With the rising public unrest and military support, the elected Egyptian government has been shaken off in just a year’s time. To stabilize the country, an interim government will be formed and an temporary Prime Minister will be appointed. After everything is settled, an election schedule will be announced so that a new government can be elected and take control of things. This sounds like a long and painful process, and companies like Apache Corporation (NYSE:APA) could witness shrinking earnings amidst this political mess.
Why Strained Earnings?
Apache Corporation (NYSE:APA) has been operating in Egypt since 1994, and is counted amongst the largest active oil and gas companies in the region. The company generates 27% of its overall revenues from the country, which also accounts for 20% of Apache’s overall oil production. Furthermore, its long term strategy includes expanding in the country, to ramp up its production over the next decade. Hence, it's evident that Apache is relying on Egypt for its long term growth.
But over the last 5 years, the Egyptian Pound has depreciated by nearly 35% against the US Dollar due to the prolonged political mess in Egypt. Currency depreciation not only induces domestic inflationary pressures, but also strains the cash flows of foreign companies. Since Egypt is currently functioning without a government, it's obvious that Egyptian Pound will continue to depreciate further, resulting in higher forex losses for Apache Corporation.
If Apache Corporation (NYSE:APA) has a long term view on Egypt, it can pump-up capital in the country and take advantage of its weak currency. Then it can expand its Egyptian assets over the next couple of years and start reaping the rewards. But unfortunately, Apache isn’t counted amongst the cash rich companies.
The company carries a huge long term debt burden of $12.48 billion, which results in a debt/equity ratio of 41%. Meanwhile, the debt/equity ratio for Chevron Corporation (NYSE:CVX) and Royal Dutch Shell plc (ADR) (NYSE:RDS.A) are much lower at 10% and 19%, respectively. Besides that, Apache has just $248 million in cash and cash equivalents.
To ease the cash crunch, Apache will be selling its non-core assets this year, with an aim of raising around $4 billion. Management stated that around $2 billion will be used to reduce its debt burden, while the remaining $2 billion will be used to repurchase around 6.25% of its outstanding shares. But even after repaying its debt, Apache doesn’t have enough cash reserves to finance such aggressive expansion plans.
So the best option available is to reduce its exposure to Egypt.
Both Chevron and Shell are active oil and gas companies in Egypt. Needless to say that they are much bigger than Apache Corporation, and are often referred to as cash cows. But even these mighty companies are shedding their Egyptian assets.