Apache's $7 Bln Deal With BP Seen As Paying Off In The Long Run

21st Jul 2010 18:01

By Isabel Ordonez Of DOW JONES NEWSWIRES HOUSTON (Dow Jones)--Apache Corp.'s (APA) $7 billion acquisition of BP PLC (BP) assets in North America and Egypt is seen by analysts as a smart deal that could hit the company's stock in the short term but has the potential to significantly lift its value in the future. Analysts said Apache paid a slight premium for BP's assets in the Permian Basin in Texas and New Mexico and paid full price for assets in Western Canada and Egypt. The company will finance the transactions through a sale ofequity and debt, a move that is expected to have a dilutive effect on the company's earnings per share this year. But as the Houston company applies its strategy of creating value by accelerating production growth and reducing costs, the deal should boost earnings and production growth targets starting in 2011. The deal, the largest in Apache's history, is likely to be dilutive but it would work "in long term considering Apache's track record of scratching out additional value from acquisitions," analysts at Tudor Pickering Holt & Co. say. The transaction, the fourth between the companies in the last 10 years, involves marginal assets for BP, which is selling properties in order to fund the mounting costs from the massive oil spill in the Gulf of Mexico. But the assets are located in core business areas for Apache. The company has been traditionally known as a company that profitably exploits assets originally developed--and shed--by larger oil firms, even though it has sought to boost its exploration business in recent years. "We think it's a fair deal that both companies are happy with," said Fadel Gheit, analyst at Oppenheimer & Co. The acquisition boosts Apache's production of 646,000 barrels of oil equivalent per day by almost 13% and proved reserves by about 20%, Gheit said. "Apache now boasts a portfolio with tremendous depth, breadth, and visibility that should provide investors with confidence in its ability to generate attractive growth and returns for the next several years," said William Featherston, analyst at UBS, in a note to clients. However, the way in which Apache is financing the transaction, which includes a $5 billion cash deposit to be done on July 30, raised concerns among some credit rating firms. Moody's Investors Service put Apache's rating under review for downgrade following the announcement of the acquisition. Some analysts were concerned that the company is over-stretching its finances, especially after its pending $3.9 billion acquisition of Mariner Energy and the June closing of its $1.05 billion acquisition of Devon Energy Corp.'s (DVN) properties in the shallow waters of the Gulf. "It's possible that they are overextending themselves, but I'm confident management can work though this," says Phil Weiss, analyst at Argus Research. Apache's shares were trading down 68 cents to $87.60 Wednesday. UBS said the company's stock is "very inexpensive" relative to its peers and said investors should take advantage of the expected hit the stock will initially take due to the acquisition to buy shares. Although Apache consistently ranks above the independent oil and gas producers group in metrics such as return on capital employed, free cash flow generation and share growth, its shares have been trading below its peers in part because of its above average exposure to the Gulf of Mexico, where a broken well spewed oil for about 12 weeks. The spill resulted after a rig, leased by BP, burned and sank in late April. The transaction is expected to be completed during the third quarter. -By Isabel Ordonez, Dow Jones Newswires; 713-547-9207; [email protected] (Jason Womack contributed to this article.) (END) Dow Jones Newswires July 21, 2010 13:01 ET (17:01 GMT)