BP assets worth risk of indigestion for Apache

July 12, 2010

It’s potentially hazardous to swallow a meal a third your size. But it could make sense for Apache to grab $10 billion of BP’s Alaskan assets. The U.S. firm’s flair for squeezing oil from older wells makes it an ideal buyer — and BP is a keener seller than it was.

With a market capitalization just shy of $30 billion and only $2 billion in cash on hand, Apache might not find it easy to digest a big deal. Nor is it coming to the table with an empty stomach. Just days before BP’s Gulf of Mexico rig explosion in April, Apache snapped up Mariner Energy for $2.7 billion and bought $1 billion of assets from Devon Energy.

As yet there’s no certainty about any deal. But if Apache spent $10 billion and funded the purchase entirely with debt, it would raise the company’s ratio of debt to total capital sharply — towards 50 percent from around 25 percent currently.

Even so, it would not break the bank, especially if combined with issuing new equity. Apache’s focus on late-stage assets gives it strong cashflow to help pay down debt quickly — some $7 billion this year and $8 billion next, by Tudor Pickering Holt estimates.

A degree of managerial and financial discomfort is worth suffering. BP’s giant wells in Alaska are past their prime, with production ebbing. That’s right in Apache’s sweet spot, and the company is well placed to give them a last lease of life.

Then there’s the timing. Apache doesn’t quite have BP over a barrel — the British firm has cash on hand and other assets it could sell. But BP will want to deliver on its promise to offload assets to help fund the Gulf clean-up. Even vague talk of a deal with Apache helped boost its battered shares.

By contrast, Apache’s stock fell 4 percent on Monday morning. Investors can be forgiven for worrying that the company bosses’ eyes may be bigger than their stomachs. But with BP a motivated seller it may be as good an opportunity as any to secure a bargain.

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