Apache Corporation (NYSE:APA) is an undervalued stock. This has been due to low profits after the company acquired several assets financed by high capex spending and debt. The company also faces problems with the uncertainty in Egypt. But Apache Corporation (NYSE:APA) recently announced a sale of its Gulf of Mexico assets that will do much to alleviate its debt. As far as the situation in Egypt, investors should keep an eye on the situation but keep from overreacting.
Rebalancing the portfolio
Apache Corporation (NYSE:APA) has been operating on a strategy of acquiring developed assets and to get maximum value out of them. From 2010 to the end of 2012, the company spent $16 billion in acquiring these assets in addition to high capital spending on its acquisitions. This has resulted in lower profits and reduced dividends, which have in turn dragged down share price. While the company has rebounded from historic lows earlier this year, it is still trading roughly 30% less than where it was in the spring of 2012.
The company’s recent announcement of a $3.7 billion sale of its Gulf of Mexico assets shows how it is refocusing its portfolio. Instead of its former “acquire and exploit” strategy, the company is clearly refocusing on its onshore liquid plays. These North American assets currently represent 44% of the company’s production. A focus on these high-return plays will result in greater profitability going forward.
Of all oil producers, Apache Corporation (NYSE:APA) is perhaps the most vulnerable to the political unrest in Egypt. The company sees roughly 20% of its liquid production coming from Egypt. But a production stop seems unlikely given that Apache Corporation (NYSE:APA)’s concerns are in the Western and Southern parts of the country, away from the large centers of population and the potential for disturbances.
Contrast that with Eni SpA (ADR) (NYSE:E) and BP plc (ADR) (NYSE:BP). Both companies operate in the Nile delta where there are significant population centers. Potential production disruptions are more likely here. BP plc (ADR) (NYSE:BP) has already withdrawn staff from the country. But Eni SpA (ADR) (NYSE:E) appears to be the most vulnerable. After suffering production stoppages during the unrest in Libya, the company now faces similar concerns in Egypt. Egypt is a major supplier of Eni SpA (ADR) (NYSE:E)’s total liquid production and any further deterioration of stability in Egypt should give investors serious pause.
There are two more likely potential ways that the Egypt situation could negatively impact Apache. First is nationalization of the oil industry. It’s obvious that nationalization would have a highly negative impact on all of the companies with operations in Egypt, but the course of action seems highly unlikely for two reasons.