What: Shares of Apache Corporation (APA +3.84%) jumped more than 10% on Monday morning. Fueling the surge was a report by Bloomberg that the company had received and rejected an unsolicited takeover offer from an unidentified suitor. The company is also reportedly working with Goldman Sachs on a defense, potentially to ward off any future takeover attempts.
So what: According to the report, the offer would have valued the company at more than $18 billion, which is roughly where its current market cap is after today's surge. However, in reportedly rejecting that initial offer, it is unclear if Apache is attempting to gain a higher offer price or to stay independent. Remaining independent is certainly a possibility given the fact that the company is performing relatively well during the downturn. It is worth noting that Apache has $1.6 billion in cash on its balance sheet, an improved leverage profile and recently reported strong third-quarter results, which were highlighted by improved costs and better-than-expected production growth.
There had been talk for months that the plunge in oil price would eventually cause a consolidation wave to hit the industry, much like what happened in the late 1990s. However, to date there have only been a few ripples, with Noble Energy's (NBL +0.00%) $3.9 billion acquisition of Rosetta Resources this past May as the only notable deal involving the U.S. shale industry, where Apache is a major player. It was thought that the Noble-Rosetta deal would serve as a benchmark for future consolidation given the fact that Noble Energy paid $13.65 per barrel of oil equivalent for Rosetta's reserves. Using the Noble Energy deal as a guide, a would-be acquirer could currently buy Apache for $11.23 per BOE based on its current enterprise value and 2014 year-end reserves. Clearly, that's a lower price than what Noble Energy paid, though there are some key differences, including the continued weakness in oil prices and the fact that Apache still has some legacy assets overseas in Egypt and the North Sea that aren't quite as valuable as shale assets.
Now what: This will be an interesting saga to watch. There are a number of potential bidders including big oil giants that could offer an all-cash deal or a closer rival that could seek a merger-of-equals. That said, given that Apache seems reluctant to engage in merger dialogue, investors need to realize that today's pop could quickly deflate should the company fight to remain independent.
