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Apache pays $1.75B for Exxon North Sea assets

by Claire Poole | Published September 21, 2011 at 6:00 PM

As part of its strategy of eking value out of assets other companies no longer want, Houston oil and gas explorer Apache Corp. announced Wednesday, Sept. 21, it agreed to buy Exxon Mobil Corp.'s assets in the North Sea for $1.75 billion.

The assets are part of Mobil North Sea LLC and include the Beryl, Nevis, Ness, Nevis South, Skene and Buckland fields, which produce 19,000 barrels of oil and natural gas liquids and 58 million cubic feet of natural gas per day and had proved reserves of 68 million barrels of oil equivalent at the end of 2010. The assets also include an operated interest in the Beryl/Brae gas pipeline and the Sage gas plant, non-operated interests in the Maclure, Scott and Telford fields and Benbecula (West of Shetlands) exploration acreage.

Apache expects to close the transaction by the end of the year, boosting its North Sea production by 54% and proved reserves by 44%.

The buyer said production from the Mobil fields will also boost the percentage of its output indexed to Brent crude oil prices, which are higher than oil prices in the U.S.

The transaction must clear regulators and preferential rights holders and Apache intends to fund it with cash.

Apache chairman and chief executive G. Steven Farris said in a statement that these "major legacy assets" will expand Apache's presence in the North Sea. "They bring us significant remaining life, high production efficiency and quality reservoirs -- the best North Sea assets we've evaluated since acquiring the Forties Field in 2003," he said. "There is a portfolio of low-risk exploitation projects, and we believe the complex structural setting holds reserve upside."

While the price for the assets is above Apache's own valuation ($61,000 for each flowing barrel of oil, versus $57,600 for Apache), analysts at Tudor, Pickering, Holt & Co. Securities Inc. wrote in a morning note that the deal is more accretive on a cash flow basis and will boost Apache's 2012 cash flows by 6%. "[The] bet is [the] company will repeat Forties value creation and squeeze incremental reserves from large/mature field," it wrote.

John Abbott, an analyst at Pritchard Capital Partners LLC, wrote in a report that the centerpiece of the deal is Beryl field, which is the sixth-largest oilfield in the U.K. North Sea with estimated ultimate recovery of 800 million barrels of oil and 1.6 trillion cubic feet of gas. He noted that before the acquisition, Apache hadn't added any additional capital to its original $850 million allocation to programs in the area. "Clearly, APA's investment in Beryl suggests they believe there is still upside in the North Sea," he wrote.

Farris said on a conference call with analysts and investors that the reason Apache hadn't added to its North Sea program was because it hadn't found the right assets. "The transaction is a major step in building our North Sea business," he said.

UBS said in a report that Apache's effective cash cost for the deal will be just half the announced $1.75 billion deal price tag because it will benefit from associated tax deductions that can be applied to its existing acreage in the area. If Apache's effective cash payment is $875 million, then the properties' output would be valued at $30,000 barrels of oil equivalent per day, half of Apache's valuation, UBS figured.

Since acquiring the Forties Field in the North Sea from BP plc in 2003 for $630 million, Apache has drilled about 100 development wells. The company said it has invested $3.2 billion, produced 161 million barrels of oil equivalent -- more than the proved reserves at the time of the acquisition -- and added an estimated 171 million barrels of oil equivalent in new reserves. It said the Forties Field's second-quarter net production averaged 56,985 barrels of oil per day, up from 33,000 barrels per day in the second quarter of 2003 after Apache assumed operations.

Apache said it will take on the Exxon Mobil employees supporting the assets, which will fall under Apache North Sea Ltd. regional vice president and managing director James House.

A source said the deal's legal work was handled in-house.

Apache is known for buying up assets that other oil and gas companies don't want and squeezing more production out of them through the use of seismic data and technology. Last year it bought properties in the Gulf of Mexico from Devon Energy Corp. for $1 billion and assets in West Texas, Egypt and Canada from embattled BP for $7 billion as well as Mariner Energy Corp. for $2.4 billion.

Like other major oil companies, Irving, Texas-based Exxon Mobil has been shedding older, less profitable assets to independent oil and gas companies, more recently turning its focus toward shale exploration and production in the U.S. and Europe and deepwater drilling in the Arctic with new Russian partner OAO Rosneft. Last month it sold nearly all of the Gulf of Mexico properties owned by unit XTO Offshore Inc. to Riverstone Holdings LLC-backed Dynamic Offshore Resources LLC for $182.5 million.

ConocoPhillips Co., Total SA, BP and Royal Dutch Shell plc are also trying to sell their North Sea properties to focus on more profitable prospects around the world and EnQuest plc and Centrica plc have said they would be interested buyers. But decommissioning costs and an increased U.K. tax on production have put a damper on dealmaking there. Farris said Apache would assume the liability, which is estimated at $495 million.

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Claire Poole

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