Houston-based Apache Corp. (NYSE; Nasdaq: APA) will bulk up its position in the Western Anadarko Basin with the acquisition of George Solich’s privately held Cordillera Energy Partners III LLC, in a $2.85-billion cash and stock deal.

Apache will pay $2.25 billion in cash funded by debt and $600 million in shares for 6.273 million shares at a fixed price.

Cordillera, based in Denver and backed by private-equity provider EnCap Investments LP, holds 254,000 net acres in the Texas Panhandle and western Oklahoma targeting the Granite Wash, Tonkawa, Cleveland and Marmaton plays. About half are held by production.

Estimated proved reserves are 71.5 million barrels of oil equivalent (88 million including natural gas liquids). Current net production is 18,000 BOE per day from 800 wells. Apache estimates 14,000 potential drilling locations.

“Multiple, stacked horizontal targets provide decades of potential drilling locations,” says Steven Farris, Apache chairman and chief executive. “Because 80% of revenue comes from liquid hydrocarbons production, this transaction provides compelling economics at current commodity prices.”

Farris says Apache has operated in the basin for 50 years, and will more than double its position there with this acquisition.

“The experience we have gained drilling 500 wells in the Granite Wash play—including 79 horizontals drilled since 2009—gives us an in-depth understanding of the geology and the operating environment and will enable us to hit the ground running.”

Having recently referred to the multi-stacked basin as the mother of all stacked plays, Solich, Cordillera president and chief executive, says, “The merger of Cordillera into Apache presents a tremendous opportunity for Apache to combine the Cordillera assets with Apache’s legacy Western Anadarko Basin position, creating a platform for a multi-decade development program in some of the most economic oil and liquids-rich gas targets in the onshore U.S.”

He adds, “Considering we are taking a meaningful amount of the consideration in Apache shares reflects our confidence that the quality of the asset base will continue to yield economic growth in production and cash flow for years to come.” Apache shares are down approximately 35% from their trailing 12-month high in May 2011.

Cordillera has 11 rigs operating in the play across 15 counties in the Texas Panhandle and western Oklahoma. Cordillera III was formed in 2007 following two previous successful sales, all focused in the Anadarko Basin. Solich says the Cordillera team intends to form a fourth domestic venture following the sale.

The effective date is Sept. 1, 2011. Closing is expected on April 30.

Goldman, Sachs & Co. and Tudor, Pickering, Holt & Co. were advisors to Apache. Jefferies & Co. Inc. and J.P. Morgan Securities LLC were financial advisors to Cordillera, and Andrews Kurth LLP and Thompson & Knight LLP were legal advisors.

Wells Fargo Securities analyst David Tameron estimates Apache is paying $39.86 per barrel proved, and is “a nice bolt-on to Apache’s already extensive Panhandle/Oklahoma position.” Applying a $7,500 per MMcfe per day value to current production, he estimates Cordillera is receiving approximately $8,000 per net acre.

“As the company has had improving success in horizontal tight-oil plays such as the Hogshooter, Cleveland, Marmaton, etc., we believe the lofty purchase price implies management enthusiasm for Apache’s existing inventory in the play. Cordillera's acreage looks to be closest to the area where Apache is targeting the Hogshooter.”

Raymond James analysts John Freeman and Andrew Coleman estimate the deal equates to $40 per BOE of reserves and $158,000 per flowing BOE of production, suggesting a high level of unbooked reserves. “After backing the value of the production stream (we assume 25%/25%/50% for oil/natural gas liquids/gas) at $945 million, the purchase price equates to $7,800 per acre.” This compares to Plains Exploration & Production Co.’s recent Granite Wash sale at $5,500 per acre (90% gas).

Apache’s prize. Apache expects to drill 160 wells on the newly acquired acreage in 2012, and 220 in total including its existing acreage, tripling its current pace in the basin, which includes seven operated rigs, and could ramp to 25 including Cordillera’s 11.

Rod Eichler, Apache chief operating officer, speaking on a conference call, said, “This is a liquids play in our backyard. It doubles our acreage position in an area we know very well. We have a rich inventory of drilling locations that provides decades of developmental drilling.”

Apache currently has 256 employees dedicated to the region. It holds 233,000 net acres in the basin, which will expand to 254,000 net acres pro forma the deal. Another $100 million in further acreage acquisitions could be added to the position.

The acquisition includes more than 60 productive zones beyond the four major ones in a range from 9,500 to 14,500 feet deep. The company estimates 306 million BOE of proved, probable and possible reserves, 390 million including NGLs.

“The geological risk is minimal. We have yet to drill a dry hole since we initiated our horizontal drilling program in 2009,” Eichler said. In the longer term, he sees upside potential in other known productive horizons that are currently uneconomic, such as the Skinner and Atoka.

Farris, speaking on the call, noted that Cordillera’s acreage neatly overlays Apache’s position in the basin with a mirror image of concentrations. “In the plays where we are the weakest, they are the strongest. It complements our position in this overall area,” he said.

The acquisition price included roughly $1 billion on proved reserves, he revealed, with about half of that valued for proved undeveloped locations.

Production from the more mature Granite Wash play is comprised of 48% liquids, while the Tonkawa, Cleveland and Marmaton all present liquids greater than 70%. “This is really a liquids play wrapped in a gas play,” Farris said. Breaking down economics by formation, the Granite Wash returns 42% rate of return, the Tonkawa 32%, the Cleveland 26%, and the Marmaton 25% rate of return.

Responding to concerns about the deal valuation as it relates to a depressed and sinking natural gas price, Farris reiterated that not much value was given to the gas stream in the deal. “From our standpoint the real value of this play is the liquids component, not the gas,” said Farris. “We could change the gas price (in the acquisition model) to a buck and it’s not going to change the economics much.”

The company anticipates development drilling from the acquired assets will be self-funding beginning in 2013.

“Apache has always believed that the Anadarko Basin is one of the most prolific, unconventional plays in North America,” Farris said. “The Granite Wash, Tonkawa and Cleveland, specifically, are some of the most prolific and highest rates of return projects we have in the company.”

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