Welcome The New, Consolidated Granite Wash

The old rancher never wants all the land in the county, just the land bordering his ever-growing fence line. So it is with Apache Corp., who demonstrated once again that it can add the cattle to go with that ten gallon Stetson atop its weathered visage.

The Houston-based superindependent rode back into the onshore domestic transactions market after an 18-month absence through the $2.85 billion acquisition of Cordillera Energy Partners III LLC. The deal corralled 254,000 net acres of liquids rich targets, including production of 18,000 Boe/d and proved reserves of 71.5 MMboe. (88 MMboe when NGLs are added).

Apache’s expanding home on the range will grow to a regional leading 487,000 net acres of mostly liquids rich targets in the Granite Wash, Marmaton, Cleveland and Tonkawa tight formation plays in a fairway that stretches from Hansford County in the Texas Panhandle to Caddo County in western Oklahoma.

The bulk of the Cordillera acreage is in Roger Mills and Ellis counties, Oklahoma, one of three core areas for the Granite Wash and a growing focus of recent drilling activity.

The transaction, which is expected to close in April, involves $2.25 billion in cash and $600 million in Apache shares. It is another marker in a long trail drive that signifies the unfolding re-alignment underway in the Anadarko Basin.

In November 2011, Linn Energy picked up Plains Exploration and Production Co.’s 75,000 Granite Wash acres in a $600 million bolt on transaction. The Houston-based MLP will spend $466 million targeting 75 horizontal Granite Wash wells in 2012. Farther east, Chesapeake Energy Corp. sponsored the $467 million IPO of its Granite Wash Drilling Trust during the fourth quarter 2011. The drilling trust encompasses 28,700 net acres in the Colony Wash play. Chesapeake owns 200,000 net acres in the Granite Wash, including 130,000 acres in its core Washita County, Oklahoma Colony Wash holdings.

Post Apache/Cordillera, the Granite Wash will feature an eastern core in Washita County dominated by Chesapeake, a western core in the Texas Panhandle in the Stiles Ranch/Buffalo Wallow area, which is the site of Linn Energy’s efforts, and a rapidly developing central core along the Texas/Oklahoma border dominated by Apache.

Give Me Land, Lots of Land

The Cordillera acquisition marks a transactional revival for Apache. The Houston-based serial acquirer had been uncharacteristically quiet on the domestic transactions front while it focused on developing Permian Basin oil properties in 2011. Such silence was a far cry from a frenetic 2010 when Apache consolidated the Gulf shelf via a $1.05 billion deal with Devon Energy Corp. days before revealing a long-held corporate interest in a stepped up deepwater presence with the $3.9 billion Mariner Energy acquisition.

It was typical Apache: another week in April 2010, another $5 billion in domestic acquisitions.

But the Macondo incident blew those plans out of the water less than two weeks later and Apache’s deepwater debut faded from the company’s headline flow. Undeterred, Apache galloped back on the transactions scene in July 2010 as the cavalry that came to BP’s rescue by tossing $7 billion in the ring for legacy BP acreage in the Permian Basin, western Canada and Egypt. A subsequent jump in oil prices in early 2011 saw Apache expanding rig employment from one unit in the Permian Basin to 25 as the company exploited the newly acquired acreage from BP and Mariner.

Apparently Apache was itching to get back in the acquisitions saddle again. The superindependent was one of the suitors for Tulsa’s Samson Investment Co., which sold in a $7.2 billion leveraged buy out to Kohlberg Kravis & Roberts Co. in November 2011. As a side note, Samson’s eclectic gas-oriented portfolio included a healthy dollop of Granite Wash acreage.

Happy Trails To You

Meanwhile Cordillera management rides off into the sunset following its third trail drive in the last ten years. Previous round ups include the $248 million sale to Patina Oil & Gas Corp. in 2003 for Cordillera Energy Partners I, followed in 2008 by the $1 billion sale of assets as part of Cordillera Energy Partners II in three transactions to Forest Oil Corp. (Granite Wash, East Texas), Merit Energy, and Devon Energy Corp. (Cana Woodford).

The latest Cordillera transaction falls comfortably within Apache’s acquire and exploit corporate strategy. The Cordillera III core properties in Roger Mills County, Oklahoma border Apache’s core Granite Wash holdings in neighboring Beckham County. Apache plans to “head ‘em up, move ‘em out” in 2012 as it targets 220 wells on the combined acreage. That program should breath new life into Apache’s central U.S. division, which was overshadowed in 2011 by the high-profile, 25-rig effort in the Permian Basin.

Like the Permian, the Granite Wash offers Apache upside via liquids. In fact the true value in the Cordillera transaction may reside in up-and-coming targets ancillary to the Granite Wash since the Cordillera portfolio provides an open range of new opportunities in the Tonkawa and Cleveland sands, and the Marmaton, all of which are greater than 70% liquids in production profile.

During its transaction conference call, Apache management intimated that 80% of Cordillera’s revenues originated from liquids, even though liquids only made up 53% of the production stream. Granite Wash wet gas, according to the Apache presentation, translates into $6.95 per Mcf in a world of $45 per Bbl NGLs and $3 per Mcf dry gas.

Keep Them Doggies Movin’ Rawhide

The Apache/Cordillera transaction also illustrates the industry’s growing infatuation with stacked formation plays. While shales garner headlines, stacked formations in tight zones have evolved into a variation on the resource play concept as the industry adapts unconventional techniques such as horizontal drilling and multi-stage fracturing to other tight formation targets. Operators in stacked plays generate production today and gain the possibility of new production in the future as the industry overcomes technical hurdles.

Stacked plays are one ingredient in the mix that has made the Permian Basin the hottest play in the onshore sector in 2011. Stacked plays are an under-recognized sweetener in the expanding Mississippi Lime play, and add value in Appalachia where targets range from the Huron to Utica to Marcellus. The Granite Wash is a part of the stacked play rodeo with more than 13 target zones. Toss in the Cleveland, Marmaton, Tonkawa and Atokan and the Granite Wash expands to dozens of potential targets across the fairway.

Not that it has been easy. Wells can cost up to $8 million, though $5 million will reach most Cleveland, Tonkawa or Marmaton targets. While the Wash produces some exemplary individual wells, repeatability is an issue and the play hasn’t always measured up to operator’s optimistic pronouncements. Apache, for example, entered the headline mix in November 2010 with the announcement of its Hogshooter discovery. Notably absent in Apache’s discussion about the Cordillera portfolio is any mention of Hogshooter.

Still, the Granite Wash is inching forward as the industry deploys unconventional techniques to multiple horizons across the fairway. Previously, vertical wells might tap four or five horizons for fracture stimulation. Now operators are employing 20 frac stages in a signel horizon. While well costs double in horizontal drilling, production is three times higher with higher IPs to boot, meaning faster pay out.

The last two years have seen a broad expansion in horizontal drilling and mutli-stage fracturing targeting Granite Wash and, more recently, Cleveland, Tonkawa and Marmaton horizons. Apache, for example, saw its horizontal well count increase from 7 in 2009 to 44 in 2010, and 53 last year.

The impact is far greater than those numbers indicate. Apache is currently generating 40,000 Boe/d from nearly 1,700 wells in its Central Region. Of these, 121 were drilled horizontally in the Granite Wash. Those new horizontal wells generate nearly 60% of Apache’s regional production.

Following the Apache/Cordillera deal, the Granite Wash will feature significant concentration. According to Hart’s Unconventional Activity Tracker, rig count targeting the Granite Wash varies between 60 and 70 units. Chesapeake Energy Corp. accounted for 35% of Granite Wash rig count during the fourth quarter 2011, averaging 21 rigs turning to the right. Cordillera Energy was second with 7 rigs active on any given sample date in the fourth quarter. Cordillera increased its Granite Wash activity from 3 to 7 rigs over the course of 2011. Other players include Laredo Petroleum, which doubled activity from 2 to 4 rigs over 2011, Forest Oil with 4 rigs employed, and Samson with 3 rigs active.

Of interest, Apache Corporation reduced specific Granite Wash activity from 8 units in the first quarter 2011 to just 2 units at yearend though management indicated it would ramp regional activity to 25 rigs in 2012 following the Cordillera acquisition. That amounts to an increase of 7 rigs on the combined 18 that Apache and Cordillera are currently operating in the Texas Panhandle and western Oklahoma. Apache expects the expanded drilling program will be self-funded out of cash flow by 2013.

Don’t Fence Me In

They don’t spend a lot of time sitting around the campfire at Apache. Indeed, recent news flow has originated out of Argentina and Australia. And deepwater returned to Apache’s stable as the company acknowledged that the Lucius prospect was moving forward in the post-Macondo Gulf.

Elsewhere, Apache followed its 2003 UK North Sea North Forties investment with the $1.75 billion buy out of ExxonMobil’s Beryl Field and ancillary UK North Sea assets in September 2011. Ever the master of acquire and exploit, Apache’s engineering alchemy is already transmuting the lead of those UK North Sea legacy cast offs into gold. Last June, Apache completed a 12,577 B/d well in the North Forties Field that featured the largest IP in more than 20 years.

The Cordillera acquisition now adds the Granite Wash to the growing list of Apache’s consolidated basins. That roster includes the Gulf shelf, a nice chunk of the Permian Basin, and the old BP North Forties in the UK North Sea.

Apache may be just who Cole Porter had in mind when he penned the witty western ditty: Don’t Fence Me In.