Inside Wall Street: Apache turns Egypt into a plus

The major oil explorer's pact with China and the sale of some of its assets boost the stock's allure.

By Gene Marcial Sep 3, 2013 10:16AM

Oil derricks © Comstock/CorbisApache (APA), a large independent oil exploration and production company, is pursuing a strategy that's uncommon in the industry. It has been raising funds to augment and improve its generation of cash flow through the sale of some valuable assets. The goal: Step up the repurchase of its own shares, execute plans for long-term growth projects, and significantly pull down its debt.


The strategy has caught Wall Street's attention, driving some analysts to upgrade their recommendations on Apache's stock. They are convinced the sale of assets, topped by the sale of part of Apache's operations in Egypt, will unlock more value that should increase the stock's valuation. The properties that Apache is putting on the block are "solid assets that will be sought after by industry players," said Leo Mariani, analyst at RBC Capital.


Apache's plan has prompted it to form a global strategic partnership with China's Sinopec International Petroleum Exploration and Production Corp. to jointly pursue upstream oil and gas projects. Apache has demonstrated a clearly serious policy about completing the sale of properties, including some in the Gulf of Mexico and Canada, Mariani said. And he suspects the company's deepwater operations in the Gulf may soon be announced.


Mariani has therefore upgraded his recommendation on Apache to "outperform" from "sector perform," noting that its decision to sell a 33% interest in its operations in Egypt to China for $3.1 billion will be a 4% accretive boost to the company's net asset value. The analyst also raised his price target on Apache to $99 a share from $93, noting that it represents still a 15% discount to its net asset value. The stock has jumped $7.04, or 8.95%, on Friday Aug 30, already partly reflecting Apache's positive moves. The stock was trading as low as $68 in April.


If the deal with China on the Egypt properties closes, it would allow Apache to redirect its capital expenditures toward lower risk onshore operations in the U.S., increasing its production in the country to 55%, said Michael Kay, analyst at S&P Capital IQ.


That would reduce its output in high-risk Egypt to 15% from 19%. "We think it would cut geopolitical risk while keeping interest in a growing , high-return free cash flow generating asset," he said.


Noting that the sale of part of its Egyptian assets isn't part of its overall $4 billion asset-sale plan, Kay figured that the rest of Apache's Egyptian portfolio after the China deal will be worth about $7 billion.


"We think the market will react positively to the deal metrics," added the analyst, who reiterated his "strong buy" recommendation on the stock. He pointed out that the deal with China makes Apache's operations in the U.S. much more valuable than they are right now, making the stock's valuation a lot more attractive.


Kay sees Apache's cash flow initially rising 11% in 2013, and bump up 8% in 2014, driven mainly by its U.S. production. He noted that the company is directing $2.2 billion in 2013 of cash to long-term growth prospects.


He said Apache will continue its upstream oil and gas business in Egypt. Excluding the impact of the sale of part of its Egyptian operations, the analyst figured the company will earn $8.41 a share this year and $9.32 in 2014, reflecting lower oil prices in 2013 but offset by rising production and natural gas prices. The company posted earnings of $4.92 a share last year on revenues of $16.94 billion.


Apache has operations in six countries -- the U.S., Canada, Egypt, the U.K., Australia, and Argentina. In North America, Apache's operations are focused on the Gulf of Mexico, the Permian region, Anadarko basin, Alaska, and Canada. On December 2014, Apache formed an agreement with Chevron (CVX) to build and operate the LNG and pipeline projects in British Columbia.



gene




Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.

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