Some oil companies grow through the drillbit, risking it all on wildcat wells. Not so Apache Corp., which has instead chosen to grow via the pocketbook, for decades grabbing and rehabbing Big Oil’s castoffs. Apache’s $7 billion purchase of oil and gas fields from BP in July is the biggest the company has ever pulled off. The key to getting first shot at good deals? Make sure the sellers know you’re a buyer.
Steven Farris, chief executive of Apache, got to know BP’s Tony Hayward back in 2003, when Apache bought BP’s Forties field in the North Sea for $630 million. BP thought Forties was pretty much wrung out, with no more than 150 million barrels of oil left. Apache invested in new technology to squeeze out all that and then some. Today Forties still has another 150 million bbl left to go.
Farris kept up contact with Hayward. In July 2009, sniffing around for more fields to buy, he dropped by Hayward’s London office and offered to buy BP’s gas fields in Egypt and oil fields in west Texas. Hayward said thanks but no thanks. But if you want something it never hurts to ask.
Fast forward a year. In early July, as oil gushed from BP’s blowout well, Farris got a call from a BP intermediary. “How quickly can you raise $10 billion?” he asked. BP was ready to sell fields not just in Egypt and Texas, but west Canada as well. Was Farris still interested? “You bet.”
Never mind that Farris was already up to his neck in new acquisitions. In April Apache had laid out $1.1 billion to buy Devon Energy’s shallow water fields in the gulf. And in May, just five days before the Deepwater Horizon explosion, Apache agreed to buy Mariner Energy for $2.7 billion. Farris’s first thoughts after BP’s rig sank: “It can’t be that bad; they’ve got to have something that can shut this thing off.”
The oil spill made those deals look dicey. The draw of Mariner was its 100 deepwater blocks (“a starter set” Farris calls it), including the newly discovered Lucius field, with 500 million barrels or so, where Mariner partner Anadarko Petroleum was forced to stop drilling by the Obama administration’s deepwater moratorium. Wary investors sold off Apache shares more than 25% during the weeks of the oil spill.
That didn’t make Farris trigger shy. The BP assets were a perfect fit for Apache’s existing position, well worth the trouble of raising $3.5 billion in equity and $1.5 billion in debt to do the deal. BP rejected his first offer. “It’s like buying a used car,” says Farris.
He met Hayward in Houston on July 16. They spoke the next day, when Hayward was back in the U.K. and “shook hands over the phone.” The deal was announced two days later. Contrary to speculation, BP’s Alaska assets were never seriously considered.
Big synergies: in Egypt Apache gets control of a pipeline will finally let it produce stranded natural gas from the 11 million acres it already controls in the western desert.
In the Permian basin of Texas Apache gets 400,000 acres of decades-old oil fields that just need some technological coaxing to flow more oil. Apache’s been working the Permian ever since buying a slug of acreage there from Amoco for $545 million in 1991. BP hasn’t bothered to drill a new well there in four years.
In Canada’s Horn River basin Apache was the first to build a position in what Farris calls “the best shale gas play in North America.” Exxon bought in, to much hoopla, last year. The plan is to build an LNG terminal in Kitimat, British Columbia.
“I never dreamed we’d be able to take someone out of three regions at once,” says Farris. With this year’s buys Apache is set to boost its volumes of oil and natural gas equivalents from 600,000 boepd to 800,000 boepd (83,000 boepd of that from BP) and revenues north of $12 billion a year.
Thus Apache leapfrogs Occidental Petroleum (in output but not market cap) to become the fourth biggest U.S. oil company after ExxonMobil, Chevron and ConocoPhillips. “We’ve got lots of ways to win.”
So Apache becomes a rare beneficiary of BP’s oil spill. That is, unless new costs and regulations complicate the drilling of Mariner’s deepwater blocks. Researchers at Wood Mackenzie figure BP’s mess will limit growth in the deepwater, with 2015 output at 1.6 million bpd, some 250,000 bpd shy of what it would have been absent the spill. Farris isn’t worried. Deepwater accounts for a third of U.S. oil production and 40% of new reserves found worldwide in the past decade. “You just can’t take that off limits.”
At least not permanently. Though Apache assumes just $70 oil and $4.50 natural gas when planning acquisitions, Farris says he does have a personal view. Considering that the world is burning through 30 billion barrels of oil a year, “Unless you can turn water into wine, we’re going to see higher oil prices.”