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.
Egypt concerns
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 BP plc (ADR) (NYSE:BP) has already withdrawn staff from the country.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.
First, Egypt relies heavily on international aid. Countries such as the United States, the Netherlands, Great Britain, and Russia all provide aid to the country and all have oil operations in Egypt. Nationalization could seriously jeopardize this aid.
Second, the Egypt National Oil Company lacks the strength and capability to guarantee success for any political entity to take such a risk. Nationalization would be more of a concern once a strong political power had asserted itself over several years.
The most likely negative impact of the political situation in Egypt is the chance that taxes are raised on oil producers. The Egyptian government is strapped for cash. Such a tax hike would have negative implications for Apache going forward as any tax hike will eat at the company’s profits. But even a tax hike seems highly unlikely in the near term until there is some degree of political stability.
Apache is a buy
Any further drop in share price due to news coming out of Egypt presents even more value for potential buyers of Apache. With its improved balance sheet coming from the divestiture of the Gulf of Mexico assets and its refocus on highly profitable onshore North American plays, Apache looks to be much undervalued while trading in the low $80 range.
The article Apache Is a Clear Buy originally appeared on Fool.com and is written by William Alder.
William Alder has no position in any stocks mentioned. The Motley Fool owns shares of Apache. William is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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