The price of oil has been rocketing higher in recent weeks. The most recent rise is due to the U.S. reportedly readying military action against Syria in the wake of its use of chemical weapons. However, before Syria became the headline of the day, it was violence in Egypt that had provided a lift to the price of oil.
While rising oil prices are usually good for the stock price of an oil company, that simply hasn't been the case for Apache (NASDAQ:APA). As the number one oil producer in Egypt, the company's stock has actually been held back due to the conflict. Investors had worried that its production in the region would be disrupted, which would affect its profits. Today, Apache is doing something to lessen its exposure to the country by selling a 33% stake in the business to China's Sinopec for $3.1 billion.
This is a pretty surprising turn as Apache's Egyptian asset delivered over 363,000 barrels of oil equivalent production per day last year. All that oil and gas production delivered $2.7 billion in cash flow and the company was only spending about $1.1 billion per year to keep it growing. Basically, Egypt was one big cash cow for Apache.
Yet, in some regards, Egypt was much more than a cash cow for the company. The billion dollars it is spending each year really had been delivering results. Earlier this year the company announced seven new oil and gas discoveries and for the past 17 years the company's production had grown every single year. It's really the type of asset an oil and gas company dreams of, but as violence in the region continues to escalate it was getting to the point where it's much too risky to operate in the country, especially given the vast resources in its much safer North American operations.
The real concern is that Egypt will become for Apache what Libya has become for Marathon Oil (NYSE:MRO). The company has been excluding its Libyan results from its reported numbers because of the uncertainty around sustained production and sales levels. In its last quarter that meant holding back what accounted for almost 10% of its production.
The uncertainty in Libya is due to security concerns for the safety of oil-field personnel. Just this past May BP (NYSE:BP) announced that it was withdrawing some of its non-essential staff from Libya after the UK government advised it to take precautions. BP experienced the dangers first hand as it was the victim of a terrorist attack at its facility in Algeria. The company simply can't put its people at risk of another attack.
For Apache, the risks of operating in Egypt have simply become too great, which is why it makes sense to take some of that risk off of the table by selling a slice of its Egyptian operations. The company is still retaining a lot of the upside if cooler heads prevail and the violence in the region settles down. Meanwhile, it has secured a partner that is voraciously locking up resources, which could provide Apache with an easier exit down the road if it determines the need to fully exit Egypt. The company really is making the best of a difficult situation.