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LNG News: Apache Corporation Bails on LNG

By Matthew DiLallo - Dec 16, 2014 at 11:20AM

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Apache Corporation sells its stakes in two Chevron Corporation-led LNG projects.

Source: Apache Corporation. 

Apache Corporation (APA 1.72%) announced on Monday that it was selling its stake in two LNG projects to Australia's Woodside Petroleum. The $2.75 billion deal includes a 13% stake in the Wheatstone LNG project in Australia as well as a 50% stake in the Kitamat LNG project in Canada, both sales include associated oil and gas properties in each project's respective country. Further, the company is expected to be reimbursed for costs associated with the projects through the closing date, which should net the company another billion dollars. Both projects are operated by Chevron Corporation (CVX 0.59%), which appears to have decided not to increase its stake in either project, though the company continues to move forward with its LNG projects around the world.

What Apache is unloading
Apache has been looking for buyers for its LNG project stakes for quite some time. Earlier this summer it was reported that the company was putting its Wheatstone LNG stake on the market because the $27 billion project was starting to get too expensive for Apache. The company needed to invest $1.4 billion in 2014 and another $800 million next year to fund its portion of that project. That's cash the company would rather invest elsewhere as LNG projects haven't delivered the economics that producers had hoped because of skyrocketing costs. When those rumors surfaced this summer it was thought that Apache was seeking as much as $2.5 billion for its Wheatstone stake alone.

The other project Apache is offloading to Woodside is its half interest in Canada's Kitimant LNG project as well as the associated natural gas fields in Western Canada. At one point Apache was thought to be seeking a minority partner to help fund the construction of the project. However, it decided that a full exit of the project was in its best interests as it no longer fit within the company's U.S. shale focused approach.

Source: Apache Corporation.

Why Apache is bailing on LNG
Over the past few years Apache has really scaled back its global energy efforts to return to its U.S. roots. The company has partially exited its Egyptian business, unloaded its shale assets in Argentina and sold non-core assets in Canada. The company has even scaled back much of its activity in the Gulf of Mexico as it sold its shelf assets as well as much of its deepwater portfolio.

With these sales we see two core themes emerge at Apache, which when combined form one clear picture. The first theme is that the company is exiting riskier areas that have increased political or project execution risks. The second theme we are seeing is that Apache is also shedding its slowest growth assets. In the place of these assets, the company is turning all of its attention to the middle of the energy risk profile, which in the company's case is U.S. shale assets as these tend to offer much more predictable growth.

Source: Apache Corporation.

In exiting its LNG assets, Apache is redoubling its efforts to exit projects that are on the riskiest end of the execution side so that it can focus its developments efforts around predictability. LNG in particular has been unpredictable on the cost side of the equation, which we saw at Chevron's Gorgon project in Australia, which has been overrun by costs. The project was supposed to cost $37 billion when it was initially approved, however, last year Chevron raised that project's cost estimate to $54 billion, or 46% more than initial estimates. Meanwhile, its partners are already budgeting for more overruns as the expectation is growing that it will cost $60 billion to complete the project. This is a risk that Apache wants to avoid altogether, which is why it's choosing to bail on Chevron's Wheatstone and Kitamat projects before costs could get out of hand.

Investor takeaway
LNG was supposed to be a great foundational investment for energy companies because these projects generate steady cash for decades. However, the rising costs associated with these projects are eating too deeply into those future cash flows. Apache wants to avoid this fate, which is why it's bailing on LNG while it still has the chance.

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