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23 Aug 2004
MOODY'S AFFIRMS APACHE CORPORATION'S RATINGS (A3 SR. UNSECURED); OUTLOOK STABLE
Approximately $2.1 Billion of Securities Rated
New York, August 23, 2004 -- Moody's Investors Service affirmed Apache Corporation's senior unsecured
debt rating at A3 with a stable outlook in response to the company's
announcement of its agreement to acquire oil and gas properties on the
Gulf of Mexico's Outer Continental Shelf from Anadarko Petroleum
for $537 million in cash. The transaction is expected to
close by the end of the third quarter of 2004, subject to regulatory
Apache is paying a very high $47,000 per daily expected unit
of fourth quarter production, $30,000 per daily expected
unit of 2005 production, and $15 per boe of reserves fully
loaded for required proven reserve development capital spending and future
lease operating expenses (LOE) associated with a pre-conveyance
volumetric production payment (VPP) on the properties. While the
transaction appears expensive and is reliant on follow-on drilling
success to justify deal economics, Moody's affirmed Apache's
ratings based on the contribution of the acquired assets in partially
offsetting steep natural production declines from Apache's existing
Gulf of Mexico reserves, the company's expertise and successful
track record in exploiting mature Gulf of Mexico fields, and its
hedging activity to lock in currently high commodity prices. The
rating affirmation also reflects Moody's view that the modest increase
in financial leverage Apache will incur to acquire the properties,
and the sale by Anadarko of a VPP on a portion of the reserves to Morgan
Stanley Capital Group prior to closing, are unlikely to pressure
The stable outlook assumes Apache will maintain conservative financial
policies and competitive full-cycle unit costs as it pursues its
reserve and production growth strategies. A ratings downgrade could
result if Apache is unable to execute its growth strategy while maintaining
its key operating and credit metrics (including adjusted debt to PD reserves,
total full-cycle costs, including 3-year average unit
F&D costs, PD reserve life, and leveraged full-cycle
ratio) at or near the top of the investment grade peer group. In
view of Apache's position as the most highly rated U.S.
independent exploration and production company and its acquisitive nature,
which heightens event risk, a rating upgrade is not highly likely,
although a material increase in scale and geographic diversity,
coupled with continued conservative financial leverage, could be
positive for the rating.
Moody's believes Apache's production trend from its mature US reserves
would be flat to declining without additional acquisitions due to rapidly
depleting offshore Gulf of Mexico production, despite a relatively
stable onshore production base. Apache estimates the Anadarko acquisition
will add 61 million barrels of oil equivalent (boe) to its net proven
reserves and about 11 thousand boe to its average daily production in
the fourth quarter of 2004, a 3% increase from average second
quarter 2004 production levels.
The Anadarko properties appear to be well diversified, with 78 fields
on 241 offshore blocks and 112 platforms. The properties comprise
mainly mature producing fields, except for the Tarantula field in
South Timbalier 308, which is expected to begin production in early
2005. Apache anticipates that the start-up of Tarantula
will cause annual average daily production from the acquired properties
to increase by about 60% to approximately 18 thousand boe.
However, Moody's notes that current production estimates for
Tarantula could be subject to change over time depending on how the field
performs once it comes onstream.
Natural gas accounts for about 51% of the Anadarko Gulf of Mexico
reserves and about 74% of estimated fourth quarter production.
As the properties have relatively short lives based on proved developed
reserves (2-3 years), Moody's expects the acquisition
could result in a slight decline in the company's proved developed
reserve life, from 7.8 years in 2003 to 7.6 years
on a pro-forma basis (excluding Tarantula).
The acquisition is consistent with Apache's strategy to acquire
and exploit properties that fit its areas of geological expertise and
to operate the majority of its production to maintain low unit operating
costs. Apache will operate 53 of the fields with 80% of
the production and 85% of the net reserves and expects to benefit
from consolidation of drilling and other service costs.
The Anadarko properties will be burdened by a VPP on 24 million boe of
lower-risk reserves estimated to be produced over the next four
years. The VPP will be sold to Morgan Stanley prior to Apache's
acquisition of the properties. In view of healthy estimated production
coverage of VPP volumes and Apache's strong track record in operating
and exploiting similar Gulf of Mexico fields, Moody's will
not view the $775 million cost of the VPP as debt of Apache,
even though Morgan Stanley will have a contingent claim on Apache's
share of production from the Anadarko fields in the event of a shortfall.
On the other hand, Moody's will include in its calculation
of Apache's financial leverage the $99 million liability
the company plans to record in order to reflect the cost of producing
and delivering the reserves to Morgan Stanley over a four-year
If Apache were to pursue additional VPP transactions, Moody's
may attribute a greater share of the VPP's cost to the company's
debt, depending on the size and nature of the assets acquired.
The Anadarko acquisition accounts for only 4% of Apache's
total reserves and 4% of its average second quarter 2004 daily
production (including expected production from Tarantula).
Apache plans to fund the acquisition with a combination of cash and commercial
paper issuance. Moody's has assumed the company will incur
approximately $380 million of additional debt (i.e.
commercial paper) in the transaction, plus the $99 million
liability related to future VPP lease operating costs. Moody's
estimates pro-forma year-end 2004 adjusted debt/PD reserves
will be about $2.51/boe, which is modestly higher
than the year-end 2003 level of $2.39/boe,
but still within a range appropriate for the A3 rating. Moody's
views favorably the price hedges Apache has entered into in connection
with the acquisition (for 70,000, 90,000 and 90,000
million Btu of daily natural gas production, respectively,
and for 6,000, 8,000 and 7,000 barrels per day
of oil production, respectively, over the next three years).
Apache's liquidity remains solid, with approximately $97
million in cash and approximately $1.5 billion available
under its committed bank facilities at June 30, 2004.
Ratings affirmed are Apache Corporation's debentures and notes at A3,
its preferred stock at Baa2, its shelf registration for senior unsecured
debt/subordinated debt/preferred stock at (P)A3/(P)Baa1/(P)Baa2,
and its rating for commercial paper at Prime 2. Also affirmed are
Apache Finance Pty Ltd's guaranteed bonds and notes at A3 and its shelf
registration for senior unsecured debt at (P)A3; Apache Finance Canada
Corporation's guaranteed debentures at A3; and the preferred stock
shelf registrations of Apache Trust I and Apache Trust II at (P)Baa1.
Apache Corporation is headquartered in Houston, Texas. It
is one of the largest independent energy companies in the U.S.,
and explores for, develops, and produces natural gas and oil
in the U.S. and overseas.
Corporate Finance Group
Moody's Investors Service
Alexandra S. Parker
Senior Vice President
Corporate Finance Group
Moody's Investors Service
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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