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Petroleum News: BP sells Gulf of Mexico shelf properties

BP sells Gulf of Mexico shelf properties

Apache buys BP’s last producing GOM continental shelf properties; $1.3B purchase second it has made from British giant

Ray Tyson

For Petroleum News

BP says it decided to sell the last of its producing properties on the Gulf of Mexico’s continental shelf because they no longer muster up to BP’s investment standards, not because of an increasing threat of hurricanes, which is said to be causing some producers to rethink their future on the shelf following last year’s devastating storms.

“Over time, they (shelf properties) have become less and less competitive for continued investment in BP’s global portfolio,” BP spokesman Ronnie Chappell told Petroleum News April 24.

E&P independent Apache, a master at squeezing new production from old fields, announced April 19 that it agreed to purchase BP’s remaining shelf properties for $1.3 billion. In 2003, Apache acquired mature BP properties in the Gulf and North Sea for the same $1.3 billion price, as well as $200 million worth of aging self assets from Shell.

The recent deal with BP includes 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 of natural gas. Apache said it 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, which could take up to two months to resolve, Apache stressed.

Nonetheless, “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,” said Steve Farris, Apache’s president and chief executive officer.

Apache said that from April through year-end 2006, the acquired BP 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 of natural gas, and generate $320 million in operating cash flow. Apache is currently the second largest producer on the shelf.

Despite selling all if its producing assets on the shelf, BP remains a major player in deepwater Gulf of Mexico, as well as an active participant in the relatively shallow waters of the shelf, where BP is pursuing high-risk, high reward “deep-gas” and “ultra-deep” exploration opportunities.

Apache addresses hurricane threat

Apache, whose shelf infrastructure was severely thrashed last year by hurricanes Katrina and Rita, went to great lengths in justifying its second acquisition of BP properties in the Gulf of Mexico. In addition to the standard press release, Apache issued a separate “White Paper” on the subject, and held a conference call to brief investors on the pending deal with BP.

“The exposure of oil and gas companies to the risks of operating in shallow waters of the outer continental shelf of the Gulf of Mexico has come under increasing scrutiny in the wake of … Katrina and Rita,” Apache acknowledged in its White Paper.

Apache added that because of rapid natural production declines on the shelf and hurricane-related disruptions, “conventional wisdom has suggested that the shallow Gulf is dead as a viable oil and gas province and that it’s time for current and … prudent operators to consider reducing their exposure and reallocating their assets. Some, analyzing the risk and reward of the shelf in their portfolios, already have begun to do so.”

Apache was down around 23,000 barrels of oil per day at year-end 2005 because of hurricane damage, representing a little over 30 percent of the company’s pre-storm production of 75,000 barrels per day. Apache also expected to be down around 20,000 barrels per day for the remainder of 2006.

Moreover, roughly 11,000 barrels per day of BP’s shelf production remained shut-in at the time of Apache’s latest announcement, according to BP transaction statistics compiled by Apache. In fact, more than 20 percent of all Gulf production affected by last year’s storms was expected to be shut-in going into this year’s hurricane season.

Investors like deal

Still, investors liked the latest BP-Apache deal. On April 19, the day of the announcement, Apache’s stock rose as high as $73.90 per share before closing that day at $73.73, a gain of 5.1 percent over the prior day’s close of $70.13. A week later Apache’s stock was trading at more than $73 per share.

BP’s Chappell said that the increasing threat of hurricanes in the Gulf played no role in the company’s decision to sell its shelf assets, reiterating that “we recognized it would be very difficult for these properties to successfully compete for investment dollars within BP.”

Apache publicly thanked BP for cleaning up its hurricane mess before deciding to sell the last of its producing shelf properties. “BP has won Apache’s admiration in the very responsible way they have handled their exit … and at a substantial cost, because it was the right thing to do,” Apache’s Farris said in a written statement.

Apache, in language obviously designed to usurp the hurricane threat and justify its latest shelf acquisition, said the recent deal is not only an excellent fit for BP, but for Apache as well, and that prior shelf acquisitions have resulted in big profits for the company.

Farris said that by year-end 2005, Apache had recovered its original shelf investment, paid for additional capital incurred and generated in excess of $1 billion of free cash, with proved remaining reserves from the properties of 270 million barrels of oil equivalent.

Apache: not all eggs in one basket

Over the years, Apache has drilled more than 350 wells on its $2.7 billion in acquired shelf properties and reinvested in the Gulf more than $2.3 billion of the $6.2 billion of cash flow generated from company operations, Farris said.

“The shelf provides some the best margins, highest returns and most free cash flow of any region in Apache’s worldwide portfolio,” he added. “By extending the lives of these fields, Apache is doing its small part to help meet rising global demand for oil and gas.”

However, Apache was quick to note that aside from its profitable shelf investment, the company does not put all its eggs in one basket. Apache said that after its latest deal with BP closes, the shelf would represent just 21 percent of Apache’s worldwide production, up from 18 percent pre-deal, and 15 percent of the company’s worldwide reserves, up from 14 percent pre-deal.

Apache also said that once the transaction closes, overall company debt is expected to be below 23 percent of total Apache capitalization, indeed an enviable debt-to-cap ratio for any E&P company.

Apache said it would purchase BP’s remaining producing shelf properties through the issuance of commercial paper, adding that the deal should close by the end of this year’s second quarter.

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