Apache Adds $490 Million in Canadian Assets

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 Daily GPI, Nov. 21).

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 area.

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 life.

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 barrels equivalent of reserves at an average price of $5.66 per barrel of oil equivalent," 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 Daily GPI, Oct. 13). Apache expects to close the Fletcher acquisition by March 31, 2001.

"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."

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