Apache, Shell Bid for Fletcher Expected to be Amended
A joint bid by Apache Corp. and Royal Dutch/Shell Group's Overseas Holdings
to buy New Zealand-based Fletcher Challenge Energy Ltd. is still alive
despite an initial rejection by the Commerce Commission of New Zealand,
which holds ultimate sway over the country's mergers.
Shell, which Commerce Commission officials fear would dominate New Zealand's
natural gas market with the Fletcher acquisition, said it would amend the
bid and resubmit it as early as this week. Shell anted up $1.03 billion
for the buyout, and would get all of Fletcher's international assets, including
New Zealand and Brunei. None of the proposed Apache properties, located
in Canada and Argentina, were expected to be amended in the new bid.
Houston-based Apache's share of the acquisition would cost the company
$600 million, and increase its Canadian holdings by 75%. Located in the
western sedimentary basin of Canada, Apache would add exploration opportunities
near existing operations and pump up its proven reserve base. Overall,
the Fletcher deal would add 713 Bcfe of natural gas in Apache's proved
reserves, or about 12% to its current proven reserve base. Apache also
would obtain 14 natural gas processing plants and 35 compressor stations.
Nearly three-quarters of the proven Canadian reserves are natural gas,
and a third of those reserves rest in the Hatton field, which now produces
35 MMcf/d. Overall, current production from the Canadian properties averages
130 MMcf/d, 670 b/d of natural gas liquids, and 12,200 b/d of oil. In the
Hatton field alone, Apache said it expected to drill nearly 100 wells a
year for the next few years.
The Commerce Commission of New Zealand, voicing concern that one company
(Shell) would control the country's natural gas markets, on Thursday rejected
the takeover of Fletcher Challenge Energy, the country's largest energy
New Zealand Commission Chair John Belgrave said his department was not
satisfied that Shell would not "acquire or strengthen its dominance
in the gas production and liquefied petroleum gas production markets"
--- basically monopolizing the country's energy markets.
Even though the commission said nothing --- nor would it have any reason
--- about Fletcher's divestiture of its Canadian assets, without Shell's
participation, the Apache deal will fall apart, too, said analysts. The
controversy centers on the New Zealand holdings only. In its current bid,
Shell was going to become the dominant oil and natural gas producer onshore
in New Zealand, also holding the largest prospects in acreage.
Last week, Shell officials said they would attempt to appease the Commerce
Commission, including offering to sell some of the Fletcher assets.
Shell New Zealand Chair Ed Johnson told Radio New Zealand last week
that "it would be our view that we'll probably go with an amended
or new application which would take into account the concerns and endeavor
to address them. We'll start that process as soon as we can get the final
report and a debriefing discussion with the commission," expected
Fletcher Challenge officials said that they, too, are still committed
to the sale. "We would still like to see the Shell and Apache transaction
completed, and are hopeful that Shell and the Commission can find a way
forward so that we complete the deal we announced earlier this week,"
Fletcher Chair Roderick Deane said in a statement. 'We remain of the view
that the wider reorganization of Fletcher Challenge is also in the best
interests of all shareholders and are determined to press ahead."
The acquisition, if finally approved, would not be the only major buy
of Apache's this year. In August, the company raised net proceeds of $433.9
million to fund other acquisitions made earlier, including a deal made
in July to acquire Occidental Petroleum's interests in the Gulf of Mexico.
In June, Apache bought properties from Collins & Ware in South Texas
and the Permian Basin. In fact, before the Fletcher deal, Apache had already
announced or completed cash acquisitions totaling $860 million this year
alone (see NGI, Aug. 7).
If there is a downside to the Fletcher acquisition for Apache, it might
be that some of the new gas production is hedged --- volumes of 75 MMcf/d
at an average price of $2.15 per Mcf in 2001, and 24 MMcf/d at an average
price of $2.59 per Mcf in 2002. The hedges expire in October 2002. However,
Apache said that while a commodity hedge below expected market values normally
isn't good, in this case the hedging actually reduced the purchase price.
No hedges were put on the oil production, said Apache.
Apache President G. Stephen Farris said last week that the $600 million
buy "balances" the company's gas portfolio in North America.
Speaking to analysts, Farris said the acquisition was strategic, increasing
the company's "natural gas exposure in one of our international core
areas at a price of 84 cents/Mcfe based on proved reserves alone. It also
adds exploration opportunities in an area with sizable reserve potential."
Just in Canada, Apache would increase its net undeveloped acreage by
200%, and improve both its oil and gas production by 80%, said Farris.
Located in the provinces of Alberta, British Columbia and Saskatchewan,
the properties comprise nearly 2.4 million net acres, and 60% of the acreage
is undeveloped. Farris said there was a "significant upside both on
the exploitation and exploration side."
An added bonus: most of the Fletcher properties are near existing Apache
operations in Alberta and northeastern British Columbia, and Farris indicated
that Apache plans to operate 80% of the properties. It already has identified
more than 300 drilling areas.
The deal was put together in early August, when Shell offered about
$2.3 billion (Australian) to buy Fletcher Challenge Energy, which had been
spun off from Fletcher Challenge Group. To precipitate the deal, Shell
offered to buy 1.64 million restricted shares of Apache common stock for
$100 million ($60.85/share), giving Apache an opportunity to take over
the assets Shell did not want.
Under terms of the stock arrangement, Shell would hold the Apache stock
for at least a year, but Farris said that when the energy giant does sell
it, he expects a lot of money to be made, referring to Apache's increased
value following the transaction, which jumped 15% to $63.38 in early trading
following the announcement last week.
If the New Zealand Commerce Commission changes its mind and approves
the deal, Apache and Shell want the acquisition to close in the first quarter
of 2001. Interim production sold by Fletcher will be applied to the acquisition
price, currently estimated to be about $95 million at the end of 2000.
Apache's latest acquisition looked good to analysts, who overall praised
the move and raised their earnings estimates. Credit Suisse First Boston
raised its target price on Apache to 75 from 70 versus close of 55.56.
Its estimate for 2001 was raised to $4.25 from $3.97. Dain Rauscher Wessels
raised its rating on the company to strong buy.
Bear Stearns, noting that this was the "fourth significant asset
purchase of the year" for Apache, said the Fletcher acquisition "should
play into Apache's exploitation strengths." Its target now is $72,
and analyst Ellen Hannan said the "low acquisition cost and high gas
commodity price make this a very accretive deal."
PaineWebber's William Featherston also raised his forecast, and said
"in keeping with its recent history of proved reserve acquisitions,
Apache has reduced its downside financial risk by entering into costless
collar hedges at very attractive prices."
Carolyn Davis, Houston