Company News: Apache joins with Shell to buy Fletcher Challenge Energy

Oct. 16, 2000
Strong oil and gas prices continue to serve as the fuel for various mergers, acquisitions, and new structures.

Strong oil and gas prices continue to serve as the fuel for various mergers, acquisitions, and new structures.

Houston-based Apache Corp. is joining Shell Overseas Holding in the bid by the Royal Dutch/Shell Group to acquire the New Zealand firm Fletcher Challenge Energy Ltd., company officials announced early last week.

Meanwhile, in a move to raise cash, reduce corporate debt, and maintain a 10%/year earnings-per-share growth target beyond 2001, CMS Energy Corp., Dearborn, Mich., said earlier this month it will spin off through an initial public offering (IPO) up to 50% of its ownership in its oil and natural gas exploration and production subsidiary, CMS Oil & Gas Co., in the first quarter of 2001.

Apache-Shell deal

Under its deal, Apache will acquire Fletcher Challenge Energy's holdings in Argentina and in the Western Canada Sedimentary Basin with proved reserves of 713 bcf of natural gas-roughly 12% of Apache's current proven reserve base-for $600 million, subject to adjustments.

That acquisition "balances" Apache's North American gas portfolio, said Apache Pres. G. Steven Farris during a telephone conference with industry analysts.

"This strategic acquisition increases our natural gas exposure in one of our international core areas at a price of 84¢/Mcf equivalent based on proved reserves alone. It also adds exploration opportunities in an area with sizeable reserve potential," he said.

"It increases our Canadian reserves by 75%, our oil and gas production there by 80% each, and our net undeveloped acreage in Canada by 200%," Farris said.

Shell will get the Fletcher Challenge Energy subsidiaries in New Zealand and Brunei.

In late August, Shell offered $2.3 billion (Aus.) for Fletcher Challenge Energy, which dominates New Zealand's petroleum industry (OGJ Online, Aug. 28, 2000). Recently spun off from the Fletcher Challenge Group, Fletcher Challenge Energy holds 68% of the country's prolific Maui gas field. Shell is operator of that field with 18.7% interest and wants a bigger share.

In a separate transaction, Shell will buy 1.64 million restricted shares of Apache common stock for $60.85/share, or $100 million, to be used to help fund the Fletcher Challenge Energy acquisition.

Shell is to hold that stock for at least a year. But when Shell sells that stock, "I hope they make even more money than that" as a result of Apache's increased value, Farris said. Apache's stock was up about 15% to $63.38/share in early trading Oct. 10, the day following its announcement.

The Canadian properties are located in the provinces of Alberta, British Columbia, and Saskatchewan and cover some 2.4 million net acres, 60% of which is undeveloped. Most of the properties are near Apache's existing operations in Alberta and northeastern British Columbia. Apache will operate 80% of the properties and has already identified more than 300 drilling locations.

About 72% of the proven Canadian reserves being acquired by Apache are natural gas. Roughly a third of those reserves are located in Hatton field, which currently produces 35 MMcfd. Apache plans to drill about 100 wells/year in that field for the next several years.

Current production from Apache's new Canadian properties averages 130 MMcfd of gas, 670 b/d of NGL, and 12,200 b/d of oil.

Some of that gas production is hedged, including volumes of 75 MMcfd at an average price of $2.15/Mcf in 2001 and 24 MMcfd at an average price of $2.59/Mcf in 2002. The last of those gas hedges expires in October 2002, officials said.

A commodity hedge below expected market values "normally is not good, but in this case it helped reduce our purchase price," said one Apache executive. The company is not assuming any oil hedges, however.

The acquisition is expected to close during the first quarter of 2001, subject to the usual approvals, but with an effective date of July 1, 2000. The sale of interim production by Fletcher Challenge Energy will be applied to the acquisition price, amounting to an estimated $95 million by the end of this year.

Adding in some $15 million in fees and severance charges and subtracting the $100 million from the stock sale to Shell and $80 million of cash on hand in Canada will leave Apache some $340 million of the purchase price to be financed through short-term debt. That will give the company a 36% pro forma debt-to-capital ratio at closing, officials said.

About two-thirds of the proven oil reserves, with some 7,000 b/d of production, are heavy crude located in Saskatchewan. Apache will likely sell that to help pay for the rest of the acquisition, said Farris.

Other Canadian assets being acquired by Apache include 14 natural gas processing plants and 35 compressor stations with a total throughput capacity of 350 MMcfd. Some 122 MMcfd of that capacity is currently unused, providing a growth opportunity, Farris said.

Most of that infrastructure is near Apache's existing Nevis field in southeastern Alberta.

As part of the deal, Apache also will acquire a 25% interest in a 5,000-acre concession in Argentina's Neuquen basin, operated by Chevron Corp. Chevron has made a discovery on that acreage that tested at a combined rate of 25 MMcfd from two wells.

CMS spinoff

CMS's intended spin-off, the company says, includes the issuance of $300 million of CMS common stock sooner than the company had planned. CMS originally anticipated to issue those shares in mid-2001.

CMS expects these two moves to raise $800 million in cash and $450 million in equity for the company, further strengthening its balance sheet. CMS will use this raised cash, it says, to pay off debt and supplement its $1.4 billion asset sale program-of which about $900 million has been completed.

Strong oil and gas commodity prices should bolster the prices for shares spun off in the IPO and those retained by the company. CMS expects to lower its debt capitalization percentage to a level near 60% from its current level of around 70%.

The moves will also significantly lower the interest charges its pays on its debt, said Alan M. Wright, senior vice-president and chief financial officer of CMS Energy. In addition, he said, the moves would not weaken CMS's per-share profits for 2001.

Much of CMS's corporate debt came from acquisitions, a CMS spokesman said. In recent years, the company expanded its international operations to include assets in South America, the Middle East, and India. And, in the US, CMS expanded through its purchase of Panhandle Eastern Pipeline and Trunkline Gas Co. Currently, CMS is refocusing its growth and development into projects where it can utilize several of its subsidiaries on the same project, it says.