Apache (NYSE:APA), the Houston-based independent energy exploration and production company, recently announced that it has inked a deal to sell its oil and gas properties in western Canada for $374 million. Let's take a closer look at what impact the deal might have on Apache and its shareholders.
Apache to sell gas-rich Canadian assets
Apache said on Monday it will sell 328,400 net acres of mostly dry-gas producing properties located in the Ojay, Noel, and Wapiti areas of western Alberta and British Columbia, to an undisclosed buyer.
However, Apache will hold on to its 100% working interest in the Wapiti area's liquids-rich Montney play, which offers higher rates of return and more predictable production growth -- in line with the company's new strategy. To improve shareholder returns, Apache has been concentrating on more profitable liquids-rich opportunities in North America, while divesting riskier foreign assets.
Production from the Canadian properties to be divested averaged 101 million cubic feet of natural gas and 1,500 barrels of liquids per day last year. The transaction is expected to close on April 30, subject to customary post-closing adjustments.
Is it a good move?
The deal looks to be an incremental positive for Apache, raising additional cash that can be used to expand the company's 30-million-share repurchase program. It will also allow Apache to concentrate its drilling program on Montney and other liquids-rich opportunities, including the Permian and Anadarko basins in Texas and Oklahoma, which offer more attractive and more predictable rates of return.
Having found a buyer for its Canadian dry gas assets, and having also recently sold off noncore Argentinian assets to state-owned YPF (NYSE:YPF) for $800 million in cash, Apache's portfolio rebalancing is largely complete. The company has shed some $8 billion worth of assets over the past year, including the sale of its Gulf of Mexico shelf assets for $3.75 billion and the sale of a third of its Egyptian oil and gas assets to China's Sinopec (NYSE:SHI) for $3.1 billion.
These asset sales have greatly bolstered Apache's financial health, allowing it to reduce debt by $2.6 billion last year, repurchase approximately $1.2 billion of its own common stock to date, and boost its quarterly dividend by 25% to $0.25 per share in February. With much greater financial flexibility, Apache can focus on its North American liquids-rich portfolio, which should drive stronger returns over the next several years.
Key drivers of Apache's future growth
Led by strong performance from its Permian and Anadarko operations, Apache's North American portfolio delivered 34% year-over-year liquids production growth last year. In 2014, North American liquids production is forecast to grow 15%-18%. The reason this is so important for the company is two-fold.
Not only do these assets offer extremely strong growth prospects, they also feature some of the strongest rates of return across Apache's global portfolio. As the company continues to drive down operating costs in these regions through additional efficiencies from multiwell pad drilling, returns should continue to improve.
Furthermore, these assets are only in the early innings of their productive capabilities; they will provide the company with several years' worth of highly economical, low-risk drilling opportunities. Apache has already identified some 60,000 remaining drilling locations across its acreage in the Permian and Anadarko basins, which represents well over a decade's worth of inventory at current activity levels.
Why shares of Apache look attractive
While Apache's asset sales over the past year will weigh on near-term production, I think the company's long-term outlook is stronger than ever thanks to its dramatically improved financial health and massive growth opportunities in the Permian and Anadarko basins. With shares trading at a significant discount to peers -- at just under 12 times forward earnings -- now may be a good time for long-term oriented investors to take a bite.