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Looking for the next big deal

Apache Corporation’s policy of growth through acquisition and drilling has proved successful – it is one of the world’s largest independent exploration and development companies, with operations around the globe. Anne Feltus talks to G Steven Farris, Apache’s president, chief executive officer and chief operating officer

WHEN BP decided to sell some of its interests the UK North Sea, Apache Corporation snapped them up. Moving aggressively into an operating arena inhabited principally by the majors, the Houston-based independent exploration and production (E&P) company paid $0.63bn for the properties. Then it offered jobs to the entire BP Forties onshore and offshore team and announced plans to open an office in Aberdeen, Scotland, to support its new core area of operations.

Apache had been eyeing this energy-rich region for over a year and was waiting for the right acquisition opportunity to arise. The timing could not have been better - a new law in the UK gives tax breaks for new capital investments in mature oil and gas fields.

About two-thirds of the reserves and daily oil production from the UK North Sea assets being purchased by Apache are in the Forties oilfield, the largest discovery in the UK North Sea, with reserves then estimated at almost 3bn barrels of recoverable oil. However, since the early 1980s, production from the field has declined to about one-tenth of its peak output of 0.5m barrels per day (b/d), diminishing its importance to a big operator such as BP.

A golden opportunity

Yet to an independent, such as Apache, it was a golden opportunity.

The Forties field still ranks as the eighth-largest UK North Sea field in terms of reserves and production rates and, once the acquisition closes, it will be the largest field in Apache's asset portfolio. The company will become the field's operator and it anticipates producing about 45,100 b/d from the field's remaining net proved reserves of 147.6m barrels.

Table 1: Apache Corporation in numbers

$m

2002

2001

Revenue

2,559.90

2,809.40

Operating expenses

1,531.80

1,483.80

Operating income

1,028.00

1,325.60

Net financing costs

112.8

118.8

Net income

554.3

723.4



The acquisition repeats a familiar pattern for Apache. During the last two decades, the company has steadily built its reserves base to 1.31bn barrels of oil equivalent (boe), by purchasing properties from oil majors that are casting them off to free up capital for bigger or more profitable ventures. Apache prefers to negotiate transactions. G Steven Farris, its president, chief executive officer and chief operating officer, says: We don't go to auctions. We don't gain anything by chasing things and paying too much. 

It also protects the value of its new acquisitions by hedging the expected production. What we've done historically is use the hedging market to lock in our rate of return on acquisitions. When you put down $1.3bn, the largest acquisition we've made, the biggest risk is that prices will drop, says Farris, referring to the UK North Sea purchase and a concurrent acquisition of BP properties in the Gulf of Mexico (GoM).

But, Farris is quick to point out that Apache's focus is not only on making acquisitions, but also on wringing as much value out of its existing assets as possible. At the same time, it keeps operating costs relatively low by using production-enhancement techniques, such as workovers and recompletions, employing new technology and shedding its marginal and non-strategic properties. Farris explains: Under the hood, we're a pretty good operating company, as well as an acquisitions company. 

Balancing growth by acquisition with growth by the drill-bit is not a new strategy, but it is one that Apache has executed well. Over the last 10 years, we've achieved over a 20% compound growth rate on production and reserves, Farris says.

At the same time, the company has maintained a healthy balance sheet that is the envy of many other independents. Its total debt-to-capitalisation ratio in 2002 was 34.4%, down from 36.9% the previous year. After a $0.55bn debt offering to help pay for the transaction, our debt-to-capitalisation ratio will be lower after we close our North Sea acquisition than it was at the end of year, Farris points out.

Balancing the books

He adds: If you look at our history, we probably went through periods since 1990 where we had a debt-to-capitalisation ratio as high as 56%, but we've never been in a position where we didn't have a plan to bring it down. We're always looking to make the next deal, which means we'd better get our balance sheet in order in case opportunities arise. 

Apache's fiscal health and its well-defined risk-management strategy have made a positive impression on the major ratings agencies. Even after Apache's largest acquisition, we have the only across-the-board A credit rating among the publicly traded US independent E&P companies, its chairman, Raymond Plank, said recently.

Farris assumed his position in May 2002, when Plank relinquished it on his 80th birthday. Plank, along with Truman Anderson and Charles Arnao, founded the company in 1954, in Minneapolis, Minnesota, as a public entity with 41 investors, six employees and $250,000 in seed capital.

The pattern of making major acquisitions was initiated in 1982, when Apache purchased oil and gas properties from Dow Chemical for $420m. Three years later, it spent $178m to acquire properties from Davis Oil and, in 1986, it announced the $440m acquisition of oil and gas assets from Occidental Petroleum. Then, in 1991, the company doubled its size with the acquisition of MW Petroleum, an independent company formed with Amoco's marginal assets, for $0.55bn, bringing its total asset value to $1bn.

Apache is now one of the world's largest independent oil and gas exploration and development companies, with a value of $9.3bn and operations in the US, Canada, Egypt, Australia, China, Argentina and, now, the UK North Sea.

It is continuing to expand in the continental US, which contributes the bulk of its operating income. Concurrent with its proposed acquisition in the UK North Sea, Apache announced plans to buy producing properties in the GoM from BP for $0.67bn. Situated in the shallow waters off the Texas and Louisiana coasts, where the company already has substantial operations, these assets made Apache the largest acreage holder in the Gulf's Outer Continental Shelf.

Just a few weeks earlier, the company revealed plans to expand its portfolio of properties along the GoM coast by purchasing 234,000 net acres onshore in south Louisiana, with net proved reserves of 178bn cubic feet equivalent (cfe) of gas, from a private-sector seller for $260m. These assets produced an average of 37,000 b/d of oil and 310m cf/d of gas in 2002.

In addition to the GoM coast, Apache has operations in some of the most significant producing regions in the central US, including: East Texas; the Anadarko Basin of western Oklahoma; the Permian Basin of West Texas; eastern New Mexico; and New Mexico's San Juan Basin. These mature provinces, where projects can be brought on stream quickly and at a relatively low cost, represent a sizeable share of Apache's total output. In 2002, its US operations produced 0.5bn cf/d of natural gas, 53,009 b/d of oil and 6,961 b/d of natural gas liquids.

About 20% of the company's production comes from Canada.

Apache entered the country in 1995 through the $285m acquisition of DeKalb Energy. During the 15 months that followed, it expanded rapidly through a trio of major purchases: Shell's Plains business unit and assets of New Zealand-based Fletcher Challenge Energy, both in Western Canada's Sedimentary Basin, as well as 650,000 acres of gas properties in the Zama area of northern Alberta, acquired from Phillips Petroleum. These transactions brought Apache's production in Canada to 82,000 boe/d and its reserves in the region to 338m barrels.

Included in the Shell acquisition was a 37% stake in northeastern British Columbia's highly prolific Ladyfern field, operated by Murphy Oil. Situated in the northwest corner of Western Canada's Sedimentary Basin, the field holds as much as 1 trillion cf of gas, making it the largest natural gas accumulation discovered in the country in 15 years.

Operating overseas

More than a decade ago, Apache became one of the first independents to expand internationally. It seeks out higher-risk exploration prospects overseas, complementing its more development-oriented projects in North America. Since 2001, more than half of the company's oil and natural gas production have come from these international assets, providing some protection against increasing price volatility in the US market.

Apache's first overseas venture started up in 1991, when it acquired interests in Airlie Island production and exploration permits in Australia. Two years later, a $98m merger with Hadson Energy Resources secured Australia as one of the company's core operating areas. Apache produces about 50,000 boe/d from its Australian assets with reserves of 145m boe.

Apache operates and owns a 68.5% interest in a joint venture that has announced a string of exploration successes in the Harriet complex of oil and gas fields, offshore northwest Australia, in the Carnarvon Basin. Production from the joint venture is processed through facilities on Varanus Island, one of only four such hubs in the Carnarvon Basin.

In December, Apache and its joint-venture partners finalised a contract to supply more than 0.6 trillion cf of gas, over 25 years, to a 2,200 tonnes a day liquid ammonia plant, scheduled for construction in Western Australia. The plant will consume 73m cf/d of gas provided by the Harriet joint venture, beginning in July 2005, providing a market for the partners' additional discoveries in the Carnarvon Basin. 

Egypt is another key growth area. Apache is the largest producer in the country's Western Desert, with output of 64,000 boe/d from 137m boe of reserves. It made 11 discoveries in the country last year.

Apache obtained its first acreage position in the region in 1994, with the acquisition of Phoenix Resources' 25% interest in the 90m barrel Qarun Field, one of the largest and most prolific discoveries in the Western Desert in a decade. It also acquired Phoenix Resources' 40% interest in the Repsol YPF-operated Khalda concession, a 2.5m-acre field, about 250 miles west of Cairo, which holds about 24 oil and gas fields. The deal established the company as the largest independent leaseholder-operator in Egypt.

Eventually, Apache also bought out Phoenix Resources' remaining 50% interest in the Qarun field and acquired Repsol YPF's interests in the Western Desert for $410m. It also traded properties in North America valued at $65m to an Australian company for its 10% share in the concession.

Egyptian expansion
Continuing its expansion in Egypt, in 1997, Apache acquired Mobil's concessions in the Western Desert, which included offshore acreage. Last year, an aggressive deep-water exploration programme led to four consecutive discoveries - Apache's first deep-water venture. It has already identified at least seven additional prospects and leads in the deep waters of the western Mediterranean, which, Farris says, undoubtedly has the greatest exploration potential in the company's history. Apache hopes to book at least 3 trillion cf of gross gas reserves from this offshore arena.

In 1994, Apache drilled the biggest discovery well to date in China on the 49,000-acre Zhao Dong block, in the shallow waters of Bohai Bay. Production is expected to begin in the second half of 2003 and to peak at about 22,000 b/d by year-end.

The firm entered Argentina in 2001 with two small acquisitions in the Neuquen Basin, in the west-central sector of the country. These properties, which produced 7.3m cf/d of gas and 617 barrels of oil last year, could provide a foundation for expansion into other parts of Latin America.

Continued worldwide expansion, combined with exploitation of existing reserves, is what Farris has in mind for Apache's future. We're building a company to last, he explains. We've been around for 49 years, and we would like to be here another 49 years. 

He draws this conclusion: We've got a lot of growth potential.

There's a lot of space between us and the supermajors. 



Major acquisitions

1982: oil and gas properties from Dow Chemical, $402m

1985: $178m of properties from Davis Oil

1986: oil and gas properties from Occidental Petroleum, $440m

1991: MW Petroleum, from Amoco Production, $0.546bn

1993: Hall-Houston, $114m, Gulf of Mexico

1993: $98m merger with Hadson Energy Resources, Australia

1994: oil and gas fields from Texaco, $0.57bn

1994: $285m merger with Canada's Dekalb Energy

1996: merger with Phoenix Resources, Egypt

1999: producing properties in Canada and Gulf of Mexico from Shell, $1.27bn

2000: US producing assets in Gulf of Mexico, Permian Basin, South Texas, Midcontinent

2001: Fletcher Challenge Energy assets in Canada and Argentina

2002: properties in South Louisiana from privately owned seller, $260m

2003: properties in UK North Sea and Gulf of Mexico from BP, $1.3bn

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