Apache (NYSE:APA) has underperformed the market significantly over the past year due to the dramatic political uncertainty in Egypt; accounting for 20% of Apache’s worldwide production in 2012. The decline triggered by these events has been far in excess of any loss that might result from, in the worst case, a total expropriation of Egyptian assets. A recent sale of a 33% interest in these assets “validated” their worth. In addition, Apache is aggressively allocating capital towards unconventional drilling in North America. The company has operated in these regions for decades and production here can be ramped up quickly achieving high rates of return. The speed of this move naturally creates questions but the value of the company is in excess of the current price.
Background
Apache’s strategy has been to invest heavily in growth over the past ten years. Every dollar of cash flow has been pushed back into the business to pursue more growth. Cumulative operating cash flows over the past ten years amount to $56b but over the same period $66b has been reinvested into the business.
The majority of this expenditure has been capex, spending on current properties. However, the company’s “acquire and exploit” strategy has relied on opportunistic acquisitions to provide the raw material for capital expenditures.
In the mid-1990s, substantially all production was domestic. After this point, the company began to pursue international resources. “Low-risk” domestic operations would fund more speculative international projects. At this point, the U.S. appeared to be a largely mature market, this switch was essential to the company’s long record of reserve and production increases. Not all of these projects would work – projects in Indonesia, Congo, and China failed, for example – but eventually one would. Egypt, Australia, and, later, Canada and Argentina have been important successes.
On the scorecard of increasing reserves and production this strategy has been highly successful. Reserves increased in 23 out of the last 27 years, production increased in 32 out of the past 34. Some of this record appears to be due to Apache’s operational expertise. For example, Apache has operated in the North Sea since 2003. Through the use of 4-D surveying and cost/production efficiencies the company has managed to keep production at roughly the same level. As in Egypt, the company has continued to make acquisitions in the North Sea as other operators have exited.
The past three years saw the…
