Exxon's Trash Is Apache's Treasure

While the sale gives the smaller player, Apache, a nice piece of real estate to work off of, it gives Exxon the opportunity to unload to streamline its portfolio -- while pocketing a bit of extra change that could prove useful on a rainy day.

"I like to think of there being a food chain in this industry," says Argus Research analyst Phil Weiss.

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While Exxon had little use for these properties and was better off selling them, Apache, a much smaller player than Exxon, is likely to be able to get a lot out of these assets.

"The majors discover fields and produce as long as the number of barrels is high," says Argus Research analyst Phil Weiss. "Over time, depletion sets in and production levels become lower. While there are techniques that can be used to maintain production or stem decline, the amount of resource -- in terms of both people and capital -- is no longer worthwhile to the major. The result is they sell the asset to a smaller company to which the production is more relevant."

Sterne Agee analyst Tim Rezvan agrees that Exxon may feel that it has better opportunities elsewhere, such as the Middle East or the Gulf of Mexico. Given that the oil major produces over four million barrels of oil equivalent per day, divesting 29,000 barrels of oil-equivalent is a "drop in the bucket -- 0.7% of total volumes to be exact."

"This is just a typical asset portfolio rationalization transaction for Exxon," MKM Partners analyst Curtis Trimble added.

Meanwhile, Apache will likely be "far more capable and motivated" to work these assets and optimize their productivity than Exxon, says Trimble.

Apache says it's eying a 54% output increase with the North Sea purchase.

While Sterne Agee analyst Michael McAllister doubts that Apache would be able to reach the at least 100 million barrels of oil equivalent (mboed) a day that Exxon was producing from these North Sea fields -- it would take a lot of capital and effort to reach those levels and the tax regime changes make economic forecasting onerous -- he does think that Apache would get to start with a level of 28 mboed of production.

"With some capital infusion and higher attention, they optically grow the production where Exxon would just be getting back to where it was," said McAllister.

Raymond James analyst Stacey Hudson thinks Apache is getting Exxon's assets at a pretty good deal.

The purchase price equates to $61,185 per flowing barrel of oil equivalent (boe) a day of production compared with roughly $100,000 per flowing barrel of oil equivalent a day for Apache's Permian Basin oil and gas deal in West Texas over the past one-and-a-half years, says Hudson.

"A general rule of thumb is that to find and develop a barrel, it can cost a third of what the prevailing price a barrel is selling at," says McAllister. "In this case the cost to find and develop these reserves was $26 per boe -- well below the conventional thinking, with Brent trading above $100 per barrel."

Weiss of Argus Research,however,thinks that the prices that Apache's paying for Exxon's legacy North Sea assets may seem a tad on the high side at first glance. Together, the $60,000 per flowing barrel and $26 per barrel of proven reserves that the company is paying is above its current valuation as well as the value Weiss would associate with production and reserves, he says.

Rezvan thinks it's likely that the $1.75 billion Exxon gains from its sale to Apache will go towards its $20 billion plus capital program.