To finance its Rocky Mountain exploration and pay down debt, Newfield Exploration Co. has agreed to sell all of its natural gas-heavy properties in the shallow waters of the Gulf of Mexico (GOM) to McMoRan Exploration Co. for $1.1 billion. Newfield, which plans to keep its deepwater leases, said the sale was one of several divestitures planned over the next few months.
The Outer Continental Shelf properties, 70% weighted to natural gas, include 125 fields on 146 offshore blocks that are currently producing 270 MMcfe/d; Newfield's net production from the assets in the first half of 2007 is expected to be 46 MMcfe/d. Proved reserves are estimated to be 327 Bcfe. Offshore leases included in the purchase agreement total 1.3 million gross acres.
In addition to the shelf properties, McMoRan will assume ownership in Newfield's ultra-deep acreage in its Treasure Island and Treasure Bay exploration program. Newfield will retain a working interest of 10-25% in the acreage, which encompasses 85 lease blocks. In addition, McMoRan will join Newfield in a 50-50 joint venture on Newfield's primary term shelf acreage. This venture will cover 19 lease blocks, or nearly 100,000 gross acres.
In a conference call to discuss the purchase Thursday, McMoRan Co-Chairman Richard Adkerson said the transaction will increase the New Orleans-based producer's reserves fivefold to more than 400 Bcfe and give it a production rate of more than 300 MMcfe/d. McMoRan's GOM operations produced 70 MMcfe/d in the first quarter.
As long as natural gas prices remain stable or move higher, the deal is a positive for McMoRan, said Stanford Group Co. energy analyst Philip Dodge.
"It's going to be a whole new company," Dodge wrote. "It's an aggressive but smart move. McMoRan knows the geological setting of the Gulf of Mexico shelf better than anybody in the business...so they are eminently qualified to evaluate the exploration prospect on that acreage."
For Newfield, the transaction gives it some leverage to spend more on its domestic operations, where it is now focused. Last month, Newfield spent $575 million to acquire Stone Energy Corp.'s Rockies assets (see NGI, May 21).
The deal, said Newfield CEO David A. Trice, "is a significant step in our on-going plan to create a longer-lived reserve base with sustainable and predictable production growth. The sale of our shelf properties is the first in a series of planned divestitures that also includes our assets in Bohai Bay China, the North Sea and select properties in Texas and Oklahoma."
The sale to McMoRan represents about 25% of Newfield's total production. While it will affect cash flow in the near term, longer term, the company will have a longer-life asset base. Most of the planned divestitures are expected to be completed in the third quarter.
According to SunTrust Robinson Humphrey/Gerdes Group energy analyst John Gerdes, the transaction value per the reserve number provided by McMoRan is at $3.36/Mcfe, which is about 5% below the median of recent transactions in the GOM.
"The transaction will be a little dilutive to cash flows initially," Gerdes wrote in a note. "But now Newfield can focus on their bread-and-butter assets." Newfield's capital productivity, per unit operating expense and general and administrative expenses "should improve about 10%" with the sale. "Capital spending related to the divested assets is approximately $200 million per annum. Notably, the divestiture adds approximately a year of reserve life."
Standard & Poor's Ratings Services analyst Paul B. Harvey wrote that the sale "continues Newfield's transformation from a pure-play offshore Gulf operator to one with a more balanced asset portfolio." He said Newfield "continues to refocus on longer lived and more predictable onshore assets."
"Pro-forma for these transactions," said Trice, "our reserve life should increase to approximately 11 years and we will have visible production growth from the development of our in-hand assets. Newfield has a long history in the Gulf of Mexico and we will continue to focus on growing our deepwater portfolio where we have an interest in three producing fields and two field developments under way that will create future production growth."
Trice noted that "McMoRan has acquired some very good properties in this transaction. But the most valuable assets will be the people who will join McMoRan's team. Their efforts are responsible for Newfield's success in the Gulf of Mexico. We will be retaining our shelf exploration team and we will continue to explore and drill shelf prospects."
Newfield expects to utilize Internal Revenue Code Section 1031 Tax Deferred Exchange rules for the sale of its shelf assets and its recent Stone Energy acquisition. As a result, after-tax proceeds from the sale of the GOM assets are expected to be more than $1 billion. Utilization of Sec 1031 rules creates nearly $30 million of additional value in these transactions, Newfield said. The effective date of the transaction is July 1, and the sale is expected to close in July.
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