Exclusive: Apache says eyeing mineral rights in bid to unlock value

HOUSTON Wed Jul 23, 2014 2:05am EDT

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HOUSTON (Reuters) - U.S. oil and gas company Apache Corp told Reuters it is looking at ways to wring more cash out of its valuable mineral rights, as it and other energy companies face investor pressure to tap more profits from the North American shale boom.

Apache did not detail the options it is mulling, but two recent successful mineral rights offerings could provide a model.

Viper Energy Partners LP and Canada's Prairie Sky Royalty Ltd this year have bundled the royalties generated by their mineral rights into subsidiaries and then listed them in public offerings.

"We continually review our mineral interest position to determine the best course of action for maximizing value," Apache spokesman Bill Mintz said in response to a Reuters query.

"Depending on the location of the acreage and activity in the area, we may look at options to unlock value from our mineral interests when it makes sense to do so."

Mineral rights are especially valuable because they entitle owners to a share of the profits from oil and gas wells, and owners are not required to pay for any of the operating or capital costs.

So Apache profits by collecting royalties when others drill on its so-called fee-acreage, a factor that greatly enhances its returns.

ACTIVIST INVESTOR

Apache has been selling assets like Gulf of Mexico offshore oil properties that would be expensive to develop, raising funds to spend on less-expensive shale drilling. Pressure on the company to accelerate that process has ramped up.

One activist investor, Jana Partners LLC, disclosed in its second-quarter update in June that it has a $1 billion stake in the Apache.

Jana has urged the company to exit its liquefied natural gas projects (LNG) in Canada and Australia and focus on drilling onshore in the United States.

Besides Apache, Anadarko Petroleum Corp said last week the $675 million a year in royalty revenue it gets from some 8 million acres in the western United States provides "future options for additional value acceleration." That statement helped push Anadarko's shares up more than 4 percent.

Energy investment bank Simmons & Co implies a valuation of up to $13.5 billion for Anadarko's mineral rights.

There is "strong market appetite," for royalty interests that offer growth potential," according to analysts at Credit Suisse.

Apache did not detail revenue from royalties, but it has extensive acreage.

In Louisiana, Apache has about 275,000 net fee acres. In the Permian of Texas, it also has about 405,000 net fee acres acquired from BP Plc in 2010.

REWARD NOW, RISK LATER?

Mineral rights securities carry risk – a drop in oil prices would quickly erode returns. But with interest rates still hovering around historic lows and crude oil trading around $100 a barrel, investor appetite remains high.

Parent Encana Corp raised $1.35 billion with its IPO of PrairieSky in late May. Units in Viper opened at $31.50 on the June 18 market debut, up 21 percent from its initial public offering price of $26 per unit.

Viper holds mineral interests in the Permian Basin that Diamondback acquired for $440 million in September 2013. Viper's current market capitalization is $2.56 billion.

Both the Viper and PrairieSky deals were innovative and, according to analysts, marked what could be the next chapter in energy finance.

They borrowed a page from royalty trusts that have been around for decades and master limited partnerships (MLPs), which U.S. energy companies have feverishly set up in recent years because they pay no corporate taxes if they distribute most of their profits to investors.

(Additional reporting by Svea Herbst-Bayliss in Boston and Scott Haggett in Calgary; Editing by Terry Wade and David Gregorio)

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