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Deals

Oil spill seen as costly for Apache-Mariner deal

HOUSTON (Reuters) - In dealmaking, timing is everything.

Oil and gas producer Apache Corp APA.N agreed to buy smaller rival Mariner Energy Inc ME.N five days before BP Plc's BP.LBP.N well blowout in the Gulf of Mexico, the worst oil spill in U.S. history.

Now, as the deal heads to a close, fallout from the spill leaves the combined company with an uncertain and more costly way ahead.

The $2.7 billion cash and stock deal was a bold move. Apache is the second-largest producer in the Gulf of Mexico’s shallow waters. The acquisition puts them in deep water, where costs are expected to soar as the U.S. government tightens regulations and insurance premiums rise.

“There is continued regulatory uncertainty,” said Bill Fitzpatrick, energy analyst at Optique Capital Management. “At this point it’s hard to determine the ultimate outcome. I think the stock is still a great value, and I hope we get some visibility soon.”

Apache has received government clearances for the deal from antitrust regulators, but still lacks approval from Mariner shareholders. That meeting will be held on November 10. The deal was expected to close in the third quarter.

The Bureau of Ocean Energy Management has issued new regulations to bolster deepwater drilling safety after the April 20 BP BP.LBP.N well rupture that killed 11 workers.

But uncertainty clouds the picture.

“The changes are a little vague, but obviously it is going to take more time to drill a well,” said Mike Breard, analyst at Hodges Capital Management in Dallas. “And it’s going to be more expensive. It’s going to mean more capital upfront, but Apache can handle that very easily.”

Mariner’s Gulf assets include 100 exploration blocks, seven discoveries in development and more than 50 prospects.

Apache also gains acreage to drill in the Permian Basin in west Texas from the deal, but the headline on the April announcement was “Apache Gains Strategic Position in Deepwater Gulf With Mariner Merger.”

SMOOTH SAILING AHEAD?

Apache’s management has been steadfast in its dedication to the deal since the BP disaster, even as arbitrage traders circled, betting that it might not close, and investors sued.

Apache and Mariner settled the shareholder lawsuits this summer, according to regulatory filings. As part of that settlement, Apache removed the $67 million deal termination fee, the filings said.

“It’s the only merger agreement you will ever see where the acquiring entity removes the break-up fee,” said Bob Gray, an attorney specializing energy-related mergers and acquisitions at law firm Mayer Brown.

The elimination of the termination fee paved the way for other Mariner suitors, but none have publicly come forward.

This year has been a busy one for Apache’s bankers, and some worry that the company may have taken on too much too quickly.

Apache bought Devon Energy Corp's DVN.N shallow-water assets in the Gulf of Mexico for $1.05 billion and agreed to pay $7 billion, a huge deal for the company, for some of BP's assets.

In its latest regulatory filing on the Mariner deal, Apache said it has closed the acquisition of BP’s Permian Basin assets. But deals to buy BP assets in Western Canada and Egypt will not likely be completed until the fourth quarter or the first quarter of 2011, later than initially expected.

Oil analyst Phil Weiss said in an October 5 note to clients that Apache’s share appreciation will be limited until it proves it has integrated the $12 billion in assets it acquired this year.

Still, Hodges Capital’s Breard said that while Apache and others will face higher Gulf drilling costs next year, the company will likely come out ahead. Still, the timing of the Mariner deal was unfortunate.

“I’m sure they wish they had waited a couple of weeks before they did the deal,” Breard said.

Reporting by Anna Driver. Editing by Robert MacMillan

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