I have been a shareholder of Apache Corporation (APA) for five months now. I bought it at $76, what I thought to be the bottom. Apache is one of the companies of my energy portfolio that also includes Surge Energy (ZPTAF.PK), a grossly undervalued oil-weighted producer which I bought below $4 for the reasons explained here.
Since late 2012, I have been following Apache's news closely on a daily basis. According to the latest news, Apache is weighing a sale of its deep-water assets in the Gulf of Mexico (GOM). The company is now seeking growth from onshore projects in North America, such as in the Williston and Permian basins. Apache said last year it planned to boost the percentage of output that comes from U.S. onshore properties to 41% in 2016 from 21% in 2011.
Apache does not re-invent the wheel actually. The company just quits the expensive projects of GOM to transition to the onshore liquids-rich North American projects that are cheaper, less risky and have quick payouts. The operating costs in GOM have risen since the deadly Horizon accident due to new safety requirements.
Actually, these high operating costs is one of the reasons why Kosmos Energy (KOS), another offshore producer in Ghana, is grossly overvalued, and I analyzed in my previous article why Kosmos is a good short candidate.
In the meantime, the horizontal drilling coupled with the hydraulic fracturing have boosted the shale oil and gas production in North America. This increasing production initiated an infrastructure boom that is transforming the U.S. pipeline network. Actually, this upgraded U.S. pipeline network was analyzed in one of my series and attracted huge interest, because the construction boom also supports many sectors of the North American economy that were analyzed here and here.
Be Proactive Instead Of Reactive
I expect Apache to pay down some of its long-term debt, once the deal is done. I do not want to read that Apache will spend all the proceeds to propel its growth at the onshore oil-rich basins of North America.
The company's debt almost doubled in one year, and it climbed from $6.8 billion in Q4 2011 up to $11.4 billion in Q4 2012. The long-term debt has also been rising about 10% on a quarter over quarter basis since 2011. The debt/equity ratio also jumped from 0.23 in Q4 2011 up to 0.36 in Q4 2012, and obviously the reliance on debt rose significantly during the last 12 months.
It is also worth noting that the company's cash resources dropped from almost $300 million in Q4 2011 down to $160 million in Q4 2012.
These concerns have also been reflected into the share price which has not performed well during the last two years. After all, I am not saying that Apache is in a financial stretch currently. I am just saying that its balance sheet has worsened lately.
As I want to be proactive, I do not want this deterioration to trigger a fire-sale price for the properties in GOM. These worries made me write this article which tries to estimate a fair price for these assets.
Apache And GOM
Apache entered GOM in a big way in 2010 when it completed two major acquisitions:
1) In April 2010, it acquired Mariner Energy Inc. for $4.3 billion, including debt. The purchase, at a 45% premium over Mariner's closing price the day before the deal was announced, made Apache a player in the deep-water Gulf where Mariner had most of its assets. In February 2010, Mariner produced 63,000 boepd from the Gulf Shelf and deep-water, the Permian Basin and unconventional onshore plays. At year-end 2009, Mariner had estimated proved reserves of 181 MMboe (47% oil and liquids). Thus, Apache paid $68,250/boepd and $23.75/boe of proved reserves.
2) In April 2010, it acquired for $1,05 billion additional Gulf Shelf assets from Devon Energy Corporation (DVN) that added production of 19,000 boepd (50% oil and liquids) with year-end 2009 estimated proved and probable reserves of 83 MMboe across 158 blocks. The estimated proved reserves were 41 MMboe (50% oil and natural gas liquids). Thus, Apache paid $55,260/boepd and $25.6/boe of proved reserves.
Deals In GOM
To make a fair estimate on today's value for Apache's assets in GOM, I had to check several recent deals there first:
1) In February 2012, SandRidge Energy (SD) acquired Dynamic Offshore Resources, LLC, a private oil and gas company with properties located mostly in the shallow water of GOM. SandRidge paid $1.28 billion for 25,000 boepd (50% oil) and proved reserves of 62.5 MMboe at the end of 2011. This being said, SandRidge paid $51,200/boepd and $20.48/boe of proved reserves.
2) In May 2012, Stone Energy (SGY) paid $67 million to Anadarko Petroleum (APC) to buy 25% interest in the Pompano field, as well as other interests in the Mississippi Canyon field. The net production of the acquired assets was 1,500 boepd (66.67% oil) with estimated proved reserves of approximately 5.9 MMboe (December 2011). Stone paid $44,700/boepd and $11.36/boe of proved reserves.
3) In September 2012, W&T Offshore (WTI) acquired Newfield's (NFX) assets in GOM for $228 million. The undeveloped acreage was ~238,300 net acres, the production from the acquired assets was 8,350 boepd (43% oil and liquids) in July 2012, and the proved reserves were 7.7 MMboe (31% liquids). W&T paid $27,300/boepd and $29.61/boe of proved reserves.
4) Plains Exploration and Production Company (PXP) paid BP Plc (BP) $5.55 billion for deep-water oilfields in GOM. As of July 2012, these fields produced 59,500 boepd (84% oil and liquids). Thus, Plains paid $93,280/boepd and it has not provided the reserves associated with these assets.
5) In September 2012, Plains Exploration and Production Company also acquired Shell's (RDS.A) 50% WI in the Holstein Field for approximately $560 million. Shell had a net average production at 7,400 boepd (86% oil and liquids) from these assets. Thus, Plains paid $75,700/boepd and it has not provided the reserves associated with these assets.
After all, the average transaction metrics were ~$41,100/boepd and $20.48/boe of proved reserves for a balanced mix of liquids and natural gas in the total production. When the production was heavily oil-weighted, the average transaction metric climbed up to $84,490/boepd.
I will use these average metrics above, for my calculations in the next paragraph.
Apache's Deep-Water Assets In GOM
Apache had an interest in 166 blocks and owned 900,000 gross acres in the deep-water region of GOM in December 2012. This region contributed 2% of its total oil and gas production and ~6% of its total US-based oil and gas production in 2012. The production from these deep-water fields was 17,903 boepd (55% oil and liquids) in Q4 2012.
The company does not provide the proved reserves held in the deep-water Gulf of Mexico, but it discloses that its total proved reserves in USA are 1,424 MMboe. This is why, I will assume that these assets also hold roughly 6% of the company's US-based proved reserves. Based on this assumption, these assets hold 85.44 MMboe of proved reserves.
According to the latest corporate news from this deep-water region, a development well of the Lucius field encountered 910 net feet of oil pay in Q4 2012. Four additional development wells are scheduled for 2013 and the first production is estimated for H2 2014. Furthermore, Heidelberg field is still in appraisal phase and Apache has received the field development plan from the operator.
Apache's production in GOM has 55% oil and liquids. This being said, I get the following valuations:
A) Per flowing barrel: 17,903 X 41,100 = $735,7 million.
B) Per proved reserves: 85.44 X 20.48 = $1,75 billion.
C) Average from A+B = ~$1,25 billion.
D) Per flowing barrel (assuming a heavily oil-weighted metric): 17,903 X $84,490 = $1,51 billion.
E) Average from A+D = $1,12 billion.
Anything less than $1,12 billion will be a big failure and anything over $1,75 billion will be a big success. I hope that Apache will sell its assets in GOM at the right price, protecting the shareholders' rights. I have already experienced cases when an asset sale triggered several lawsuits by shareholders claiming the price was too low. I do not want to experience it with Apache too.