In the negotiated transaction, Apache will pay $1.3 billion in cash to acquire 18 producing fields (11 of which are operated) covering 92 blocks with estimated proved reserves of 27 million barrels of liquid hydrocarbons and 185 billion cubic feet (Bcf) of natural gas. Apache also has identified 50 drilling locations on the properties and an additional 4 million barrels of liquids and 26 Bcf of natural gas in probable and possible reserves. Some of the fields are subject to exercise of preferential rights to purchase by other interest owners. The transaction, which is subject to government approvals, is expected to close by the end of the second quarter.
From the April 1 effective date to yearend, the acquired assets are expected to provide average daily production of 7,100 barrels of oil, 1,500 barrels of natural gas liquids and 108 million cubic feet (MMcf) of natural gas, and to generate $320 million of operating cash flow, based on strip prices used in the acquisition. Production and cash flow are expected to rise in 2007 as fields damaged in the 2005 hurricane season are brought back on line.
"We want to thank the people at BP for the opportunity to work with them on this transaction," said G. Steven Farris, Apache president and chief executive officer. "This is our third transaction with BP; in 2003, we acquired properties in the North Sea and the Gulf of Mexico.
"BP has won Apache's admiration in the very responsible way they have handled their exit," Farris said. "Before leaving the shallow-water Gulf of Mexico, they have chosen to clean up the devastation of the two major hurricanes of 2005 at a substantial cost because they saw that it was the right thing to do."
"This transaction is a good fit for the long-term strategies of both BP and Apache," said Raymond Plank, Apache's founder and chairman. "Though we are much smaller than BP, we share its desire to focus capital and talented professionals on assets that will provide the maximum return for shareholders.
"Apache's path to long-term shareholder returns has been and will be through growth -- from our successful exploration and development programs and from negotiated acquisitions when they make economic sense," Plank said.
"The energy industry is the world's largest, and it will continue to be essential to raising living standards throughout the world," he said. "Apache is a small part of this industry. As we see it, our role is to serve our shareholders with well-above-average rates of return on their investments over the long term by growing our production and reserves efficiently in the areas we know best, and contributing to the effort to raise living standards."
"Certainly, BP kept the best for last," Farris said. "Nearly half of the reserves in the transaction are in properties in which we already own an interest, including the Grand Isle 40s/West Delta complex -- one of the largest fields ever discovered in the Gulf. We know these assets very well, and gaining operatorship will enable Apache to drive the development program, leverage infrastructure and realize significant operating synergies."
"Apache built its Gulf of Mexico Shelf core area over the past 15 years through $2.7 billion in acquisitions of producing assets," Farris said. "The more important measure is what we accomplished after the acquisitions: Over the years, Apache has drilled more than 350 wells on the acquired properties and re-invested in the Gulf more than $2.3 billion of the $6.2 billion of cash flow generated in the Gulf.
"At the end of 2005, we have recovered all of our original investment, paid for all of the additional capital incurred and generated in excess of $1 billion of free cash, with proved remaining reserves from these properties of 270 million barrels of oil equivalent (MMboe) at the end of 2005," Farris said. By extending the lives of these fields, Apache is doing its small part to help meet rising global demand for oil and gas.
"The Shelf provides some of the best margins, highest returns and most free cash flow of any region in Apache's worldwide portfolio," he said. "This acquisition, like all other investments we make, is based on rate-of-return criteria to provide our shareholders long term growth potential in building Apache to last."
After the transaction, Shelf assets will comprise 21 percent of Apache's production (up from 18 percent) and 15 percent of worldwide reserves (up from 14 percent).
"The Shelf is an integral part of our overall portfolio approach to a volatile business," Farris said. "We're excited about these assets and look forward to closing the transaction and getting on with adding value to what we are acquiring."
Apache plans to finance the transaction by issuing commercial paper. Upon completion of the transaction, Apache's debt is projected to remain below 23 percent of total capitalization. The acquisition is expected to be additive to Apache's earnings per share and cash flow.
Apache has hedged approximately half of the projected 2006, 2007 and 2008 oil and natural gas production from the acquired properties at prices that protect its acquisition economics. The hedging strategy enables Apache to retain potential upside from higher prices.
The BP transaction is the latest of three acquisitions that are expected to add 14,700 barrels of liquids and 142 MMcf of natural gas to Apache's 2006 average worldwide daily production (based on the expected closing dates of the transactions). The added production is equal to 9.3 percent of Apache's 2005 average daily output.
"Over the last five years, we have acquired, in negotiated transactions primarily from companies far larger than ourselves, more than $4.2 billion of assets with proven reserves of 669 MMboe," Farris said. "Over that same period, we have drilled nearly 7,800 wells that added 1.2 billion barrels of oil equivalent."
Goldman, Sachs & Co. acted as Apache's financial adviser in connection with the BP transaction.
Apache also announced that its Board of Directors has authorized the repurchase of up to 15 million shares of the company's common stock, or approximately $1 billion worth at Apache's recent share price. With Apache's debt capacity, the increased cash flow that is expected to be generated by the BP transaction and continued strong oil prices, Apache may buy shares from time to time on the open market, in privately negotiated transactions, or a combination of both. The timing and amounts of any repurchases will be at the discretion of Apache's management and will depend on many factors, including the current market price of the common stock and overall market conditions.
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