BP took a major step toward acheiving its targeted $10 billion in asset sales by agreeing to sell $7 billion of assets in the Permian Basin of West Texas and New Mexico, Egypt's Western Desert, and Western Canada to Apache. Using BP's June 30 estimated proved reserves for assets sold of 385 million barrels of oil equivalent and Apache's $5.15 billion allocation to proved reserves ($1.85 billion was allocated to probables, acreage, and midstream), we arrive at a price of $13.38 per boe (barrel of oil equivalent) of proved reserves. This falls within the $7-$23 per boe of proved reserves purchased by Apache for Permian Basin assets in 2009 and 2010. Production from these assets during the first half of 2010 was 83,000 boe per day, which accounts for about 2% of BP's total production. We look for more parcels for sale from BP over the next few months, including assets in Vietnam and Pakistan. Neither country is a core area, with production making up 2% of BP's total gas production.
For Apache, this marks another well-timed purchase of developed (but underworked) assets from a major oil company, a strategy that has worked for it in the past. The purchase breaks down to $3.1 billion for Permian Basin assets, $3.25 billion for Western Canada gas assets, and $0.65 billion for the Western Desert business concessions and East Badr El-din exploration concession. Apache can develop dominant acreage positions in the US Permian Basin and Egypt's Western Desert, where it already had strong, growth-oriented operations, and will further establish its presence in southern and western Alberta through the acquired Canadian acreage. After the acquisition, based on second-quarter production levels, Permian assets will contribute 12% of daily production (up from 10%), with Canadian assets contributing 15% (up from 10%). In aggregate, Apache will acquire 566 million boe of proved and probable reserves (33% liquids, 77% proven), 82,800 boe per day of production based on first-half levels (valuing the proved portion of the deal at $62,200 per flowing barrel), and 2.4 million net acres.
Apache intends to finance these acquisitions with $1.5 billion in cash, $2.7 billion in debt, $1.1 billion in mandatory convertible preferreds, and 21 million new shares of common equity. At this time, Apache does not intend to hedge any meaningful portion of production from the acquired BP assets, leaving it open to fluctuations in oil and gas prices and consistent with its historical practices. These transactions are expected to close in the third and fourth quarters, subject to regulatory approval, and are not mutually conditional upon each other.
Catharina Milostan is an equity analyst with Morningstar. Mark Hanson contributed to this note.
