Apache in $2.85 Billion Shale Oil Deal
Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It looks as if merger and acquisition activity in the energy sector is shifting away from an emphasis on shale gas to shale oil instead.
The latest example of this emerging trend is the $2.85 billion proposed cash and stock deal for privately held Cordillera Energy Partners by Apache (NYSE: APA), one of the largest independent U.S. oil companies. This is Apache's largest acquisition since it bought assets from BP ADR (NYSE: BP) in 2010.
Apache will acquire Cordillera's 254,000 net acres of drilling rights in Oklahoma and Texas, with 14,000 potential drilling locations. This purchase doubles Apache's acreage in the energy-rich Anadarko Basin and adds Cordillera's proved reserves of 71.5 million barrels of oil and gas equivalent, along with a further 234.5 million barrels of probable and possible reserves.
Cordillera's main attraction is the 'tight' oil reserves that can be produced by using techniques that are the same as those used to retrieve shale gas – horizontal drilling and hydraulic fracturing. The oil lies in several different rock layers including the Granite Wash, Tonkawa, Cleveland and Marmiton formations.
Currently, liquids including crude oil and liquefied fuel gases such as ethane and propane make up 53% of the company's production. But 80% of Cordillera's reserves are made up of such liquids, which is attractive.
Apache described the deal both as extending its move towards more unconventional energy resources and as purely a “liquids play”. The company said the price paid for Cordillera was for the liquids and “the gas is coming for free”.
This current strategy by Apache is a bit of a shift from its traditional one of building its business by acquiring mature assets from larger oil companies and boosting production from those assets. One prime example of this has been the company's success with purchases of fields in the North Sea from BP.
The company's strategic move to unconventional energy assets is apparent. As recently as 2009, just seven of Apache's 103 wells in the United States involved horizontal drilling. But by 2011, 53 of its 64 wells were using horizontal drilling.
The reasoning behind Apache's purchase of Cordillera looks to be simple economics since it is a liquids-heavy company.
Just look at what has happened in the energy markets over the past few years. New drilling methods have pushed natural gas to a 10-year low recently as natural gas production has soared.
Meanwhile, strong global demand has held up the price of oil. At about $100 a barrel, oil is more than three times its level of a decade ago.
So an emphasis on liquids production instead of gas production makes sense for energy companies.
Apache's numbers on Cordillera point out the difference between oil and gas prices and Cordillera's attraction. Apache calculates the value of the natural gas to be about $3 per thousand cubic feet, a bit above the current price level.
But Apache says it can make more than twice as much - $6.95 per thousand cubic feet – with a well that produces liquids, justifying the price it paid for Cordillera.
It looks like the trend – lower gas prices and high oil prices – will be in place for years, so the Apache deal for Cordillera makes sense.
The Motley Fool has no positions in the stocks mentioned above. tdalmoe has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
