Independent oil and gas producer Apache Corp. (NYSE: APA) has agreed to purchase the North Sea assets of a subsidiary of Exxon Mobil Corp. (NYSE: XOM) for $1.75 billion. The total number of barrels involved in the purchase is not large, but the returns to Apache are likely to be larger than many investors may be expecting.

The acquisition should boost Apache’s position among all US oil and gas companies. The company is currently about the same size as Anadarko Petroleum Corp. (NYSE: APC), and trails only Exxon, Chevron Corp. (NYSE: CVX), ConocoPhillips Corp. (NYSE: COP), and Occidental Petroleum Corp. (NYSE: OXY) when measured by market cap.

Apache has spent more than $12 billion since April 2010 on acquisitions. The company has acquired the shallow water Gulf of Mexico fields of Devon Energy Corp. (NYSE: DVN), the deepwater Gulf fields of Mariner Energy, and a big portion of the North American assets of BP plc (NYSE: BP). The company has boosted production from 647,000 barrels/day to 749,000 barrels/day.

Today’s purchase of the Beryl field and related properties adds 68 million barrels of oil equivalent to Apache’s reserves and about 19,000 barrels/day of production plus 58 million cubic feet of daily natural gas production. The acquisition increases the company’s North Sea production by 54% and its North Sea reserves by 44%.

There are two noteworthy aspects of the deal. First, since Apache bought the North Sea’s famous Forties field in 2003, the company has produced more oil from the field than was estimated to be present at the time of acquisition. And the company has booked reserves above that production that are greater than the reserve barrels it purchased at the time. In other words, the company has more than doubled the reserves in the Forties field while nearly doubling production. These guys apparently know what they’re doing.

Second, the 68 million barrels of reserves are premium-priced Brent crude. Brent crude trades today at a premium of about $25/barrel to WTI, making every barrel of Brent worth nearly 30% more than a barrel of WTI. And because WTI is essentially landlocked within US borders and is rarely traded, Brent is replacing WTI as the global benchmark for crude pricing. That virtually guarantees Apache premium pricing on its Brent barrels for a long time to come.

In 2010, the Forties field yielded about 9% of Apache’s world-wide production and about 13% of the company’s world-wide production revenue. In 2011, Apache is selling all its North Sea production under a term contract with a per-barrel premium to the price of Brent. The addition of the Beryl field only improves Apache’s profits.

Apache’s shares are trading up just less than 0.2%, at $94.68 in late morning trading. The stock’s 52-week range is $91.97-$134.13.

Paul Ausick

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