Morgan Stanley was on the E&P acquisition scene in July with involvement in two deals totaling more than $800 million. In one deal, Morgan Stanley showed up at Shell Exploration & Production Co. (Sepco) with Apache Corp. for its total $500-million acquisition of 26 shallow-water Gulf of Mexico fields covering 50 blocks (approximately 209,000 acres) and interests in two onshore gas plants. Morgan Stanley put up $300 million for an overriding royalty interest in some of the lower-risk reserves, from which Apache is to deliver 68.4 billion cu. ft. of gas equivalent to Morgan Stanley during the next four years. Houston-based Apache put up $200 million and will own the assets. Apache doesn't get to book the reserves associated with the Morgan Stanley portion of the deal; however, Apache gets the remaining reserves at the end of the four-year period. The reserves total 124.6 billion cu. ft. of gas and 6.6 million bbl. of oil-for a transaction cost of approximately $1.22 per thousand cu. ft. of gas equivalent to Apache. Operatorship and 91% of production comes with 15 of the fields. Production net to its interest is expected to average 70.4 million cu. ft. of gas and 4,600 bbl. of oil per day for the remainder of 2003. Apache retains all of the potential upside from the assets. The properties include 107 active wells and 17 major production platforms. "These assets have been capital-constrained for several years," says Steven Farris, Apache chief executive officer and president. "Just as with the Gulf of Mexico property package we purchased from Shell in May 1999, we plan to invest money to maximize production and add new reserves." Apache recovered 91% of its investment in the 1999 deal by year-end 2002, he says, and still had 74% of the proved reserves that were booked upon the acquisition. He adds that Morgan Stanley's acquisition of the low-risk reserves "enables us to concentrate our capital and abilities on adding reserves and value to mature fields." The overriding royalty interest is also known as a "volumetric production payment" (VPP), which is payment in the form of product-oil and/or gas-and is a popular acquisition-finance tool that has not been used much lately, with the departure of Enron, Mirant, Aquila and others from the VPP-backed-loan business. In another deal, Morgan Stanley's private-equity business Morgan Stanley Capital Partners affiliate Triana Energy Holdings Inc., Charleston, W. Va., agreed to purchase the NiSource Inc., Merrillville, Ind., E&P subsidiary, Columbia Energy Resources Inc., for $330 million. With Columbia comes 1.1 trillion cu. ft. of gas reserves. Triana will assume the approximately 94 billion cu. ft. of gas Columbia has promised under existing forward-sales contracts through 2006. The deal, combined with NiSource's sale of its New York E&P assets earlier this year, is NiSource's exit from the E&P business. Columbia's assets are in the Appalachian Basin, where Triana operates. "In Triana and Morgan Stanley Capital Partners, we have found a well-capitalized buyer experienced in the Appalachian Basin," says Gary L. Neale, NiSource chairman, president and chief executive officer. "We believe that, including today's sale, the New York State transaction and applying current market value to the 94 billion cu. ft. of gas to be delivered against the remaining forward-sales obligations, we have obtained the equivalent of approximately 85 cents per thousand cu. ft. for our Appalachian E&P assets." Credit Suisse First Boston represented NiSource in the transaction. Dresdner Kleinwort Wasserstein provided an independent fairness opinion. -Nissa Darbonne