Exploration and production independent Apache Corp. is scooping up yet more oil and gas properties on the U.S. Gulf of Mexico’s continental shelf in a $1.3 billion transaction said to be a win-win-win deal for seller Anadarko Petroleum and buyers Apache and investment bank Morgan Stanley.
Anadarko said it signed a separate purchase and sale agreement for the divestiture of its Phase 1 Canadian properties to Advantage Oil & Gas for $142 million.
The U.S. Gulf transaction marks Anadarko’s exit from the Gulf’s continental shelf, where the company pioneered tricky sub-salt exploration resulting in such noted discoveries as Mahogany, Hickory and Tanzanite.
As part of an on-going restructuring effort, Anadarko’s $1.3 billion in property sales on the shelf also represents a huge leap in the company’s goal to divest $2.5 billion of properties.
“By exiting the shelf, we can focus our Gulf program on the deepwater,” James Hackett, Anadarko’s chief executive officer, said in announcing the deal Aug. 20.
Apache now one of largest shelf leaseholders
The deal also would transform Apache into one of the largest leaseholders on the shelf with 2.6-million acres covering 546 offshore blocks, which includes Anadarko’s 241 leases that would make up nearly 45 percent of Apache’s expanded shelf base once the transaction closes by the end of this year’s third quarter.
Anadarko’s package consists of proved reserves totaling 98.6 million barrels of oil equivalent and current daily production of 46,000 barrels of equivalent, or about 11,000 barrels of oil and 199 million cubic feet of natural gas per day. It also includes the company’s interest in 78 fields and 112 offshore platforms.
Upon completion of the sale, Anadarko would operate only one offshore platform, the recently commissioned Marco Polo facility at deepwater Green Canyon Block 608.
Apache said it would ante up $537 million of the $1.3 billion sale price to acquire a net 61 million barrels of the proved reserves and a hefty share of the daily production, plus the fields and platforms.
Morgan Stanley uses VPP investment tool
Morgan Stanley Capital Group agreed to pay Anadarko $775 million to acquire an overriding interest in just 24 million barrels of proved oil equivalent reserves, using an investment tool known as Volumetric Production Payment, or VPP.
“Any time you have a three-handed deal it’s a bit of a circus,” confessed Roger Plank, Apache’s chief financial officer said in an Aug. 23 conference call with industry analysts. “But this one came together well and, frankly, quite quickly. The reason is because the deal makes sense for all parties.”
In light of the high commodity price environment, Apache said it would pay a “reasonable” $8.83 per barrel of oil equivalent for its share of the deal, plus an extra $1.62 per barrel to produce and deliver Morgan Stanley’s volumes, for a total of $10.45 per barrel in costs to Apache.
In contrast, Morgan Stanley would pay a steep $15.46 per barrel, obviously reflecting the firm’s belief that oil and gas prices will continue strong. However, for its willingness to pay a reserve premium, Morgan Stanley would take its production up front over the four year-term of the VPP.
“The reason Morgan Stanley is paying a high price is because they get the first (production) out of the ground,” Apache’s Plank said. “So their production is lower risk and therefore worth more.”
Shell deal used similar VPP approach
Actually, Morgan Stanley and Apache used a similar VPP approach to acquire Shell oil and gas properties on the shelf last year, a deal which Apache said has thus far proved successful. In the year since the properties were acquired, Apache said it already has recovered more than half its investment and added reserves through exploitation activities.
Still, Apache was cautious about entering into a deal with Anadarko given that “ski-high commodity prices have driven the acquisition market to very expensive levels,” Steve Farris, Apache’s chief executive officer, said, noting that Apache was unwilling to pay the $15.46 per barrel asking price without finding a way to enhance company returns.
“Our rate of return is enhanced since we are not acquiring the lower-risk, higher unit cost reserves,” he said.
Additionally, Morgan Stanley’s production share would revert to Apache when the VPP expires in four years. Apache also retains sole rights to an additional 23 million barrels of estimated probable reserves.
“By structuring the transaction the way we have, we’re able to exploit a $1.3 billion asset with a $537 million capital investment and retain all the future upside,” Farris said.
He said that when Apache bought its first Shell package on the shelf in 1999, reserve life was estimated at seven years. After five years of exploitation activities, he added, the properties are still producing 16,000 barrels of oil and 54 million cubic feet of gas per day, roughly 50 percent of production at the time of purchase. And remaining reserves represent 62 percent of the reserves the company acquired in 1999.
“We expect these (Anadarko) assets to produce much longer than current reserve life would indicate,” Farris said. “Our strategy on the shelf is to take what it gives us and not try to re-invest all that cash flow back into the assets.”
Apache likes deal because it was a complete exit
In the past, Apache has shied away from purchasing large oil and gas packages from an exploration and production independent such as Anadarko.
“Quite frankly, we were drawn to this package because it was a complete exit by Anadarko from the shelf,” Farris said, noting a major difference in company philosophies on the shelf.
“Anadarko’s focus … has been to explore for larger fields and create value through discovery,” he added. “Apache’s focus in the Gulf is really quite different. We create value through exploitation in and around our existing property base with less focus on higher risk exploration.”
Of the 241 blocks being acquired from Anadarko, 93 are undeveloped and also hold promise for additional reserves. Apache would operate 53 of the 78 producing fields along with 80 percent of the production and 85 percent of net reserves, assuring its control over the Anadarko assets.
Apache expects its share of daily production from Anadarko properties to average about 3,000 barrels of oil and 50 million cubic feet of gas during the 2004 fourth quarter, increasing to 6,500 barrels of oil and 70 million cubic feet of gas per day in early 2005 when the Tarantula discovery at South Timbalier 308 comes on line.
Apache said the Anadarko properties would increase the company’s 2005 earnings by about $83 million or 25 cents per share. The company said it plans an additional $55 million in capital expenditures this year to achieve those results.
Apache using cash on hand, commercial paper
Because of substantial cash flow expected from Apache operations, the company said it intends to finance the deal with cash on hand and commercial paper. The transaction is expected to raise Apache’s debt to 24 to 25 percent of capitalization, just a percent or two above the current level. “We expect to pay off that debt very quickly,” Plank said.
Because some of the properties being acquired from Anadarko are subject to preferential rights by undisclosed third parties, the exact purchase price will not be known for about a month, Apache said.
Just days after announcing the sale of its Gulf shelf properties to Apache and Morgan Stanley, Anadarko said it signed an agreement with Advantage Oil & Gas to sell an estimated 9.9 million barrels of oil equivalent for $142 million.
The package was said to contain various assets in Central and Southern Alberta and Southeast Saskatchewan representing daily net production of about 4,500 barrels of equivalent. Both reserves and production are net after royalties.
Those assets include 35 fields covering about 130,000 net acres. Oil and natural gas production from the package is 60 percent operated by Anadarko.
“The completion of this first phase of our divestiture program in Canada is yet another step forward in the execution of our refocused corporate strategy,” Anadarko’s Hackett said.
Data room open
None of the properties sold by Anadarko in its divestiture program were in Alaska, Alaska spokesman Mark Hanley told Petroleum News.
Anadarko Canada President Mike Bridges said the data room for the company’s Phase 2 Canadian package was to open the week of Aug. 22. “We anticipate at least as much interest in our Phase 2 package,” he added. The Phase 1 transaction is expected to close by Sept. 30 with an effective date of July 1.
Data rooms already are open for all seven packages of Anadarko’s U.S. onshore properties. Together, the remaining packages represent an estimated 230 million cubic feet of proved oil equivalent reserves, the company said.
Anadarko said it intends to use about $1.4 billion in proceeds from its $2.5 billion divestiture program to pay down debt with the remainder going primarily to repurchase its own stock.
“The sales agreements provide greater confidence that we will exceed our targeted minimum after-tax proceeds of $2.5 billion,” said Jim Larson, Anadarko’s chief financial officer.
