Into the Deep: Apache Bids $4B for Mariner Energy

Mariner Energy (ME), a relatively large independent oil and gas producer known for its deep water assets in the Gulf of Mexico, received a bid for purchase by Apache Corp. (APA). The offer is valued at nearly $4 billion, which includes $2.7 billion for all of Mariner’s equity and also assumes $1.2 billion in debt. Earlier in the week, Apache announced they would acquire oil and gas assets in the Gulf of Mexico shelf from Devon Energy (DVN) for $1.05B, so they are obviously making a big push into the deepwater Gulf looking for growth. The deal for DVN’s Gulf properties is supposed to provide “net proven and probable” reserves of 83M barrels of oil equivalent as of the end of year-end 2009. The deal for Mariner is even larger with 181M proven barrels of oil equivalent (47 percent are oil or other hydrocarbon liquids), but according to the press release there is the potential of 2B barrels of oil equivalent among their 50 deepwater prospects.

It is a bit surprising to see two major acquisitions by one company bunched within just a few days, but this shows Apache’s aggressive attitude towards deepwater drilling in the Gulf. In sum, the company has spent about $5B in acquiring assets just this week, which compares to about $10B the company has spent in acquisitions over the last decade. They have been considering making further investments into the Gulf Shelf for years, but management believes now is the time and these are the right opportunities to move on. Apache may be looking to allocate resources to an area with less political risks than their current assets; they have been largely dependent on resources in Egypt and the North Sea. While those regions are stable relative to some parts of the world, Apache is effectively diversifying and lessening risk through these acquisitions off the Southern US Coast.

In their bid for Mariner, Apache offered a premium to yesterday’s closing price of about 45% and the stock is trading just a little bit below that bid price. For each of their shares, Mariner stakeholders will receive 0.17043 shares of Apache and cash of $7.80, which would be equivalent to $26.22 based on yesterday’s close. As if this week’s Ockham report, we had a Fairly Valued rating on Mariner Energy with an expected price range of $13.40 to $20.20 per share. According to our valuation methodology, Apache is paying a slightly higher price than is warranted by ME current fundamentals, but that is not especially problematic considering the Gulf of Mexico now represents the centerpiece of their growth strategy. Apache had just over $2 billion in cash on hand as of their latest quarterly reporting, which in all likelihood will effectively be wiped out by the cash payment to Mariner shareholders. However, we did not come across notice of additional financing necessary to complete the deal.

Apache is trading fractionally lower on the news, which is common for acquirers on a deal of this size. As you can see from our ratings history, we recently downgraded Apache to Overvalued because we believe the stock had gotten a little ahead of itself. However, this deal demonstrates that Apache has gotten aggressive and now stands to be one of the premier players in the Gulf Shelf, assuming the Mariner acquisition passes both regulatory and shareholder approvals. Based on our research, Mariner shareholders should be pleased with the purchase price, and we do not anticipate regulators providing a road block for the deal.

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