Apache - Divesting To Grow

| About: Apache Corporation (APA)


The company has been pursuing its long-term strategy of divesting its international portfolio of assets. It has sold $10 billion worth of assets from all around the world.

Recently the company has revealed its intention to exit completely from the Wheatstone and Kitimat LNG projects.

Some analysts believe that it will sharpen the company’s focus on North American Shale production. Others tend to think differently.

However, much is dependent upon the company’s use of these proceeds.

Over the last year, Apache (NYSE:APA) has sold $10 billion worth of assets. The company aims to use these cash proceeds towards production growth on the Permian Basin and the Eagle Ford shale. This will result in increased focus on drilling activities in more profitable assets in U.S. shale in South Texas.

In addition to the sale of its Western Canadian properties for $374 million the company also recently sold off its other assets. These assets include the selling of non-core Argentinean assets for approximately $800 million, the selling of assets in the Gulf of Mexico for $3.75 billion and the selling of Egyptian oil and gas assets for $3.1 billion. By divesting riskier foreign assets as a part of its long-term strategy, Apache has been focusing on liquid rich opportunities in North America.

Apache is Shrinking its Assets in Order to Grow

Moreover, JANA Partners LLC, the hedge fund that holds a $1 billion stake in Apache is putting pressure on Apache's management to divest its international holdings. The hedge fund suggests Apache divests its stake in liquefied natural gas projects in Canada and Australia. The fund is determined to unlock greater value for its shareholders and wants the company to focus more on the growth opportunities available in U.S shale. During the 2Q 2014 earnings release, the company agreed to exit from these projects.

As it was observed, "Consistent with the company's ongoing repositioning for profitable and repeatable North American onshore growth,Apache intends to completely exit the Wheatstone and Kitimat LNG projects. In addition, Apache is evaluating its international assets and exploring multiple opportunities, including the potential separation of some or all of these assets through the capital markets."The increasing potential LNG project cost is another factor that led the company to make this decision. The decision of divesting its international operations is viewed as a strategic step that will help sharpen the company's focus and help it to concentrate more on the profitable and predictable shale oil wells in places like the Permian Basin and Eagle Ford.

Enhanced Liquid-Based Production

During the second quarter of 2014, the company reported an 18 percent growth year over year in North American onshore liquids. The production volumes in North American assets exceeded 201,000 barrels per day. Similarly, worldwide, the company was able to produce an average volume of 636,000 barrels of oil equivalent per day. Moreover, the company was able to increase the liquid-based production by 59 percent compared to 54 percent growth during the second quarter of 2013.

Source: Apache's Earning Release

As can be seen in the figure above, the oil-based production increased to 141 million barrels per day from the previous year's 118 million barrels per day reflecting a 19 percent increase. Similarly, NGLs production volume was 60 million barrels per day reflecting an increase of 15 percent from the previous year's 52 million barrels per day.

The increased production was primarily driven by the company's lucrative assets located in the Permian Basin. The production in the Permian Basin increased by 26 percent from the previous year's figure of 155,244 barrels of oil equivalent. In addition to the Permian Basin, the company is also well positioned in emerging plays in the Eagle Ford Shale and Canyon Lime in the U.S. The company seems to be determined to broaden its portfolio of North American onshore assets.

Concluding Remarks

Analysts believe that the company's decision to divest its international assets will ensure bright long-term growth prospects. Conversely, there are other analysts who think it to be counterproductive and claim that selling or divesting international assets would greatly reduce the company's production. Currently, the international assets constitute approximately 36 percent of total production. The divestment will certainly cause the company's global diversification and solid production growth to be questioned. However, the company is now directing the capital investment budget towards the unconventional resource plays in the Permian and Anadarko Basins.

Therefore I believe that the portfolio transition will bring in more predictable organic production growth. Given the company's lucrative position in the Permian Basin, I believe that it will be able to produce higher margin oil and natural gas liquids. However, a lot is dependent upon the company's priorities regarding utilizing the sale proceeds. The company has the option to use these proceeds for debt reduction or reinvestment in its onshore US properties.

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The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.