As political chaos runs rampant through the streets of Egypt, investors have been edgy regarding companies with ties to Egypt. Houston,Texas-based Apache (APA: Charts, News, Offers), a natural gas and crude oil energy company with heavy investments in Egypt, has been in the crosshairs of many bears waiting for the other shoe to drop. Can Apache, which has domestic operations in the Gulf of Mexico, East Texas, the Permian Basin and Anadarko Basin, as well as international operations in Canada, Australia, the U.K., Argentina and Chile, remain profitable and continue riding the spike in crude oil prices despite the vulnerability of its Egyptian exploration and production interests?
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Apache operates under multiple subsidiaries and divisions, which include Apache Canada, DEK Energy, Apache Energy Limited, Apache North America and Apache Overseas. The company’s Egyptian holdings were acquired from a $650 million deal with British Petroleum (BP: Charts, News, Offers), which added four development leases and one exploration concession to its international operations. In 2010 alone, Apache expanded with three major deals with BP worth $7 billion in North America, the Gulf of Mexico and Egypt, which were paid with stock and stock-diluting sales. The move has been mutually beneficial to BP, which needs capital to streamline its downsized business, and Apache, which is aggressively expanding. The deals with BP will potentially increase Apache’s daily oil production by 13% and its reserves by 20%. Analysts have long been concerned that the 42.1 billion market cap company has expanded too quickly and stretched itself too thin, increasing its debt load and diluting earnings per share throughout 2010. Apache needs to expand internationally or start incurring losses, due to the fact that 70% of its North American reserves are running low.
Apache is currently a second-tier oil company in comparison to oil giants such as ExxonMobil (XOM: Charts, News, Offers) or Chevron (CVX: Charts, News, Offers), which restricts its current strategy to the purchase of undesirable reserves in politically unstable regions that the big companies won’t touch. This additional exposure to international politics increases the inherent risk of investing in Apache. Apache also purchases nearly dry reserves at a discount from other companies, using more expensive drilling technologies to drain out the last amount of oil from these “mature” wells. This strategy can be inefficient and unprofitable if the cost of the drilling technology outweighs the remaining reserves in the well. Both these strategies are hardly used by the larger oil companies, which have the large cash reserves and political muscle to purchase ideal reserves. Without a major partner in the oil industry, Apache will have to make do with this current scavenging strategy.
Egyptian unrest against the current ruling regime has put Apache’s newest properties at risk, but the company has attempted to insure investors that business will continue as usual, citing the distance between its oil operations, located in the Western Desert, and the urban centers where violent protests are occurring. Last year, Apache’s Egyptian oil production totaled 152,600 barrels daily, comprising 26% of the company’s total global output. Pessimistic analysts, such as the ones at FBR Capital Markets, have forecast a $2.7 billion loss in market capitalization for Apache due to the unfolding crisis. Crude oil prices have ironically risen, however, on speculation that the Egyptian crisis could send ripples through the Middle East, which has boosted the stock price of Apache’s larger competitors.
In addition to its massive deal with BP, Apache also acquired Devon Energy’s (DVN: Charts, News, Offers) Gulf of Mexico properties in May 2010 for $1.1 billion, which has made Apache the largest oil and gas producer in shallow waters, defined as less than 1,200 feet deep, and safe from upcoming deepwater drilling legislation. These reserves, which cover nearly half a million acres off the coast of Texas, Louisiana and Alabama, potentially hold 83 million barrels of oil. In the same month, Apache acquired Mariner Energy’s (ME: Charts, News, Offers) Gulf of Mexico properties, which produce 63,000 barrels of oil daily, with reserves estimated at 181 million barrels, by paying $2.7 billion upfront and assuming $1.2 billion in debt. These deals set Apache up nicely for a future with high oil prices, but will do little if alternative energy sources, such as shale gas, natural gas, solar or wind power rise to prominence in the coming decade. The stock currently trades at 10.39 times forward earnings and currently pays a quarterly dividend of 15 cents per share.
Other News About APA
Apache Shares Fall on Egypt Turmoil
Bearish investors bet on Egyptian chaos.
Apache claims that the show must go on.
Other Stocks in the News
Shell Moves Staff Out Of Egypt
Shell begins its Egyptian retreat.
BG, Statoil Halt Drilling in Egypt as Unrest Escalates
Other big names join Shell in backing out of Egypt.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
