As the world's energy needs grow, global demand for liquefied natural gas, or LNG, is expected to double over the next decade, according to Royal Dutch Shell (RDS.A). Hoping to capitalize on this projected trend, several companies have embarked on major LNG projects in places such as Angola, Australia, and Canada.

But oil and gas producer Apache (APA 0.53%) is cutting its stake in one major Canadian LNG project. Has the company become less optimistic about the outlook for LNG or is there another reason behind its decision?

An LNG project located along the Sabine Pass River on the border between Texas and Louisiana. Source: Wikimedia Commons.

Apache to reduce stake in Kitimat
Bloomberg recently reported that Apache plans to reduce its 50% stake in Kitimat LNG, a proposed gas export project in which Chevron (CVX 0.75%) holds the remaining 50% stake in assets that include a two-train liquefaction plant, a major pipeline, and 644,000 gross acres in the Horn River and Liard basins in northeast British Columbia.

Despite the project's massive potential to export North American natural gas to Asian markets from a proposed facility in British Columbia, Apache wants to reduce the $1 billion it initially planned to spend on the venture this year. The reason? The project's ballooning projected expenses clash with Apache's strategic focus on cost-cutting.

Speaking to a handful of reporters last month, Apache CEO Steven Farris said the company can't afford to spend $1 billion on the project right now and has had discussions with a number of prospective buyers that want to purchase a part of its stake in the project. The company has not yet revealed what portion of its Kitimat stake it intends to sell.

This year, Apache plans to reduce its overall exploration and production capital spending by almost 20%, as it seeks to improve its financial performance by focusing on its highest rate of return opportunities. This reduction in spending will allow the company to fund the majority of its capital program through operating cash flow, which means it won't have to take on additional debt.

Apache still invested in LNG
Despite Apache's plans to shrink its stake in Kitimat LNG and increase its focus on liquids-rich onshore U.S. opportunities, it's not completely shying away from LNG projects. The company maintains a 13% stake in the massive Chevron-operated Wheatstone LNG project offshore western Australia, which is slated to come online by 2016.

The project is expected to have a total capacity of 8.9 million tonnes per annum and will be a major cash cow for Apache, along with its operations in Egypt and the U.K. North Sea. The company expects Wheatstone to generate more than $1 billion in annual cash flow starting in 2018. Apache can reinvest that cash in higher rate of return opportunities, namely in Texas' Permian Basin and Oklahoma's Greater Anadarko Basin.

Furthermore, since LNG projects tend to produce at flat levels for extremely long periods of time and much of their production is tied to long-term contracts, cash flow from Wheatstone and Kitimat are extremely reliable. Their production is also linked to oil, as opposed to natural gas, which is much more profitable in the current environment. Roughly 85% of Wheatstone's expected production has already been contracted at oil-linked pricing.

What's next for Apache?
Apache is serious about reining in spending. Over the past year or so, it has shed some $8 billion worth of assets in Canada, the Gulf of Mexico, and Egypt. While these asset sales have affected the company's production levels, they have helped to dramatically improve its financial health by allowing Apache to reduce its debt by $2.6 billion last year and repurchase some $1 billion of its own shares.

Reflecting its improved financial position, Apache entered 2014 with $1.9 billion in cash, no commercial paper outstanding, and a low debt-to-capitalization ratio of 22%. With a much more streamlined portfolio after asset sales, the company can now focus the bulk of its capital on its onshore U.S. assets, which feature much stronger and more predictable rates of return and should drive more profitable growth in the years ahead.