According to recent news, Newfield Exploration Co (NYSE:NFX) is weighing a sale of its international offshore assets in Malaysia and China. The company is now seeking certainty and growth from its onshore projects in North America, in such formations as the Uinta, Cana Woodford, Williston, and Eagle Ford. In September 2012, Newfield also divested its assets in the Gulf of Mexico (GOM) for $228 million.
However, Newfield Exploration Co (NYSE:NFX) does not re-invent the wheel. Several major players have already done the same, by focusing on their onshore North American assets and selling the international ones. For instance, Devon Energysold its Brazilian assets one year ago to focus on its North American properties.
The horizontal drilling, coupled with hydraulic fracturing, have boosted the shale oil and gas production in North America. This increased oil and gas production has also revived several sectors of the American economy, pushing the unemployment rate down significantly during the last two years. This has lead Newfield to believe that it can raise its production from its U.S. onshore properties, avoiding the high exploratory costs of risky offshore drilling.
Rising debt
However, there is one more reason that makes Newfield Exploration Co (NYSE:NFX) seek a buyer for its international assets. The company’s cash resources are depleting, falling from $656 million in Q2 2012 to $88 million in Q4 2012.
The debt-equity ratio has also deteriorated, going from 0.72 in Q1 2012 to 1.09 in Q4 2012. The stock’s performance is indicative of this fundamental deterioration, and the stock is a laggard despite Dow’s recent new highs.
After all, I expect Newfield to pay down some of its long-term debt once the deal is done. It will be a strategic mistake if the company uses all the proceeds to fund its growth going forward.
The company’s operating cash flow remains consistently positive, which helps Newfield from triggering a fire-sale price for its international properties. What is a fair price for these assets then?
Recent offshore deals
Before estimating Newfield Exploration Co (NYSE:NFX)’s international assets, let’s check out some other offshore deals first:
1) In September 2012, EPL Oil & Gas Inc (NYSE:EPL) acquired offshore assets in the GOM from Hilcorp for $550 million, paying $55,000/boepd (50% oil) and $15.16/boe of proved reserves.
2) In May 2012, EPL Oil & Gas also acquired offshore oil and natural gas interests in GOM from W&T Offshore for $32.4 million. The acquired assets were producing 960 boepd (52% oil) and had proved reserves of 1 MMboe (51% oil). That said, EPL paid approximately $34,000/boepd and $32.4/boe of proved reserves.
3) In February 2012, SandRidge Energy Inc. (NYSE:SD) acquired Dynamic Offshore Resources, a private oil and gas company with properties located mostly in the shallow waters of the GOM. SandRidge paid $1.28 billion for 25,000 boepd (50% oil) and proved reserves of 62.5 MMboe at the end of 2011. In other words, SandRidge paid $51,200/boepd and $20.48/boe of proved reserves.
4) In late 2012, Plains Exploration & Production Company (NYSE:PXP) paid BP $5.55 billion for deep-water oilfields in the GOM. These fields produced 59,500 boepd (84% oil and liquids) and Plains paid $93,280/boepd.
5) Coastal Energy (TSX: CEN), a Houston-based explorer of oil off Thailand’s shores, rejected few weeks ago a takeover proposal from Indonesia’s state owned PT Pertamina.
Coastal Energy operates mostly in the Gulf of Thailand, and PT Pertamina’s offer valued Coastal at $2.7 billion, including debt. Coastal produces approximately 24,000 boepd (90% oil) currently, and has 149.1 MMboe 2P reserves. This means that PT Pertamina was willing to pay $112,500/boepd and $18.1/boe of 2P reserves.
Newfield’s offshore assets
Newfield’s international assets are about 925,000 net acres offshore Malaysia, and about 290,000 net acres offshore China. These assets hold 6% of total company’s proved reserves (December 2012) which translates into 34 MMboe.
Newfield’s net production from its international operations was 31,000 boepd in Q4 2012. The good thing is that Newfield’s international production is heavily oil weighted, and is sold at Brent pricing.
Based on the aforementioned deals, the average transaction metrics were approximately $47,000/boepd and $17.6/boe of proved reserves, for a balanced mix of liquids and natural gas in the total production. If the production was heavily oil-weighted, the average transaction metric rose up to approximately $103,000/boepd.
After all, the best case for Newfield’s international assets gives a price tag of approximately $3 billion, and the worst one calls for $1.6 billion, based on the current production volumes. Based on a proved reserves scenario, the highest estimated price is around $1 billion, and the lowest one is nearly $650 million.It is clear that the average price is lower in the latter scenario, due to the small quantity of proved reserves. It is also worth noting that the average price from these two different valuations is around $1.5 billion.
Conclusion
To me, Newfield Exploration Co (NYSE:NFX) must reject any offer lower than $1.5 billion. Anything less than $1.5 billion will be a big failure, and anything over $2.5 billion will be a big success. I hope that Newfield will sell its assets at the right price, and its actions will not initiate several lawsuits by shareholders claiming the price was too low.
The article Newfield Exploration: How Much Can it Get for its International Assets? originally appeared on Fool.com and is written by Nathan Kirykos.
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