Apache Corporation Valuation Report, July 2010 - Strategic and Operational Analysis

15 Jul 2010 • by Natalie Aster

Apache Recent Acquisition in Kitimat LNG Terminal Will Help the Company to Exploit Natural Gas Export Market Efficiently

With the aspiration of increasing its returns from Canadian operations and leveraging its natural gas production from the Horn River Basin, Apache has acquired 51% of Kitimat LNG Inc.'s planned Liquefied Natural Gas (LNG) export terminal in British Columbia. Apache also acquired a 51% throughput capacity interest in the terminal. The Kitimat LNG project will export LNG, liquefaction and act as an LNG send-out terminal at Bish Cove near the Port of Kitimat, British Colombia, Canada. The proposed planned capacity of the Kitimat terminal is around 700 MMcf of natural gas per day, or five million metric tons of LNG per year. The gross cost of the project estimated to be around $3 billion. Apache will fund the project’s Front-End Engineering and Design (FEED) shortly and expects the final investment decision in 2011. The first shipment is expected to be in 2014 with four to five shipments every month. The total send-out capacity is estimated to be 5 million metric tons per annum.

The Kitimat LNG terminal offers access to the highly lucrative LNG markets in Asia including Japan, the largest importer of LNG in the world. Its proximity to the Asian market reduces sailing time and marginal transportation costs. This provides the company with an opportunity to exploit the higher LNG prices in the Asian market compared to North America. The Kitimat project also has geopolitical benefits such as a transparent and comprehensive regulatory regime, stable government, and a provincial government with a strong Asia-Pacific focus. In addition, the province of British Columbia has been a reliable exporter of commodities, including natural gas, for a long time.

The growing prospects and huge reserves of natural gas in North America have combined with the new opportunities to meet the huge demand for the resource in the emerging markets of Asia. In order to exploit the potential, Apache has begun to be more aggressive in the LNG market. Its investment in Kitimat indicates its confidence in its Canadian resources.

Extending Presence in GOM Deep Water Projects; Leveraging its Experience of North Sea and Australia

The concerns over future reserves and supply and recent increases in commodity prices have fuelled a drive by many oil and gas companies to rely on and invest in deep water prospects. The drive is being supported by technological advances that make deep water and ultra deep-water exploration more economically viable. It has been estimated that the Gulf of Mexico will be an area of major significance because of its potential.

Apache has some deep-water exposure in the North Sea and Western Australia. In order to these exploit deep-water prospects and utilize its experience in the North Sea and Western Australia, Apache has been planning to merge with Mariner Energy, which will also enable the company to strengthen its deep-water operations in the Gulf of Mexico. In April 2010, Apache signed a merger agreement with Mariner Energy for a transaction value of $2.7 billion. Its increasing interest in deep-water exploration will provide the company with an opportunity to make money for its shareholders.

The acquisition will provide Apache with 100 deep-water blocks, 38 subsea wells and seven additional projects, including Dalmatian, Wide Berth, Balboa, Heidelberg and Lucius, which are under development. As of December 2009, Mariner Energy held estimated proved reserve of 181 MMboe including 27 MMboe from GoM deep-water operations and 52 MMboe from the GoM deep-water shelf. During 2009, Mariner Energy produced 103.2 Bcfe from its GoM deep water and deep shelf operations, representing 82% of its total production.

With the significant potential in GoM deep water and its long-term benefits, the company has been considering extending its operations for a long time. This acquisition suits Apache’s growth strategy and its synergies will support the long-term growth of the company.

Strong Liquidity Position through Optimized Capital Structure

One of Apache’s growth strategies is to maintain financial flexibility and a strong balance sheet. Apache has maintained a strong balance sheet to support its operational and financial activities. Apache had cash and cash equivalents of $2 billion as of December 31, 2009. It also has an unsecured revolving credit facility of $2.3 billion that matures on 2013 and is fully available on December 2009. The ample liquidity reduces the company’s dependence on the secondary market under the current vulnerable business environment and permits it to pursue its exploration and development activities without any disruption.

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