Is Apache’s Presence in Egypt Cause for Concern?

One of the main reasons shares of Apache (NYSE: APA  ) , the Houston-based oil and gas producer, have underperformed its peers recently is the company's large exposure to Egypt, a nation that continues to be roiled by political and social unrest.

Surprisingly, however, the company's operations in Egypt have continued largely uninterrupted despite the recent violence. Still, there could be another threat to Apache and other foreign companies operating in the North African nation: the Egyptian government's mounting arrears. Let's take a closer look at what impact this could have on Apache and its shareholders.

Egyptian government's growing arrears
Some estimates indicate the Egyptian government owes foreign energy companies more than $5 billion for the oil and gas they produce, much of which is overdue. BG Group (NASDAQOTH: BRGYY  ) , for instance, claims it was owed $1.3 billion last month, while BP (NYSE: BP  ) , one of the largest producers of natural gas in Egypt, said Cairo owed it $3 billion as of the end of last year, the Financial Times reported.

The government's failure to pay on time hasn't had much impact on Apache because the vast majority of the company's revenue in Egypt comes from oil  as opposed to natural gas. By contrast, BP and BG Group are more heavily focused on producing gas, whose prices are set artificially low by Egypt's government.

Impact on Apache so far minimal
Furthermore, Apache has an insurance policy with the Overseas Private Investment Corporation (OPIC), an "independent" U.S. government agency, and other international insurers for its Egyptian assets, which provides roughly $1 billion of coverage for "losses arising from confiscation, nationalization, and expropriation risks."

Apache also has a separate agreement with OPIC, which provides about $300 million for losses arising from "(1) non-payment by EGPC of arbitral awards covering amounts owed Apache on past due invoices and (2) expropriation of exportable petroleum in the event that actions taken by the government of Egypt prevent Apache from exporting our share of production."

In addition to these insurance policies, Apache's tremendous bargaining power over the Egyptian government shouldn't be overlooked; the company is the largest U.S. investor in the North African nation. In the company's second-quarter conference call, CEO Steve Farris explained:

"The importance to Egypt of Apache or the importance of Apache being in Egypt it is very big. We are the most active driller. We drill more wells than everybody else combined in the Western Desert. And I say this and it's a factual statement and I understand the uncertainty, but from the way we see it, would it be very difficult for Egypt to change our tax regime or change our position, because we are their oil growth in Egypt going forward."

Reduced risk
In short, I think Apache's exposure to an increasingly unstable Egypt may not be as risky as some commentators believe given the company's extensive insurance policies and bargaining power over the Egyptian government. This is especially true after the recent sale of a third of its Egyptian assets to Chinese oil giant Sinopec (NYSE: SHI  ) , which is expected to reduce the share of Apache's oil and gas production from Egypt to 15 %, compared to about 20% currently and roughly 25% in 2010.

The transaction with Sinopec also highlights a company that is determined to validate the value of its Egypt business to shareholders by actively rebalancing its portfolio and diversifying its risk. Combined with its strategy of returning cash to shareholders through repurchasing up to 30 million shares, this should help quell any lingering concerns Apache shareholders may have over the company's continued presence in Egypt.

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