Shell Overseas Holdings is joining Apache Corp. in a $600-million purchase of New Zealand independent Fletcher Challenge Energy's assets in Canada, Argentina, New Zealand and Brunei. Apache will pay US$600 million for Fletcher Challenge properties in Canada's Western Sedimentary Basin and in Argentina, with proved reserves of 713 billion cu. ft. of natural gas equivalent. Meanwhile, Shell Overseas, a subsidiary of Royal Dutch/Shell will purchase 1.64 million restricted shares of Apache common for US$100 million. Apache will use that, along with short-term debt and cash on hand to fund the deal. Apache's debt-to-capitalization ratio will be 36% upon closing. Shell Overseas is acquiring the Fletcher Challenge operations in New Zealand and Brunei. The companies expect to close the deal in the first quarter of 2001, with an effective date of July 1, 2000. "We feel fortunate to have been Shell's junior partner in this transaction from its inception," Apache president G. Steven Farris said. "This strategic acquisition increases our natural gas exposure in one of our international core areas at a price of 84 cents per thousand cu. ft. equivalent, based on proved reserves alone. It also adds exploration opportunities in an area with sizable reserve potential." Approximately 72% of the proved reserves Apache will acquire are natural gas. Net daily production for second-half 2000 is expected to average 139 million cu. ft. of gas and 12,600 bbl. of liquids. Apache will operate 80% of the Canadian properties, which contain more than 300 identified drilling locations. "This transaction continues the momentum of our Canadian region," said Farris. "It increases our Canadian reserves by 75%, our oil and gas production there by 80% each, and our net undeveloped acreage by 200%." Apache's acquisition evaluation took into account the effect of assuming Fletcher Challenge's existing gas hedges, the last of which expires in October 2002. Apache is not assuming any oil hedges. In Argentina, Apache will acquire a 25% interest in a 5,000-acre, nonoperated exploration concession in the Neuquen Basin. Credit Suisse First Boston raised its 12-month target on APA to $75 from $70 and Apache's estimated 2001 earnings per share to $4.25 from $3.97. Frost Securities upgraded APA from Buy to Strong Buy; Robert W. Baird & Co. Inc., from Market Outperform to Strong Buy; and Dain Rauscher Wessels, from Buy Aggressive to Strong Buy Aggressive. Moody's Investors Service confirmed Apache's Baa1 senior unsecured debt rating, following the announcement. The additional debt that Apache will take on to fund the deal will not affect the company's total debt-to-proved-developed-reserve ratio meaningfully, if at all, Moody's reported. Total debt-to-capitalization will be affected only slightly. The agreement has been rejected by the New Zealand Commerce Commission, which said Shell Overseas, which is acquiring the New Zealand assets, will have too much control of the country's natural gas market. New Orleans-based Hibernia Southcoast Capital Inc. reverted its Apache earnings estimates to a preannouncement position-Buy/Strong Buy and a target of $75. Roderick Deane, chairman of Fletcher Challenge, said, "We are extremely disappointed with this development...We would still like to see the Shell and Apache transaction completed, and are hopeful that Shell and the commission can find a way forward so that we can complete the deal." Apache reported that Shell will find a solution to move the deal forward. -Petroleum Finance Week