Jana Partners has built a $1 billion stake in Apache Corp, and is calling on the international oil and gas producer to sell off its international holdings and to drill exclusively on American soil. Still, a $1 billion stake in a $40 billion company is not really enough to push for change. Jana's holding works out to around 2.5% of Apache's total market cap.
However, the activist fund is basically asking Apache to continue on with its current strategy. During the past 12 months, Apache has been working consistently to sell down international assets, increasing its exposure to U.S. fields, where drilling is reaching an inflection point.
There is some substance behind Jana's demands. Apache is one of the most active drillers within North America, but the company still owns some international assets.
These international assets include LNG projects, specifically, the Kitimat and Wheatstone projects. It had previously been thought that Apache was committed to these projects, although management is now considering a sale. The divestment of Apache's shares in the two projects is set to net the group around $6 billion -- $4 billion for Wheatstone, $1.5 billion to $2 billion for Kitimat. Including the cash from these two stakes, Apache will have announced around $9.8 billion of asset sales in the past year alone.
But Apache's international presence is not just limited to LNG. The company still holds an interest in projects within the North Sea, Egypt, and Australia. However, these assets are key to Apache's overall development plan.
In particular, while the company continues to spend heavily in North America, these assets are providing the company with much-needed free cash flow. As of yet, Apache's North American operations are not totally self-sustainable, and the international assets mentioned above are set to generate a free cash flow of more than $1 billion for the company this year. So, it makes sense for Apache to hold onto these assets for the time being, until the company's North American operations can support themselves.
Jana has a history of creating value for shareholders through activist activities. The fund's other targets have included the likes of QEP Resources, which Jana pounced on last year.
The activist fund got its way with QEP, and spurred the company's management into action. First, Jana demanded that QEP spin off its midstream division, something the QEP did soon after Jana made its demands. QEP, under the watchful eyes of Jana, then sought to unlock value from its portfolio, something that it continues to do.
During the past few months, QEP has conducted $800 million in asset sales in order to focus its upstream portfolio. Further sales are planned throughout the year. Additionally, QEP is spending heavily on ramping up oil production; 70% of 2014's capital-spending budget is targeted on increasing oil production.
Management also announced a $950 million acquisition of about 26,500 net acres in the Permian Basin. This acquisition was undertaken in order to address a perceived oil "inventory" problem.
This move was something Jana failed to see any value in. Specifically, as noted within Jana's year-end letter to investors:
We were dismayed by the acquisition announcement, made at a lofty price in a competitive auction, in a basin where QEP has no operations or proven track record...Valuations of E&P companies are driven by returns on invested capital, not arbitrary metrics like years of drilling inventory. That is why QEP's market capitalization dropped by about $720 million following the acquisition announcement...
Still, since the beginning of the year, QEP's share price has jumped around 12%. So, it would appear as if Jana's actions are driving value creation at the company.
The bottom line
All in all, it would appear as if, based on Jana's record with QEP, the activist fund might be able to drive value at Apache. That said, Jana's demands are similar to management's existing strategy, which is already driving value for investors.