Apache to buy North Sea Forties oil field stake, Gulf of Mexico assets from BP for $1.3 billion

By OGJ editors

HOUSTON, Jan. 13 -- Houston independent Apache Corp. inked an agreement in principle Monday to purchase a 96.14% stake in North Sea Forties oil field as well as certain shallow-water assets in the Gulf of Mexico from BP PLC for a total $1.3 billion. Apache's transaction costs for Forties field and the gulf assets are split $630 million and $670 million, respectively. Apache also will assume $100 million associated plugging and abandonment liabilities.

BP's total proven reserves for both sets of assets is estimated to be 233.2 million boe, Apache said. Apache figured that it paid $5.58/boe for the combined assets.

Production from Forties field—discovered in 1970—peaked in 1979 at 500,000 b/d of oil. Current production from the field is some 48,000 boe/d, BP reported. The Forties pipeline is not included in the sale, BP said.

The Gulf of Mexico assets comprise interests in 61 small fields, mainly gas producers, covering 113 blocks off Texas and Louisiana. BP held 100% ownership in 19 of the fields, and its net share of output was about 71,000 boe/d—198 MMcfd of gas and 20,400 b/d of oil. About 70% of the production is operated. The transaction makes Apache the largest acreage holder on the continental shelf, the company said.

The purchase of BP's stake in Forties field establishes the North Sea as a core area for Apache. The company will serve as operator of the field, which has produced 2.5 billion bbl of oil to date. "The North Sea fits our balanced-portfolio business model and provides the potential for future internal growth similar to what we have experienced in places like Egypt," Apache said.

BP Chief Executive John Browne announced last October that BP would review its portfolio and divest itself of certain assets considered by the major to be noncore. "The objective of our asset review is to emerge with a more streamlined, consolidated portfolio that offers improved financial returns and higher value growth in the near and long term," BP said.

The effective transaction date was Jan. 1. Apache said it expects to close the gulf portion of the deal by the end of the first quarter, while the North Sea portion is expected to close by the end of the first half.

Apache said it would fund its transactions through a 6.2 million share public offering, which at current prices would represent $350 million, RBC Capital Markets analyst Andrew T. Lees said. In addition, Apache will issue $800-900 million in debt, Lees added.

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Standard & Poor's Rating Services Monday reaffirmed its ratings with a stable outlook for Apache following the firm's acquisition announcement.

S&P analyst Bruce Schwartz said that while Apache's debt leverage has increased as a result of the transaction, the company's total debt-to-capital ration likely will peak at 39%.

But, S&P expects the firm to "reduce debt leverage to near pretransaction levels (36%) by yearend." S&P retained an A- rating for Apache's debt leverage.

Schwartz added, "Apache's cash flow protection measures should remain solid as a result of ample hedging." So far, the firm has hedged roughly 75% of the acquired volumes for this year and about half of the volumes for 2004.

"Apache is expected to restrict capital spending to less than its anticipated 2003 operating cash flow, allowing for deleveraging through free cash flow and earnings retention," Schwartz said.

Banc of America Securities analyst Tyler Dann speculated that drilling activity in the gulf fields "should increase as a result of the transaction."

He said, "Given that BP had planned the divestiture of the assets and deemed them to be noncore to its portfolio, we expect that the company would have been trying to limit the amount of incremental investment into them ahead of the deal. Apache, on the other hand, is already expressing the intent to increase the capital spending associated with these fields going forward."

Dann noted that in the gulf, for example, "Apache has already identified 19 locations for in-fill drilling with the expected average (oil) reserve size of 3 million bbl and (oil) production of about 3,000-5,000 b/d each."