Stock market analysts are already lining up to weigh in on Apache Corp.'s $1.8-billion purchase of select oil fields in the North Sea. But is the deal a good one for Apache investors? A comparison of similar deals says the answer may be a positive one, but only if Apache stays on its current track.

The story starts on September 21, 2011, when Apache (Stock Quote: APA) announced it had agreed to purchase ExxonMobil Corp.'s Mobil North Sea LLC assets – including the Beryl field and related properties – for $1.75 billion. The all-cash deal is expected to close at the end of 2011.

Some key elements to the deal include:
  • The North Sea fields boast current net production of approximately 19,000 barrels of oil and natural gas liquids and 58 million cubic feet (MMcf) of gas per day.
  • At year-end 2010, estimated proved reserves totaled 68 million barrels of oil equivalent.
  • The deal should boost Apache's North Sea production by 54% and proved reserves by 44%.

The assets to be acquired include: Operated interests in the Beryl, Nevis, Ness, Nevis South, Skene and Buckland fields; 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.

It's the second foray into the region in eight years for Apache, and the company obviously feels that the drilling opportunities represent some low-hanging fruit for the company and its shareholders. "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," notes G. Steven Farris, Apache's chairman and chief executive. "There is a portfolio of low-risk exploitation projects, and we believe the complex structural setting holds reserve upside."

Investors weren't sure what to make of the deal, as Apache's stock price slid from $96 to $82 per share in the five trading days since the deal was announced (although it did finish at $86 per share at the end of the fifth day's trading). That suggests a volatile short-term trading window, and at the lower end of the $82-to-$134 trading band during the past 12 months.

But things may not be as anxious as investors might think. After the North Sea buy, Apache jumped right in and sweetened the ante for those apparently discouraged shareholders, declaring a regular cash dividend at a rate of 15% per share (6% for preferred stock investors--about 75 cents per share compared to Apache's common stock).

Analysts seem to like both moves. Deutsche Bank, for instance, immediately upgraded Apache to a Buy status. And the median share price target, according to Thompson/First Call, is almost 75% higher than the current stock price, at $142 per share.

Of all analysts surveyed by Thompson, 12 now rate Apache as a Strong Buy while 10 see it as a Buy and five analysts have placed a Hold on the stock. None of the analysts surveyed by Thompson have either an Underperform or Sell rating on Apache stock.

If there is some consternation among investors, it's the price that Apache paid Exxon for the North Sea drilling sites.

According to Michael McAlister, an analyst at Sterne, Agee & Lynch, the $1.75-billion payout by Apache is about four times the price per unit of proven reserves culled by Apache in a 2003 purchase in the same area from British Petroleum (Stock Quote: BP).

McAllister also notes that Brent crude oil, produced in abundance in the North Sea, is priced at about 3.6 times higher than it was in 2003, when Apache made the BP deal. Thus, he concludes, the Exxon purchase and the BP purchase don't generate an apples-to-apples comparison, as some Wall Street professionals have suggested. As a matter of fact, the 2003 deal proves that Apache knows what it’s doing in the region, and has the ability "to take over a mature field in the North Sea from a major and exploit it."

Wall Street energy analyst Shelley Lin agrees, calling Apache an "undervalued stock," and notes that beefing up its oversea drilling operations is a big net positive for the company, given that it derives 60% of its oil revenues from international markets.

In commentary published on September 23 by the financial web site Seeking Alpha, Lin says that it's that balance between natural gas in North America and crude oil in the North Sea that makes such a compelling case for Apache.

Then there's this from Lin:

The company has a strong balance sheet, with a debt ratio of 12% as of June 30, 2011. During the fourth quarter of 2008 when oil prices tanked to $36 per barrel, the company took an impairment charge of $3.6 billion (i.e. net of tax), and in 2009, it took another impairment charge of $1.98 billion (i.e. net of tax). These charges are nonreversible even after oil prices have recovered, so my view is that even if we have another economic downturn and tumbling oil prices, Apache’s balance sheet is not likely to take further major hits.

Lin is calling for an earnings-per-share rate above $3 for the current quarter, a moderate rise over the consensus third-quarter estimate by analysts of $2.83 EPS with a target price of $144 per share.

Other stock-monitoring firms are equally bullish. Both Morningstar and Standard & Poor's have tabbed just nine stocks with 5-star ratings that made both company's lists this month (Morningstar listed 124 5-star companies, while S&P listed 93). Apache was one of those stocks, with S&P estimating that the company's stock price will rise to $145 within a year, while Morningstar pegs Apache stock to rise to $150 during the same time period.

That's a tall order, but also a good sign of what Wall Street research firms think about Apache these days.

Right now, especially with its North Sea acquisition, Apache's arrow is pointing upward. The question is, will investors follow?

Offshore