Since its reintroduction to the north country in 1995, ApacheCorp. continues on its steadfast course of absorbing Canadian realestate at a fever pitch. Almost a month after Phillips Petroleumput its Canadian assets in the Zama area of northwest Alberta onthe market, the company reported that it has entered into adefinitive agreement in which Apache will acquire the oil and gasassets for $490 million. The properties included have provedreserves of 71.6 million boe, of which 59% is natural gas (seeDaily GPI, Nov. 21).

Current production on the Zama properties is approximately 70MMcf/d of natural gas and 6,000 b/d of liquid hydrocarbons. Theproperties are comprised of about 212,000 net developed acres and275,000 net undeveloped acres. The location is especially appealingbecause there is room for expansion with an additional 1.5 millionacres of Crown land available in the immediate area.

Phillips’ financial advisor, Waterous & Co. of Calgary, saidthe Zama properties are the single largest Canadian asset ever madeavailable in a public offering.

The sale includes three sour gas plants with a total capacity of150 MMcf/d, 13 compressor stations and 150 miles of owned andoperated gas gathering lines, 786 square miles of proprietary 3-Dseismic and 4,155 miles of 2-D seismic. The Zama area is expectedto have an 11-year reserve life.

Production for 2001 for the properties is expected to average 72MMcf/d of gas and 5,800 barrels of liquid hydrocarbons. In previousestimates, Phillips anticipated that cash flow for the Zamaproperty in 2000 would be C$155 million.

“Including the pending Phillips and Fletcher Challengetransactions, since re-entering Canada in 1995 via a merger withDeKalb, Apache will have acquired approximately 338 million barrelsequivalent of reserves at an average price of $5.66 per barrel ofoil equivalent,” said G. Steven Farris, president of Apache. Hesaid the Phillips properties have extensive upside potential, “bothin terms of exploitation and exploration. We have identifiedapproximately 228 new exploration and development drillinglocations and re-entries at present, plus numerous recompletion andproduction enhancement opportunities.”

Apache announced on Oct. 9 a joint bid with Royal Dutch/ShellGroup’s Overseas Holdings to buy New Zealand-based Fletcher ChallengeEnergy Ltd. Apache’s $600 million share would mainly be in Canadianassets that would add 713 Bcfe of natural gas to Apache’s provedreserves, or about 12% to its current proven reserve base (see DailyGPI, Oct. 13). Apache expects to closethe Fletcher acquisition by March 31, 2001.

“Based on current production and forward prices, the twoCanadian 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 acquisitionto 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 toclose as soon as regulatory approval is obtained, possibly bymid-January. Because the company’s balance sheet is so strong,Apache plans to fund the acquisition with cash on hand andcommercial paper, which would bring its debt-to-capitalizationratio to approximately 38% upon completion of the deal.

“We expect this transaction [Zama] will add somewhere around 35cents earnings per share, and $1.10 or so to cash flow,” said RogerPlank, executive vice president for Apache. “2001 will be anotheryear of record production with oil production up over 20%, gasproduction will be up over 30%, and by holding our share countdown, production per share will also grow meaningfully while ourbalance sheet grows stronger.”

Since Apache re-entered the Canadian production scene, it hasacquired approximately $1.9 billion worth of assets and currentlyholds 2.5 million undeveloped, and 1.5 million developed acres inthe country.

Phillips, which purchased the Zama properties in 1997 fromPennzoil 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, Phillipsanticipates its year-end debt to capital ratio to be about 52%, asizeable reduction from the 61% mark following the company’sacquisition of Arco’s 36.5% interest in the Prudhoe Bay Alaskafield in April. Phillips spokeswoman Kristi DesJarlais pointed outthat the Zama sale does not mark an exit for Phillips from Canada.She said the company plans to keep properties it holds interests inbut does not operate.

“This sale is part of Phillips’ ongoing effort to rationalizeour exploration and production portfolio, focusing on legacy assetsand divesting properties that are not core to our business,” saidBill Parker, executive vice president of production and operations.”An added benefit is a reduction in debt and a strengthenedfinancial position.”

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