Apache Quits Ultra-Deep Gas Search off Louisiana Coast

Apache Corp. (APA), the second-largest U.S. independent oil producer by market value, is abandoning a project with Energy Partners Ltd. (EPL) to explore for natural gas in the Gulf of Mexico amid a slump in the price of the fuel.

Apache isn’t interested in pursuing gas in rock formations underneath Energy Partners’ East Bay field, Bill Mintz, a spokesman for the Houston-based company, said in a telephone interview today. Apache became a partner in the venture last year when it acquired closely held Phoenix Exploration.

Mintz’s comments came after Energy Partners said today that it’s postponing the search for gas more than two miles (3.2 kilometers) underneath the seabed off the coast of Louisiana. A glut of the fuel from onshore North American wells has caused prices to fall to a 10-year low, prompting some of the largest producers in the U.S., such as Chesapeake Energy Corp. (CHK), to focus on higher profit oil and gas-liquids deposits.

“With gas prices today, I don’t think there’s any rush to work that play very hard,” Energy Partners Chief Executive Officer Gary Hanna said during a telephone interview.

Neither Hanna nor T.J. Thom, Energy Partners’ chief financial officer, returned messages left at the company’s New Orleans headquarters seeking comment on Apache’s decision.

“After the acquisition, we decided not to proceed with the partnership,” Mintz said. He didn’t provide details on why the project was dropped.
Oil-Rich Deposits

In lieu of drilling to test for the presence of gas beneath the East Bay field, Energy Partners will spend $8 million this year to buy seismic data for thousands of square miles around East Bay to search for oil-rich prospects, Hanna said.

Gas futures rose 1.6 percent to settle at $2.187 per million British thermal units today in New York. They’ve dropped 27 percent this year, the worst performer on the Standard & Poor’s GSCI Index of 24 commodities.

The agreement Apache inherited during the Phoenix acquisition called for the the partners to explore for gas more than 14,000 feet (4,000 meters) underground, beneath current production at East Bay. The field, which accounts for 39 percent of Energy Partners’ reserves, may hold the equivalent of 900 million barrels of oil, according to a March presentation on the company’s website.
‘Analogue Blocks’

Energy Partners is boosting capital spending by 66 percent this year to $168 million, 97 percent of which will be used to find and develop oil fields, Hanna said. The company is focusing on drilling untapped geologic formations close to its wells, rather than so-called wildcat prospects that are far from existing production zones, he said.

“We look for analogue blocks” that have pressure, temperature and other characteristics similar to nearby oil fields, Hanna said. “Those are much lower risk and the turnaround times to get a project done are much better” than wildcat prospects.

Energy Partners’ proved reserves were 74 percent crude at the end of 2011, according to the company.

Energy Partners plans to continue adding offshore reserves through acquisitions this year, Hanna said. The company’s strategy is to buy assets that show the potential for doubling reserves through additional seismic evaluation and drilling, he said.

Energy Partners fell 3.8 percent to $16.62 at the close in New York, the biggest decline since Dec. 12. Before today, the shares had gained 18 percent this year.

The company is worth about $18.90 per barrel of reserves, based on its enterprise value, a calculation of takeover value. That exceeds the per-barrel valuations of onshore oil producers such as EOG Resources Inc. (EOG) and Nexen Inc. (NXY), according to data compiled by Bloomberg.

Energy Partners expects to generate $75 million to $100 million in free cash flow this year, compared with $75 million in 2011, Hanna said. Greenwich, Connecticut-based hedge fund manager Wexford Capital LP is the company’s biggest shareholder, according to data compiled by Bloomberg.