Apache to sell $3.75B in Gulf of Mexico assets

By Harry R. Weber and Zain Shauk

Houston-based Apache Corp, the largest producer of oil and gas in the shallower regions of the Gulf of Mexico, will sell off all of its production there as part of a $3.75 billion cash deal with a unit of New York private equity firm Riverstone Holdings.

The assets include wells currently producing about 100,000 barrels of oil equivalent per day.

The sale will end Apache’s 30-year run as a producer in Gulf waters up to 1,000 feet deep, known as the shelf region.

Apache’s shelf portfolio that is subject to the sale includes more than 500 blocks with 1.9 million net acres and year-end 2012 estimated proved reserves of 133 million barrels of oil and natural gas liquids and 636 billion cubic feet of natural gas.

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The deal effectively means Apache is selling its shallower water Gulf production assets but still has deepwater production assets — currently producing about 13,000 barrels of oil equivalent per day — and will continue to explore.

Prior to Thursday’s announcement, the company had said it planned to sell at least $4 billion in assets by the end of this year.

In a conference call with reporters after the announcement, Chief Executive Officer G. Steven Farris said the company has more assets on the table that it is considering selling and the total exceeds $4 billion, but he would not say what, if anything further, the company plans to sell.

The company said it will use the proceeds from the sale of the Gulf assets first to pay down debt and buy back shares.

“This is really the first step in the rebalancing of our portfolio,” Farris said.

The Riverstone affiliate, Fieldwood Energy, has agreed to assume all asset retirement obligations for the properties, which, as of June 30, Apache estimated at a discounted value of roughly $1.5 billion.

Apache will keep 50 percent of its ownership interest in all exploration blocks and in horizons below production in developed blocks, where high-potential deep hydrocarbon plays are being tested, the company said.

Fieldwood said in a statement that it and Apache have agreed to jointly participate in deep exploration opportunities on the acquired assets.

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The news comes as Apache has faced concerns over its sagging stock price and some of its investment decisions. In May, shareholders voted down a proposal to raise executive pay at Apache, in what was viewed as a visible rebuke to top management. Apache shares rose then fell then rose again in roller-coaster after-hours trading, as investors digested the Gulf assets sale announcement.

In recent years, Apache has fueled production growth through a series of acquisitions, but has had more trouble in transitioning the company to organic growth. The company wowed investors at its analyst’s meeting last June with an ambitious 6 to 9 percent growth target, but has since pulled these goals back to 3 to 5 percent, leaving investors jittery about its prospects.

While the Gulf deal gets Apache close to its target for sales this year, the value the company received seemed unfavorable, said James Sullivan, an analyst for Alembic Global Advisors in New York.

“It is also more of the (Gulf of Mexico) shelf than a lot of people said they would sell,” Sullivan said.

He added that Apache appears to have sold “even more than what they wanted to, in order to maximize the cash inflow. I would say the metrics are at the lower end.”

But Mark Hanson, an analyst for investment research firm Morningstar in Chicago, said the deal seemed fair and was “probably a good thing for Apache and its shareholders,” because production can be a volatile business.

Hanson compared Apache’s offshore production records from its Gulf assets to an electrocardiogram readout.

“It’s all over the place,” he said.

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Even with the volatility of production, which can vary because of maintenance or hurricane threats, returns from Apache’s production were strong in the past, Hanson said. But removing assets with sudden swings in activity was a good decision, he said.

“I would say it probably does make sense if you’re trying to introduce more predictability,” Hanson said.

Apache also obtained some important concessions from the deal, mainly the covering of retirement obligations, Sullivan said.

“They’ve been out there for 30 years and that asset’s been very good to them and they know it and they’ve operated it pretty well,” Sullivan said. “But it’s obviously a declining asset … they were facing that problem and a significant (retirement) obligation associated with it.”

The Gulf assets sale is expected to close Sept. 30.

Apache said Fieldwood has agreed to offer employment to substantially all of the Apache employees affected by the sale.