Though Houston-based independent exploration and production company Apache (APA +3.61%) meaningfully reduced its exposure to Egypt by selling a minority interest in its Egyptian operations to China's Sinopec (SNP +0.00%) last year, it still has a massive presence in the country.
Given continued social unrest in Egypt -- highlighted by recent clashes between government security forces and members of the Muslim Brotherhood -- it may make sense for Apache to exit its Egyptian operations entirely. Not only would such a move virtually eliminate geopolitical risk from the company's portfolio, it would also enable Apache to further reduce debt, expand its share buyback program, and focus on low-risk, high-return assets in the U.S.
Photo credit: Linn Energy.
Apache's exposure to Egypt
Last year, Apache took a huge step to reassure shareholders that it was reducing its exposure to Egypt by selling a one-third minority stake in its oil and gas business there to Sinopec for a cash consideration of $2.95 billion. However, even after this deal, Apache's exposure to Egypt is probably bigger than most investors realize.
Of the $2.8 billion in oil production revenue the company reported in the first quarter of 2014, Egypt accounted for $846 million, or about 30%. The North African nation was the second-largest contributor to first-quarter oil revenue after the U.S, which accounted for 39%. For the full-year 2013, Egypt accounted for 19% of Apache's total oil and gas production and represented about 10% of the its total proved reserves.
Egypt's role in Apache's portfolio actually seems to be growing, with the company planning to develop multiple leases this year and accelerate horizontal drilling activity in the Abu Gharadig and surrounding fields. It also plans to further develop the Matruh and Shushan basins based on encouraging first-quarter test results from two separate exploration wells. With roughly 72% of its Egyptian acreage undeveloped, the company sees major opportunities to use horizontal drilling to unlock new plays.
Apache's Egyptian operations, located in a remote part of the Western Desert, have been largely unaffected by the political and social crises that have plagued the nation since 2011. However, as Apache noted in its 2013 10-K, a further deterioration in Egypt's political, economic, and social conditions that leads to changes in laws, export restrictions, expropriation of the company's assets, and/or forced renegotiation of existing contracts could significantly impact its operations in the country.
Better options elsewhere
Given the current situation, I'm tempted to ask this question: Why not just go all the way and sell the entire Egypt oil and gas business? If Apache can receive a fair price, it could use those proceeds to further reduce debt, buy back even more of its stock, and accelerate activity in its Permian and Central region operations.
Such a move would, in one fell swoop, essentially eliminate geopolitical risk from the company's portfolio, while allowing it to focus on highly profitable, liquids-rich opportunities right here in the U.S. Perhaps the main issue would be actually receiving a fair price for the assets: Most other U.S. companies have also been busy divesting riskier assets in the Middle East and Africa to focus on lower-risk North American opportunities and therefore wouldn't be part of the buyers market.
For instance, ConocoPhillips (COP +2.51%), has divested its international operations in Kazakhstan, Algeria, and Nigeria in order to focus on the Bakken, Eagle Ford, and Permian Basin, while Occidental Petroleum (OXY +4.62%) is marketing a minority stake in its Middle East and North African operations as part of a broad restructuring strategy to reduce geopolitical risk and focus on its most promising opportunity in the Permian.
But Chinese state-owned oil companies such as Sinopec may be willing to acquire a larger stake of Apache's operations. Over the past few years, Sinopec and other Chinese energy entities have dramatically expanded their global presence and are dominant players in global energy mergers and acquisitions.
Investor takeaway
Though much of Egypt's future will depend on the outcome of its ongoing presidential election, in which former military chief Abdul Fattah al-Sisi is expected to win in a landslide victory, the risk of continued social and political unrest in Egypt and the Middle East/North Africa region in general may simply be too high for Apache to justify maintaining or expanding operations there. Apache's capital may be put to better use right here in the U.S., where the company has more than a decade's worth of drilling opportunities.
