Apache Corp.'s announcement late Tuesday that it intends to purchase $7 billion worth of North American and Egyptian oil and natural gas assets from BP plc 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.
Apache agreed to buy three big BP assets that would add 2.4 million net acres to the company's portfolio (see Daily GPI, July 21). Included are 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.
Moody's Investors Service reacted swiftly, placing Apache's ratings under review for a downgrade. Even though Apache's "substantial existing cash and equity will fund the BP transaction," analysts said that leverage is "amplified by the fairly low proportion of production and producing reserves relative to the price paid for the BP assets, the corresponding substantial proportion of undrilled yet-to-be-funded proven undeveloped reserves and probable and possible acreage, the pending $3.9 billion acquisition of Mariner Energy and the June closing of its $1.050 billion acquisition of Devon Energy properties."
However, the Moody's team noted that 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 earlier transactions this year, "the prospects for higher future capital expenditures linked to these acquisitions, and to a lesser degree, ongoing uncertainties stemming from the impact of the moratorium on Gulf of Mexico [GOM] activity."
Apache's debt balances at the end of March were $5.064 billion, noted Fitch. With the BP acquisition, Apache's total debt is expected to rise on a pro forma basis "to the $9.5-10 billion range."
Adjusting for acquired proven reserves of 607 million boe in the transactions, "Fitch calculates that Apache would have pro forma debt/boe of proven reserves of approximately $3.22/boe, versus debt/boe of just $2.10/boe in 2009 and just $1.65/boe in 2006." The BP deal would increase Apache's debt/boe of proven developed reserves to $4.88/boe from an initial $3.10/boe in 2009, noted Fitch.
The potential for higher future capital expenditures also is a ratings concern, said Fitch. Before the "current round of acquisitions, Apache's planned capital expenditures [were] $6-6.5 billion for 2010, an increase of approximately 65-80% from the $3.63 billion seen in 2009. Fitch anticipates that this figure may rise additionally as the company exploits the new assets and acreage added with its 2010 deals."
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. 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 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."
Only 16,000 boe/d of Apache's production is from the deepwater GOM, but "access to the deepwater was a key driver of the Mariner acquisition, and any unexpected extension of the moratorium or other roadblocks to exploitation of GOM acreage could add to cash flow pressures on the company," noted Fitch.
Other analysts were more positive.
Standard & Poor's (S&P) Equity Research reiterated its "strong buy" rating, and analysts said they view the deal positively. "This is Apache's third major recent acquisition, and in our view, it has built its portfolio at attractive prices."
Morningstar's Catharina Milostan said 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...Apache can develop dominant acreage positions in the U.S. Permian Basin and Egypt's Western Desert, where it already had strong, growth-oriented operations, and will further establish its presence in southern and western Alberta through the acquired Canadian acreage."
Peters & Co. Ltd. also was positive about future growth prospects, noting that the acquisition "should provide the company with a platform for future growth; however, the transaction was slightly dilutive to our 2010 and 2011 estimates."
Financial analyst Joshua Caucutt, who writes for InvestorGuide.com, called the BP acquisitions "a golden opportunity for Apache. The assets being purchased are in far better shape than the usual Apache buy. Their new oil fields are not used up and exploited like most Apache acquisitions, but in many cases are ready for large quantities of production...BP's misfortune is only making Apache stronger."
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