Investors are getting even more of what they say they want from Apache (NYSE:APA), as this large independent oil and gas producer has reached an agreement to sell down its stake in Egypt. Due in no small part to the significant increase in political/operating risk in Egypt, many shareholders and analysts had been vocal in calling for Apache to reduce its exposure to the country. Although it sounds like Apache got a reasonable deal, I am skeptical that it's really going to change opinions on this company as it goes through a restructuring of its operations.
Selling A Third Of Egypt At A Reasonable Price
Apache announced Friday that it had reached an agreement with Sinopec (NYSE:SNP) that would effectively see it selling one-third of its Egyptian interests for $3.1 billion in cash.
This is not a very surprising development, nor is the reaction to it. Analysts who liked Apache prior to this announcement are out in print this morning saying that Apache got a good price for the asset. On the other side, analysts who were bearish on Apache are out talking down the deal and pointing out that the deal price proves that investors have been overestimating the value that Apache could unlock from asset sales.
As I'm in the bullish camp on Apache, I guess it's not surprising that I see this as a solid deal on balance. Based on the production levels of 2013 and the estimated production for 2014, it looks as though the sale to Sinopec valued the Egyptian asset at at least 4x cash flow, while Apache itself is trading in the low 3x range. At a minimum, then, it would seem to suggest that the market is valuing all of Apache as worth less than its most concerning asset.
Of course, a key issue with the valuation is that we don't have all of the figures we need to really assess what Egyptian production is worth. I have seen estimates on future cash flows from Apache's Egyptian production range from $1.5 billion to over $2 billion. If the lower number is accurate, then working backwards does indeed produce a discount rate (in the neighborhood of 13%) that highlights the above-average risk and below-average value of Apache's Egypt holdings.
Could More Activity Be On The Way?
While almost all of the attention on the Apache-Sinopec deal concerns the price that Apache got, the use of those proceeds (likely an accelerated/expanded buyback and debt repayment program), and the implications for Apache's underlying value, that's not all there is to it. Apache has also formed a global joint venture with Sinopec to “jointly pursue upstream oil and gas projects”.
Now, it's anybody's guess as to what that really means and how significant it will be to Apache's future. But given how badly some investors want Apache to just focus on its onshore U.S. assets, any talk of further overseas activity could be seen as a negative by some.
A World Of Buyers And Sellers
Although the global energy market is never static, it feels like there's more activity now than in recent times. Companies like Apache, Tullow Oil (Nasdaq: TUWOY), Anadarko (NYSE:APC), Chesapeake (NYSE:CHK), and Occidental (NYSE:OXY) have been looking to sell down ownership of productive assets, while others like OMV (Nasdaq:OMVKY), Sinopec, and CNOOC (NYSE:CEO) look to use M&A to expand their production in the coming years.
At a minimum, this activity ought to keep things interesting in the oil sector, while the transaction between Apache and Sinopec could be seen as a relative positive for Occidental – another company looking to sell down its exposure to the Mideast.
The Bottom Line
I liked Apache before this deal, and I still like it after. While I'll admit I do have a predilection to “scratch and dent” stories in the energy space, I think Apache gets way too little credit for the quality of its onshore U.S. assets (which should make up about 60% of 2014 production) and its proven history of value creation. While the company's acquisition binge was dilutive, management has reversed course and I think these shares could be a long-term outperformer with its new, leaner profile.
Disclosure – At the time of writing, the author did not own shares of any company mentioned in this article.