Editor's Note: A previous version of this article overstated Apache's interest in Egypt. The author used consolidated financials and did not adjust for Apache's actual ownership stake. The Fool regrets the error.
Apache Corporation (NYSE:APA), the Houston-based independent exploration and production company, has a huge presence in Egypt. It currently has 50 drilling rigs up and running in the nation's Western Desert, which is as much as all other companies combined.
While Apache doesn't plan on expanding its Egyptian operations, it plans to maintain its current level of activity and production for the foreseeable future. But considering the growing geopolitical risk in the Middle East/North Africa region, could Apache's optimism be misguided?
Apache's exposure to Egypt
Last year, Apache took a major step to reassure shareholders that it would reduce its exposure to Egypt at a time when the nation's geopolitical environment was much worse than it is today. In August 2013, it announced that it would sell a third of its interest in its Egyptian operations to China's Sinopec (NYSE:SHI). The move came shortly after former Egyptian president Mohamed Morsi was ousted from his position following a series of violent protests that eventually led to a coup d'etat.
Today, almost a year later, Apache still remains exposed to Egypt. The north African nation is the second largest contributor to its oil revenues after the U.S. Egypt still represents 14% of Apache's total oil production and about 8% of its total proved reserves. While geopolitical risk is reduced, Apache still has a sizable position here.
"Business as usual"
But despite continued unrest in Egypt, Apache remains undeterred by its exposure to the country and is actually very enthusiastic about its future there. In a recent interview with FuelFix, Apache's general manager and regional vice president for Egypt, Tom Maher, discussed Apache's plans in the country, expressing optimism about its Egyptian operations following the recent election of Abdel Fattah el-Sisi.
"We feel very good about the current president. He was elected by an overwhelming majority. We have a democratic constitution in place. It's an improvement over the previous one that had limited input from the public. I've only been back in Egypt for the last year and a half, but I'm probably more confident now than I have been in the last three years. The message I'd offer is it's business as usual," he told FuelFix.
Another major reason why Apache remains confident about Egypt is because of the strong working relationships it has built with Egyptian government leaders over the past several years. Despite the recent change in presidential leadership, the government leaders Apache has been dealing with for the past few years are still in power, Maher said.
Why exiting Egypt may make sense
Though Egypt's social and political environment appears to have improved after el-Sisi's election, I wonder how long relative stability can last given the pervasive issues that are at the core of the Middle East/North Africa region's woes.
Extremist ideology is spreading, as evidenced by the rapid rise of ISIS in Iraq, while deep religious, political, and social divides are growing within many Middle East countries. Stressed relations between Iran and Saudi Arabia, the region's most powerful countries, are another source of concern.
With all these issues, I think it would be best for U.S. companies to avoid the region altogether if possible. Though Apache does have several promising prospects in Egypt, it also has no shortage of low-risk drilling opportunities in Texas and Oklahoma that are highly profitable in the current commodity price environment.
If Apache can receive a fair price for its Egyptian assets, it could use that cash to further delever its balance sheet, return more cash to shareholders, and expand its drilling programs in the U.S. Shareholders would rest easy knowing that the company is no longer exposed to geopolitical risk, while its trading multiples would likely expand to a level in line with other North America-focused peers.
Arjun Sreekumar owns shares of Apache. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.