COMPANY NEWS: Apache, TotalFinaElf expand into uncommon areas

Jan. 20, 2003
Two recent company transactions have taken two operators—one large US independent and another international major—into uncharted or uncommon areas of their operations.

Two recent company transactions have taken two operators—one large US independent and another international major—into uncharted or uncommon areas of their operations.

Apache Corp. inked an agreement in principle last week 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. The transaction takes the Houston-based firm into the North Sea for the first time.

Separately, TotalFinaElf SA agreed to acquire a 43.5% interest in the Surmont oil sands project near Fort McMurray, Alta. The proposed Surmont project involves four adjacent licenses covering 548 sq km.

In other recent company news, TransMontaigne Inc., Denver, said it will acquire the Florida petroleum terminals and tug and barge operations of Houston-based El Paso Corp. for an estimated $155 million, including an estimated $35 million of product inventory value at closing.

Apache enters North Sea

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 in associated plugging and abandonment liabilities.

BP's total proven reserves for both sets of assets are estimated at 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 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 gulf's 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.

Reactions

Standard & Poor's Rating Services 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 will likely peak at about 39%. S&P said, however, that it would expect the firm to "reduce debt leverage to near pretransaction levels (36%) by yearend." S&P retains 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, Schwartz said.

"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," noted Schwartz.

Banc of America Securities LLC 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 of Mexico, for example, "Apache has already identified 19 locations for infill drilling with the expected average reserve size of 3 million bbl and production of about 3,000-5,000 b/d each."

TotalFinaElf buys into Surmont

The permit is part of a continuing heavy oil sands thermal extraction pilot project that has been in the planning since 1998. The project involves steam assisted gravity drainage. TotalFinaElf is partnered with operator ConocoPhillips 43.5%, and Devon Energy Corp, Oklahoma City, 13%.

ConocoPhillips acquired its stake in Surmont through then-Conoco's Inc. $3.1 billion (Can.) takeover of Gulf Canada Resources (OGJ Online, May 29, 2001).

This year, the consortium will continue to assess a first phase of development for the $1 billion (Can.) project, which is to be built in several stages and is expected to recover 5-10 billion bbl of bitumen.

"We will place at the disposal of the consortium in charge of developing Surmont our expertise as concerns heavy oils acquired notably in Vene- zuela where we operate the Sincor project within the Orinoco belt," said Christophe de Margerie, TotalFinaElf exploration and production president.

"We believe that TotalFinaElf is well- positioned as concerns the development of nonconventional reserves whether it be in ultradeep offshore Angola or in the North Sea with high temperatures and pressures," he said.

TransMontaigne acquisition

El Paso acquired the Florida assets through its merger with Coastal Corp. in 2001 (OGJ Online, Jan. 21, 2001). The Florida terminals, which have an aggregate storage capacity of about 5 million bbl, provide bunker fuel, residual fuel, diesel, and gasoline to the Florida cities of Jacksonville, Cape Canaveral, Port Manatee-Tampa, Port Everglades, and Fisher Island.

In 2002, these facilities sold an average of 29,000 b/d of bunker fuel, primarily to the cruise ship industry, and supplied about 28,000 b/d of gasoline and distillates over its petroleum products racks, TransMontaigne said.

In addition, the facilities provide a variety of third party lease capacity to the asphalt, jet fuel (commercial and government), power generation, and oil industries.

TransMontaigne said it plans to integrate these new assets with its existing Port Everglades, Tampa, and Pensacola terminals that have an aggregate 1.2 million bbl of storage capacity. The company added that it anticipates hiring "substantially all" of the current El Paso employees.

The transaction is expected to close in the first quarter.