialize major natural gas prospects, including two in British Columbia: its 51% ownership stake in the proposed Kitimat liquefied natural gas (LNG) export facility, and the Horn River Shale, said Fitch analysts. In addition, Apache is a stakeholder in the Chevron Corp.-operated Wheatstone LNG project in Australia.
“To a lesser degree,” said Fitch, “regulatory uncertainties regarding the length and impact of the ongoing Gulf of Mexico (GOM) drilling moratorium could also negatively impact Apache’s cash flows, given Apache’s increased exposure to the Gulf and the relatively high margins associated with GOM production. While the recently revised drilling moratorium focuses on wells with blowout preventers rather than wells categorized by water depth, it has had a chilling effect on new activity.”
However, Standard & Poor’s (S&P) Equity Research reiterated its “strong buy” rating, and said Apache was building its portfolio “at attractive prices.” For Apache, the new acquisition deal “marks another well-timed purchase of developed (but underworked) assets from a major oil company, a strategy that has worked for it in the past,” said Morningstar’s Catharina Milostan. Financial analyst Joshua Caucutt, who writes for InvestorGuide.com, called the BP acquisitions “a golden opportunity for Apache…BP’s misfortune is only making Apache stronger.”
In related news, The Interior Department last week granted Apache a permit to drill a gas well in the shallow waters of the GOM. Apache said earlier this month that Interior had given it preliminary approval for the new well, which would be the first issued since the new offshore drilling safety regulations were put into effect following the April 20 offshore rig disaster.
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