Houston-based Apache Corp. (NYSE, Nasdaq: APA) plans to extend its reach into the deepwater Gulf of Mexico and broaden its footprint in the Gulf shelf, the Permian Basin and Rockies oil shales with the planned acquisition of Mariner Energy Inc., Houston, (NYSE: ME) for $3.9 billion in cash, stock and debt assumption.

“This is a strategic step and a natural extension into the deepwater Gulf for Apache,” says G. Steven Farris, Apache chairman and chief executive. “Mariner provides an exciting new platform for growth in the deepwater and complements our strengths in the Gulf shelf and the Permian Basin. Based on our experience working with the Mariner team, we also believe the two companies will make an excellent cultural fit.”

This deal follows quickly on the heels of Apache’s announced acquisition of Gulf shelf assets from Devon Energy Corp., Oklahoma City, (NYSE: DVN) for $1 billion, which will add production of 19,000 barrels of oil equivalent (BOE) per day, with year-end 2009 estimated proved and probable reserves of 83 million BOE across 158 blocks.

Apache will pay 0.17043 share and $7.80 in cash per Mariner share. Based on Apache’s closing stock price of $108.06 on April 14, the transaction values Mariner’s shares at $26.22 per share, or approximately $2.7 billion, a 45% premium. Apache also will assume $1.2 billion in debt.

In February, Mariner produced 63,000 BOE per day from the Gulf shelf and deepwater, the Permian Basin and unconventional onshore plays. At year-end 2009, Mariner had estimated proved reserves of 181 million BOE (1.087 trillion cu. ft. equivalent); 47% oil and liquids, of which 56% is onshore; and unbooked resource potential of 2 billion BOE. Total offshore acreage as of year-end was 879,000 acres.

Mariner’s deepwater portfolio includes some 100 blocks with seven discoveries in development—including interests in Lucius and Heidelberg—and more than 50 prospects. It reports some 1.4 billion BOE of net unrisked potential in the deepwater Gulf.

Farris says Apache has considered extending its Gulf of Mexico operations into the deepwater for a number of years, and “this is the right set of assets and the right time for Apache to expand its deepwater presence.

“Mariner brings an inventory of developments and prospects that will jump-start our position in the deepwater Gulf; Apache’s financial resources will maximize the value of the portfolio,” he says. “It’s the right time because recent advances in seismic technology and continued enhancements in facilities design have reduced the risks in one of the world’s most prolific oil-exploration basins.”

Mariner also has more than 240 blocks on the Gulf shelf with 53 million BOE of net unrisked potential and more than 200,000 net acres across several emerging onshore plays.

In the Permian, Mariner holds more than 125,000 net acres in Reagan, Glasscock, Upton, Martin and Midland counties with proved reserves of 86 million BOE and 3,000 nonproved drilling locations. As of March, Mariner held some 43,000 net acres in unconventional oil plays in North Dakota, Wyoming, Arkansas and New Mexico. Recently, the company announced it had acquired a 100% working interest in approximately 54,000 net acres in the Denver-Julesburg Basin prospective for Niobrara shale in Wyoming.

In December, Mariner acquired Edge Petroleum Corp. out of bankruptcy and established a position in South Texas.

Apache’s last corporate transaction was with the Phoenix Resource Cos. in 1996, which established Apache as an operator in Egypt, and which has become one of the company’s principal growth areas.
Combining with Mariner enhances Apache’s global portfolio, which is balanced in terms of commodity mix, geography and geology, Farris says. “This transaction is similar to our earlier strategic steps, bringing near-term production and cash flow as well as long-term upside potential from a large acreage position with identified exploration opportunities.”

The deal is expected to close in third-quarter 2010.

Goldman, Sachs & Co. and J.P. Morgan Securities are advisors to Apache. Credit Suisse Securities (USA) LLC is advisor to Mariner.

The deal with Devon includes all of its Gulf of Mexico shelf assets. The companies value the deal at $16.76 per BOE proved and $241 per acre.

“Devon’s exit from the Gulf of Mexico creates a great opportunity for Apache to add one of the best remaining shelf asset portfolios to our existing core area,” says Farris.

The agreement covers 477,194 net acres across 158 blocks including 51 producing blocks offshore Texas, Louisiana and Alabama. The fields have 80 platforms and 211 production caissons in waters to 450 feet deep. Seven major field areas hold 90% of the proved reserves, and Devon operates 75% of the production.

Devon reports 2009 production was some 62 million cu. ft. of gas and 9,000 bbl. of liquids per day. As of year-end 2009, estimated proved reserves included 144 billion cu. ft. of gas and 15 million bbl. of liquids. Apache estimated net proved and probable reserves of 83 million BOE (41 million barrels proved; 49% oil) at year-end 2009 and projects production following closing to be 9,500 bbl. of liquids and 55 million cu. ft. of gas per day net (19,000 bbl. equivalent). Some 72% of revenues are from liquids.

Apache, the largest held-by-production acreage owner and the second-largest producer in Gulf waters less than 1,200 feet deep, reports it has identified 79 recompletion opportunities, 14 reactivations and 26 drilling prospects across the acquired assets.

Devon chairman and chief executive Larry Nichols says, “When we first announced our plans to reposition Devon, we expected total after-tax proceeds of between $4.5- and $7.5 billion. This sale of the remaining Gulf of Mexico assets, combined with our previously announced divestitures of $8.3 billion, ensures that we will exceed the upper end of that range. Furthermore, we are pleased to have a single purchaser for the shelf assets with the financial strength and experience of Apache.”

Devon estimates after-tax proceeds to be approximately $840 million. Data rooms for Devon’s remaining international assets are currently open. Devon expects the closings of all divestitures to be completed prior to year-end.

Apache will fund the Devon asset acquisition primarily from existing cash on hand and commercial paper. Apache has hedged a portion of the production for three years using swaps and collars to protect the economics of the transaction.

Closing is expected in early June.

Jefferies & Co. Inc. analyst Biju Perincheril equates the transaction price to $9,375 per Mcfe per day, and $4.25 per Mcfe of proved reserves.