Apache Corp. on Tuesday agreed to pay BP plc $7 billion for a set of assets that includes acreage and infrastructure in the Permian Basin of West Texas and New Mexico, "substantially all" of the 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. Apache and BP will have to achieve regulatory approvals in the United States, Canada, Egypt and the European Union.
As a part of the acquisition, Apache said it would advance BP $5 billion of the purchase price on July 30, ahead of the anticipated closing. The advance is to be returned to Apache or applied to the purchase price at closing.
The acquisition is to be funded with a combination of debt and equity, as well as cash on hand. Apache also obtained a $5 billion bridge loan facility to backstop any financing requirements.
Farris, who led 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. Apache already this year 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 Daily GPI, April 16).
"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 natural 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 he said it wouldn't be anytime soon.
The three separate transactions include not only substantial production but also "field studies, seismic...a tremendous amount of acreage...a number of development projects," said Farris. "We do get some midstream assets with these that add to the value and play to Apache's core competencies."
The Canadian upstream business to be acquired excludes BP's oilsands and natural gas liquids businesses.
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.
"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 current 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."
Apache's financial advisers for these transactions were Goldman, Sachs & Co., Bank of America Merrill Lynch, Citi and J.P. Morgan.
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