Apache's CEO Discusses Acquisition of Cordillera Energy Partners (Transcript)

Executives

W. Kregg Olson - Executive Vice President of Corporate Reservoir Engineering

Rodney J. Eichler - President and Chief Operating Officer

G. Steven Farris - Chairman of the Board, Chief Executive Officer and Member of Executive Committee

Unknown Executive -

Patrick Cassidy -

Analysts

Pearce W. Hammond - Simmons & Company International, Research Division

John P. Herrlin - Societe Generale Cross Asset Research

Leo P. Mariani - RBC Capital Markets, LLC, Research Division

Joseph Patrick Magner - Macquarie Research

Robert S. Morris - Citigroup Inc, Research Division

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

David R. Tameron - Wells Fargo Securities, LLC, Research Division

Apache Corporation (APA) Acquisition of Cordillera Energy Partners Call January 23, 2012 10:00 AM ET

Operator

Good morning, everyone, and welcome to Apache Corporation's conference call. This call is being recorded and will cover Apache's acquisition of Cordillera Energy Partners. Today's presentation will be hosted by Mr. Patrick Cassidy, Director of Investor Relations. Mr. Cassidy, please go ahead.

Patrick Cassidy

Thank you, Christie. Good morning and thank you for joining us. This morning at midnight, Apache issued a news release announcing the company's acquisition of Cordillera Energy Partners III. A slide presentation has been prepared to accompany today's remarks. It can be accessed on our website at www.apachecorp.com. Viewers will be able to advance or reverse the presentation as they choose.

On today's call, we will have 2 speakers making prepared remarks prior to taking questions: Steve Farris, our Chairman and Chief Executive Officer; and Rod Eichler, Chief Operating Officer.

Today's discussion contains forward-looking estimates and assumptions, and no assurances can be given that those expectations will be realized. A full disclaimer can be found on Page 2 of the presentation. With that, I will now turn the call over to Steve.

G. Steven Farris

Thank you, Patrick, and thank all of you for joining us this morning on such short notice. Obviously, we're excited about the transaction that Patrick mentioned, the Cordillera acquisition that we've made.

Apache always has believed that the Anadarko Basin is one of the most prolific, unconventional plays in North America. And more specifically, the Granite Wash, Tonkawa, Cleveland and really the other washes off the Mountain Front are some of the most prolific, highest rate of return projects we have in the company. And adding this transaction to it just doubles our provision there.

As you can see, I'm going to talk from the slides, a summary of terms. The total value was $2.85 billion. The seller, Cordillera, did agree to take some shares in the transaction. They took about $600 million worth of shares. The effective date is September 1, and we hope to close this by about April 30. I've got about 8 slides I'm going to go through and then I'm going to turn it over to Rod Eichler, our COO, and he's going to go through some of the more detail.

The first slide is really what it's all about. And that it's 254,000 acres, this is Slide 4, which if you look at that slide, it has Apache acreage in the fairway and Cordillera's acreage in the fairway. Cordillera is blue. It's just a mirror image of Apache's acreage position in this play.

We're not only getting the acreage however; we're getting about 18,000 barrels of oil and liquids equivalent per day. We have -- going to add [ph] 71 million barrels of oil equivalent. That does not include NGLs, because they have a percentage of proceeds contract that over time, we think we can renegotiate. But the fact of the matter is if we were able to book the NGLs on this transaction, it would go up to 88 million barrels approved.

The P3 (sic) [3P] is really associated -- I'm going to talk a little bit about 14,000 locations. Those are only 2,000 locations that we put on this acreage. And the 3P, if you take it without NGLs, is about 300 million barrels equivalent. If you add the NGLs, it's about 390 million. So a tremendous upside from where we step today.

The next slide, really, is why we like it. I mean, this is obviously a bolt-on acquisition for us. Apache started actually in Oklahoma over 50 years ago. And we've drilled 2,500 wells in the Anadarko Basin, 500 Granite Wash wells. And we have an excellent staff that has the potential to take this over without adding really any significant staff.

All of those things -- rich inventory with premium economics, obviously, as you'll see, as you go through these slides, we have visible growth not only in the central region, but also what it does for our company. And it's immediately accretive to both earnings and cash flow.

The next slide talks a little bit about the crossover between Cordillera's acreage and our acreage. Down to the right of that slide, Page 6, is Cordillera's acreage, composite acreage in each one of those player play concepts in the Tonkawa, Cleveland and Marmaton. And as you can see, in those plays that we are the weakest in, they are strongest in. So it really complements our position in this overall area.

The next slide is entitled, "The Granite Wash and More" because we really think, although it's not significantly valued in our numbers, it really has tremendous potential, and that is the Tonkawa and the Cleveland, particularly. If you see the EURs there, those 2 plays, specifically, are over 70% liquids. The Granite Wash itself is almost 50% liquids. So this is really a liquids play wrapped up that looks like a gas play.

The next slide shows the growth. At the end of December, we, Apache, had sold some producing properties in East Texas. So our run rate in December of 2011 was about 40,000 barrels of oil equivalent a day in the central region. If you add on the Cordillera current production, and then you show the growth over the year to the December 2012, that will be an 80% growth just for the region. And although we're not going to go over today, we're presenting to our board after our earnings call our planned presentation for 2012. But this should have some impact on our growth potential for the overall company for 2012.

The next slide is Slide 9, a liquids growth play. And what it really shows you is the -- not unlike LNG actually; the price of the gas is really tied to the price of the oil. And what you have here is that over 50% of the production is really priced off of liquids. And from a revenue standpoint, 80% of the revenues come from the liquids side of the flow stream.

And the last slide shows basically the same thing. If you take a dry gas well, and we're being overly optimistic at $3 an M today. But at $3, if you gross that up for the liquid content, obviously, it more than doubles your price of your product, with the NGL priced in the gas stream. I can't tell you how excited we are about it. I'm going to turn it over to Rod, and then we'll be taking some questions.

Rodney J. Eichler

Thank you, Steve. I will pick it up on Page 11, or Slide 11, just hitting the ground running. Apache has extensive operating experience in the Anadarko Basin in general, and Granite Wash in particular. The Granite Wash is considered a tight rock play by conventional standards. It comprises a series of thick, multi-layered liquids-rich sandstones and conglomerates. While frequently lumped in with unconventional plays, the Granite Wash possesses better reservoir qualities than typical shale resource plays, and it responds well to horizontal drilling and multistage fracturing completions.

Apache has drilled more than 2,500 wells in the area where Cordillera assets are located, and represented by the green dots on this map. This transaction bring us an extensive geologic data set, including reproductions of cross sections [ph], geologic maps covering 18 productive target zones and correlated formation tops in approximately 24,000 wells.

We have the people and expertise to hit the ground running the day the deal closes. Our existing field offices are highlighted by the stars on the slide. We're already based and staffed in the heart of the play. During 2012, we expect to drill about 160 wells on the newly acquired assets.

The impact of horizontal drilling cannot be overstated. Page 12, or Slide 12, highlights this transformation in the Central Region, our Central Region. Today, half of our production in Central Region comes from just 121 horizontal wells. This compares with nearly 1,600 vertical wells for the remainder. Oil and NGLs have doubled to almost 25% of overall production in just 2 years. And half of all production coming online in 2012 is expected to be liquids.

Turning to Slide 13. This slide provides the other [ph] data set highlighting the benefits of horizontal drilling in our Central Region. This data is taken from wells drilled on our Stiles Ranch leases in the Texas Panhandle. While costs were double that of a typical vertical well, the recovery rates are up to 3x higher and initial flow rates up to 5x better. The ability to cut a greater cross-section of hydrocarbon-bearing rock with directional drilling can make what would be a marginal well into a producer with impressive economics. Horizontal drilling cannot work everywhere, but it has truly revolutionized plays like the Granite Wash.

Now turning to Slide 14. Slide 14 provides economic data in the formations we're additionally targeting with these acquisitions. Based on a $90 per barrel oil price and $3 natural gas, horizontal drilling achieves robust returns ranging from 25% in the Marmaton to 42% in the Granite Wash. Horizontal drilling combined with multistage fracturing and well completion technology is ideally suited for the tight, clastic reservoirs of the Anadarko Basin.

Now moving to Slide 15. This slide highlights Apache's recent performance in the Granite Wash. These were primarily Granite Wash wells, though we drilled Cleveland and Marmaton target prospects also. We achieved some impressive results. These are highlighted in the map in the various colored text boxes. Now I wanted to mention just a few of these.

The Thetford 4-23H, which came online at 1,500 barrels of oil and 4.2 million cubic feet of gas per day, the Smith 1-16H, which flowed at nearly 1,000 barrels of oil and 9.1 million cubic feet of gas per day, the Smith 1-17H, another Granite Wash well that flowed at 1,000 barrels of oil at nearly 11 million cubic feet of gas per day, and the McGarraugh 138#7H; this was a Cleveland well that flowed almost 700 barrels of oil at 800,000 cubic feet of gas per day.

Slide 12, it highlighted the multiple stack pay potential Granite Wash. It indicates resource after it reached [ph] the plays. So now we're looking at Page 16.

With productive sales of 9,500 to 14,500 feet, the geological risk is minimal. We have yet to drill a dry hole since we initiated our horizontal drilling program in 2009. Our valuation of the Cordillera asset was primarily focused on these zones. Some are Granite Wash zones in the Marmaton, the Cleveland and the Tonkawa. Now longer term, we see upside potential in other zones. This includes known productive horizons that are currently uneconomic, such as the Skinner and Atoka. Now I wouldn't be surprised if new ideas and technologies unlock zones we don't currently know exist or are considered for exploitation. According to Oklahoma regulatory agencies, more than 60 separate formations currently produce oil and gas in the fairway.

Now moving to Slide 17. Part of having this action with Cordillera relates to the asset's ability to generate cash. In addition to the acreage, we acquired 800 producing wells. Given the anticipated capital program in 2012 and given commodity price assumptions, these assets are expected to be self-funding within a year, with projected lease double income exceeding currently planned capital spending beginning next year.

Now moving to Slide 18. The ability to successfully drill and replicate results provides a more visible and reliable growth profile than conventional oil gas plays. Slide 18 highlights this potential growth profile through 2019. By 2015, daily production can be seen to be more than -- expected to be more than 2.5x our current rate. I would note that this current reflects the producing wells at only 2,000 of the respective 14,000 locations that Steve previously mentioned.

We actually expect to more than triple the pace of activity in this prolific area during 2012. We plan to increase our operated rig count from 5 to 16, just in the Wash fairway that we've discussed today.

Now lastly, moving to Slide 16, our summary. This slide really iterates our key points of the Cordillera acquisition. This is a liquids play in our backyard. It doubles our acreage position in an area we know very well, and we can hit the ground running when we close. We have a rich inventory of drilling locations that provide decades of developmental growth.

To sum it up, this is a classic Apache transaction. It was negotiated, so we're confident we're getting high-quality assets at a good price. [indiscernible] finance the existing balance sheet capacity. It's accretive across all metrics. We're excited to begin our work. Patrick?

Patrick Cassidy

That concludes our prepared remarks. We are now ready to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Doug Leggate of Bank of America.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Steve, a couple of questions. On the press release, you said that you would look to travel your activity. Can I just ask you to clarify -- will you tell me what you mean by that? Because, previously, you split the play, the Anadarko Basin into multiple different parts. And the Granite Wash, I think was about 4.5 rigs or something like that, but the total play was 14 rigs. So are we talking about just taking the 8 that were already there and going to 12? Or are we talking about taking the 14 to north of 40? That's my first question, and then I've got a follow-up, please.

G. Steven Farris

We, right now, have about 7 rigs running in this fairway. And Cordillera, right now, has about 11. In fact, our acquisition forecast was based on, a, we'll probably go to higher than the 11 that they have. So the numbers you see in, hopefully, are going to increase a little bit. But if you look, we've got 63 rigs -- I mean, 63 [indiscernible] for 2012 in our inventory. And the inventory of Cordillera has got 159 wells. So you've got 220 total wells that are going to be drilled in 2012. And then that's going to -- as you see, the numbers down at the bottom of that, Doug, they're going to increase over the next 3 or 4 years.

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Got it. And just a follow-up, 14,000 locations. So how are you breaking that down? Is that 14,000 locations because you've got maybe 1,400 with 10 stacked targets? Or is it really -- I assume these are verticals. So I was late getting on the call, so I missed the description of that. Are these verticals or horizontals?

G. Steven Farris

Yes. Are all horizontal wells, but they're also on all of the acreage and in a number of plays. If you see my slide, which is Slide 6, and you look at the acreage, the crossover, the acreage position in the Granite Wash, Tonkawa, Cleveland and Marmaton, all of these plays were right in the middle of the fairway of all 4 of those plays. So what you're getting is, is that you're getting 4 wells or 5 wells per section in 4 or 5 different zones.

Operator

Your next question comes from the line of Leo Mariani of RBC.

Leo P. Mariani - RBC Capital Markets, LLC, Research Division

In terms of the Granite Wash. You guys talked about the economics here in your slide deck, being the one that you guys are seeing at Stiles Ranch, could you talk a little about what the variability of those economics might be across your acreage position? I guess I've generally been kind of understanding from talking to you to different operators out there that Stiles Ranch is considered to be one of the better areas in the play. Are you seeing a fair bit of variability across your acreage position?

G. Steven Farris

Well, I think if you look at my slide on 7, this is our estimated EUR per well for the Granite Wash, and that's based on our history. And Kregg Olson, our Executive Vice President of Reservoir Engineering, is sitting here. And how many wells is in that population? It's got to be a big number of wells in the population, Kregg.

W. Kregg Olson

And this represents the average of our type curve going forward for all of our locations.

G. Steven Farris

Right. And based on our results.

W. Kregg Olson

Right.

G. Steven Farris

All of these numbers are based on Apache's results because we've been very active in this play also.

Leo P. Mariani - RBC Capital Markets, LLC, Research Division

Okay. And I guess the thing that was kind of noticeably absent from your presentation was a discussion of the Hogshooter Wash. Are you guys maybe including that in the Granite Wash here? Or is that -- I think you guys have historically talked about that as a separate formation.

G. Steven Farris

We are very cognizant of the Hogshooter. We've drilled some wells in that formation as you know. And we didn't put a significant amount of values on this acquisition with respect to that play. But that play exists, and we're drilling it on our locations, and I'm sure we'll be drilling some on Cordillera's locations also.

W. Kregg Olson

And that would be encompass in the Granite Wash location.

Leo P. Mariani - RBC Capital Markets, LLC, Research Division

Okay. And I guess in terms of your 14,000 locations here, you guys talked about 2,000 locations that you use to evaluate the deal. I guess, would you consider that sort of your risks number from that 14,000? And I guess from your comments, Steve, it sounded like the 14,000 number kind of represents if there were, as you say, 4 to 5 wells per section in 4 and 5 different zones. It sounds like a completely under-risk number, assuming that all the acreage is successful in all the different zones and you're getting more to a 2,000 risk number. Is that kind of the way to think about it?

G. Steven Farris

Well, actually what we did, if you look on, with respect to the production profile, both locations of what we're going to drill over that period of time. It's got almost 2,000 locations out on that if you add those across.

Rodney J. Eichler

Slide 18.

G. Steven Farris

Slide 18, I'm sorry. And that's the production profile. That's what we used in the acquisition forecast.

Operator

Your next question comes from the line of Joe Magner of Macquarie Capital.

Joseph Patrick Magner - Macquarie Research

I just want to follow up on the inventory calculation. Are there any parts of this acreage or any other acreage within the basin that are currently being developed horizontally, targeting multiple-stacked horizons?

G. Steven Farris

Well, all of these plays, in terms of the -- in the maturity of the plays, the Granite Wash is probably the most mature. And I think there's probably been 2,000 wells drilled in the Granite Wash horizontal. The next one is the Cleveland, which we've had about 1,400 wells grow in it. And then the Marmaton and the Tonkawa are left, maybe 200 or 300 wells per -- in the whole basin in those plays. And the significance, honestly, of the question is really a good question because we're on the -- we're really on the forefront of the horizontal drilling in this basin. And if you look across the basin today, there are about 130 rigs running. 130 horizontal rigs running.

Rodney J. Eichler

Yes, Slide 16 really kind of shows what you're seeing out there from the 3 activities. These are all stacked pays, the individual zones. And that combined with the fairway map that shows the individual breakout by the major zones that we've identified for this evaluation. But you can see, that's exactly how this plays out. The industry has already drilled over 3,000 horizontal wells in these 4 major zones alone, and they fall -- overlap in many areas of the basin.

Joseph Patrick Magner - Macquarie Research

I've got some follow-ups on that, but I'd like to use my second one just to ask about, what's going to be required to renegotiate percent of proceeds? How significant of an effort is it to renegotiate the current marketing arrangement?

G. Steven Farris

Well, actually, they get 100% of the uplift. So it really shouldn't be a significant issue. We've done that on our acreage in the past. And it's really not a revenue adjustment as much as it is just a reserve. You're going to change some gas to oil or liquid.

Rodney J. Eichler

So in other words, we already, and Steve said it, but we already get the full economics of that NGL uplift. It just shows up in our gas price, rather than as broken out in our gas volumes, rather than broken out as NGLs. So to that extent, it's really, it's almost an accounting adjustment; it isn't going to be a value issue.

Operator

Your next question comes from the line of John Herrlin of Societe Generale.

John P. Herrlin - Societe Generale Cross Asset Research

Just some quick ones. You said it was negotiated, so this wasn't a data room transaction.

G. Steven Farris

Yes, to the best of our knowledge. In fact, I think George Solich was interviewed in the Wall Street Journal. And we sat in on part of that interview. From his standpoint, it was definitely a negotiated transaction. And he did say that he had some other people out there that were interested, but our deal was a negotiated transaction.

Rodney J. Eichler

Okay. In terms of the cost allocation, how much are you assigning to proven and how much to unproven?

G. Steven Farris

We've got about $1 billion unproved, and the rest of it on unproved. Round numbers.

John P. Herrlin - Societe Generale Cross Asset Research

Okay. Looking at your presentation, you have higher EURs in the front for the Granite Wash than for the individual well economics that you had later on that Rod discussed. What was the difference?

G. Steven Farris

Well, one of them is [indiscernible] the entire basin, and it's based on all our results. The one that shows the 853 versus the 1,117, which I think you're referring to, the 853 is specifically Stiles Ranch.

John P. Herrlin - Societe Generale Cross Asset Research

Okay. And people are trying to ask you how much is Granite Wash in terms of the 14,000 locations. And how much is the other formations mentioned, the Paleozoic? Could you give us kind of a rough percentage of what would be Granite Wash versus the Cleveland and Marmaton, et cetera?

G. Steven Farris

We can get those numbers, I just don't have them.

Operator

Your next question comes from the line of Pearce Hammond of Simmons & Company.

Pearce W. Hammond - Simmons & Company International, Research Division

I was curious why you chose to use shares as part of the financing for this particular transaction, especially since it seems like your shares are a little bit undervalued because of the Egypt overhang.

G. Steven Farris

It was part of the value negotiation and also a part of our negotiation with respect to our credit rating. Because we really wanted to do this without -- with just being able to finance the transaction predominantly with that. So it worked out for both sides.

Pearce W. Hammond - Simmons & Company International, Research Division

And then how did the current gas price environment and outlook impact your thoughts on the transaction as it went along before it actually concluded?

G. Steven Farris

I'll be real honest with you. This is -- I'm going to show my age, but what's happening on the gas side today is what happened back in the early '70s in the Rocky Mountains, when you got rid of your gas so you could produce the liquids. And from our standpoint, the real value of this play is the liquids component of it, not the gas side. I mean, we could change the gas price in this thing $1, and it's not going to change the economics much.

Unknown Executive

The other way to say that is on that pie chart that showed the breakout, one of the reasons we show revenue breakout is, basically, we're evaluating the revenue. So if it's 80% liquids, it tells you we're not paying much at all for the gas. So it's almost like we're buying the liquids and the gas is thrown in for free.

Rodney J. Eichler

That's Slide 9.

G. Steven Farris

Yes. But we maybe a little bit [indiscernible]. Yes, but if you're off 10% on 20%, you're off 2%, if you understand what I'm saying.

Operator

Your next question comes from the line of Bob Morris of Citigroup.