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Apache Deal More than Doubles Liquids Acreage in Anadarko Basin

Apache Corp. is picking up 254,000 net acres in the Granite Wash, Tonkawa, Cleveland and Marmaton plays in Oklahoma and Texas with estimated proved reserves of 71.5 million boe through a $2.85 billion deal to acquire privately held Cordillera Energy Partners III LLC, the Houston-based company said Monday.

The properties have current net production of 18,000 boe/d. "...Cordillera has assembled a leading acreage position with significant resource potential including 14,000 potential drilling locations in liquids-rich Anadarko Basin plays," Apache said, noting that the acreage to be acquired is characterized by high working interest and operatorship with about half held by production.

"This is an important growth step for Apache: a unique bolt-on opportunity that more than doubles Apache's acreage in a highly liquids-rich fairway in the Anadarko Basin," said Apache CEO G. Steven Farris. "Apache has been active in the basin for more than 50 years; the experience we have gained drilling 500 wells in the Granite Wash play, including 79 horizontals drilled since 2009, gives us an in-depth understanding of the geology and the operating environment and will enable us to hit the ground running.

"Multiple, stacked horizontal targets provide decades of potential drilling locations. Because 80% of revenue comes from liquid hydrocarbons production, this transaction provides compelling economics at current commodity prices."

The acquisition -- at a price considered to be rather rich, according to one analyst -- is expected to be accretive to Apache's earnings and cash flow beginning in 2012 with development drilling to be self-funding beginning in 2013.

"Based on a $90/bbl oil price and $3 natural gas, horizontal drilling achieves robust returns ranging from 25% in the Marmaton to 42% in the Granite Wash," COO Rod Eichler said during a conference call with financial analysts Monday. "Horizontal drilling combined with multi-stage fracturing and well completion technology is ideally suited for the type of reservoirs in the Anadarko Basin.

"This is a liquids play in our backyard. It doubles our acreage position in an area that we know very well, and we can hit the ground running when we close. We have a rich inventory of drilling locations that provide decades of developmental growth. To sum it up, this is a classic Apache transaction. It was negotiated, so we're confident we're getting high-quality assets at a good price."

Wells Fargo Securities analyst David Tameron called the deal a "slight positive" for Apache and estimated that Cordillera got about $8,000 per net acre. "We think longer term, it is a nice inventory add for APA [Apache], but the knee-jerk reaction may be that APA overpaid for the assets...

"As the company has had improving success in horizontal tight oil plays such as the Hogshooter, Cleveland, Marmaton, etc., we believe the lofty purchase price implies management enthusiasm for APA's existing inventory in the play. Cordillera's acreage looks to be closest to the area where APA is targeting the Hogshooter."

Tameron wrote that he expects Apache "to remain acquisitive" as the company's cash flow is outpacing its capital budget this year and likely will do so next year. Apache also has "a very low" net debt-to-capital ratio of about 20%, he said.

The sellers, including EnCap Investments, other institutional investors and Cordillera management will receive about $600 million in Apache common stock subject to customary lock-up provisions. The balance of the consideration will be paid in cash to be funded with debt. The effective date of the transaction is Sept. 1, 2011, with closing anticipated in the second quarter, subject to customary conditions.

"This transaction presents a tremendous opportunity for Apache to combine the Cordillera assets with its legacy western Anadarko Basin position, creating a platform for a multi-decade development program in some of the most economic, oil- and liquids-rich gas targets in the onshore United States," said George H. Solich, CEO of Denver-based Cordillera. "The combination is an excellent outcome for the Cordillera shareholders. We are taking a meaningful amount of the consideration in Apache shares, reflecting our confidence that the quality of the asset base will continue to yield economic growth in production and cash flow for years to come."

Cordillera is to continue to acquire acreage in the area on Apache's behalf through closing.

While it is considered tight by conventional standards, the Granite Wash possesses reservoir properties superior to typical shale resource plays and responds well to horizontal drilling with multi-stage fracturing completions, Apache said. A typical producing column in the acreage fairway is more than a mile thick with up to five liquids-rich Granite Wash targets and five additional oil-bearing tight sandstone targets. About 50% of the hydrocarbon stream is liquid: condensate and natural gas liquids. Additional deep gas horizons include the Skinner, Atoka and Morrow. According to Oklahoma regulatory agencies, more than 60 separate formations currently produce oil and gas in the fairway.

Cordillera Energy Partners is one of the largest leaseholders in the Granite Wash (108,000 acres) followed by Forest Oil (103,000 acres). In addition, Devon Energy Corp., which holds more than 60,000 acres, brought 10 wells on line in the Granite Wash in 3Q2011 and production from the new wells averaged 1,250 boe/d. Total production in the play averaged 16,400 boe/d in the third quarter of last year (see Shale Daily, Dec. 21, 2011).

Tameron wrote that the sale is a positive for Forest and the valuation of its Granite Wash acreage. The $2.85 billion price paid to Cordillera by Apache "far surpasses our expectations given the commodity price trend since September. The purchase price is well above our estimate..." Tameron wrote that Wall Street sources had expected a $1-1.5 billion deal "with some even doubting the deal would get done."

As Apache has transformed itself, horizontal wells drilled in the last three years now account for about half of the company's central region production, which totaled about 40,000 net boe/d at year-end 2011. "With this growth step, we expect to more than triple the pace of our operated activity in the multi-play fairway of combined Apache and Cordillera acreage during 2012," Farris said.

Cordillera III is the third iteration of Cordillera Energy Partners, led by Solich. Cordillera III was formed in March 2007 with equity capitalization from EnCap Investments LP and 20 institutional and individual investors. The company's producing property and acreage acquisitions combined with its horizontal drilling development program in the Texas Panhandle and Western Oklahoma enabled the company to grow production and cash flow at a compound annual growth rate of more than 70%, Cordillera said.

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