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Are Apache Corporation’s Asset Sales Now Destroying Shareholder Value?

In an effort to reduce debt and focus on its most profitable North American onshore operations, Houston-based Apache (NYSE: APA  ) has divested more than $8 billion worth of assets over the past year, including assets in the Gulf of Mexico shelf, a third of its stake in its Egyptian operations, natural gas assets in Canada, and all of its energy assets in Argentina. But the company is still not satisfied, recently announcing another major sale in the Gulf of Mexico.

While I was initially surprised by Apache's Gulf asset sale announcement, the sale should prove to be an incremental positive for the company. Not only will it raise significant proceeds without reducing the company's current production, but it also fits well with Apache's strategy of focusing on less capital-intensive projects with more immediate payoffs. Let's take a closer look at why Apache's Gulf asset sale is a net positive and why the company's shares could have big upside.

Photo credit: Flickr/Paul Lowry

Apache to sell Gulf of Mexico interests and assets
On May 8, Apache announced that it will sell its nonoperated interests in the Lucius and Heidelberg development projects, two massive Gulf of Mexico deepwater projects operated by Anadarko Petroleum  (NYSE: APC  ) , as well as 11 deepwater exploration blocks to Freeport-McMoRan Copper & Gold (NYSE: FCX  ) for $1.4 billion. The transaction is expected to close by June 30, 2014.

To be honest, I was surprised by the company's announcement for a couple of reasons. First, Apache has already sold over $8 billion worth of assets over the past year and seems to have accomplished its task of reducing debt, bolstering its balance sheet, and ramping up its share buyback program. I assumed it would now focus overwhelmingly on growing domestic liquids production.

And second, management had indicated that the February Argentina asset sale to state-owned YPF (NYSE: YPF  ) for $800 million in cash marked the end of its asset divestiture program. "[The Argentina] transaction essentially marks the end of a process that Apache began last year to rebalance its portfolio to focus on assets in North America that can grow more predictably combined with international assets that generate substantial free cash flow," said G. Steven Farris, Apache's CEO, in a company news release concerning the sale of its Argentinian assets.

Pros and cons of the Gulf sale
But upon closer review, I think the recently announced Gulf of Mexico sale should actually be an incremental positive for the company. Firstly, the sale won't impact Apache's near-term production at all because it doesn't include any of Apache's producing properties in the deepwater Gulf, which were producing a little over 9,000 barrels of oil equivalent per day as of the fourth quarter.

That's a huge plus since Apache's production has suffered considerably due to the sale of producing properties over the past few quarters. Further, the $1.4 billion in proceeds that the sale will bring in will allow Apache to further reduce its debt, bolster its balance sheet, and buy back more shares without foregoing current production.

But the company is foregoing longer-term production upside. Lucius and Heidelberg, which are operated by Anadarko and are expected to go into service later this year and in 2016, respectively, will each have a maximum production capacity of 80,000 barrels of oil per day. Given Apache's 11.7% and 12.5% interests in the two projects, that means it will be giving up production of nearly 20,000 barrels of oil per day. It is also giving up potential exploration upside by parting with its 11 deepwater exploration blocks. Still, given that the company sees much more attractive opportunities in its North American onshore portfolio, this really isn't a big deal.

Secondly, the asset sale actually fits really well with Apache's new strategy of cutting costs and focusing on high-margin liquids production. By selling its interests in Lucius and Heidelberg and 11 exploration blocks in deeper waters, Apache can focus its efforts on exploration opportunities in shallower water depths of less than 1,000 feet, which feature quicker cycle times, require less capital to develop, and offer more options to bring hydrocarbons to market.  

Investor takeaway
In the long run, I think Apache's portfolio rebalancing will pay off handsomely, allowing it to deliver stronger and more profitable growth in the years ahead. With the company trading at just 12x forward earnings and commanding an EV/EBITDA multiple of less than 4x -- a massive discount to similarly sized North America-focused peers -- I think multiple expansion is imminent and could easily push shares above $100 within the next year or so.

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  • Report this Comment On May 26, 2014, at 8:37 PM, bobdurino wrote:

    Finally, a thoughtful blurb on APA. I fell onto Apache when Barron's published a piece on them in 1989. And as the shark bites I kept returning for more building a nice position. They have never disappointed me. Apache's function in my portfolio provides ready cash without diminishing my ability to backfill later. Yes, it is a piggy bank for a rainy day. Why invest if you can't enjoy it ...

  • Report this Comment On May 27, 2014, at 7:56 PM, stelajohnson84 wrote:

    With these share repurchases programs, the financial metrics of company will definitely improve. Earnings per share, P/E multiple, ROE, ROA and the share price which has been stagnant during recent times, all will be

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Arjun Sreekumar

Arjun is a value-oriented investor focusing primarily on the oil and gas sector, with an emphasis on E&Ps and integrated majors. He also occasionally writes about the US housing market and China’s economy.

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