Apache
Corp. has been in restructuring mode a long time. But today brought
arguably the biggest restructuring yet — the sudden and immediate
departure of longtime CEO Steven Farris. Considering the work Apache has
been doing to clean itself up and focus on core operations, a Farris
exit has the potential to pave the way for a long-awaited spinoff of
Apache’s international operations or even an outright sale.
His replacement is John Christmann, 48, who has been leading Apache’s
efforts to develop the company’s core asset: 6 million net acres of
unconventional oil-rich acreage across North America. The keystone of
that is 1.7 million acres in the Permian basin of west Texas, where
Apache has doubled its output since 2010 to 160,000 barrels per day.
These assets may not look so great after oil prices have fallen 60%
(WTI closed at $46.39 today). But they represent the future of Apache.
Apache last year booked 900 million barrels of proven reserves under its
Permian acreage. Only Exxon Mobil , Chevron and Occidental Petroleum have bigger positions there.
Houston-based Apache, prodded on by activist investors like Jana
Partners, has been working to focus its company around onshore North
America after a series of questionable international ventures caused the
company to lag far behind its peers like Anadarko Petroleum
and EOG Resources. Since a 2012 decision to pare itself down, Apache
has sold off its Gulf of Mexico shelf fields (for $3.7 billion), a third
of its assets in Egypt ($3 billion), stakes in LNG projects ($2.75
billion), stakes in the deepwater Lucius and Heidelberg fields and 11
other Gulf of Mexico exploration blocks ($1.4 billion), its entire
Argentina portfolio ($800 million), dry gas fields in western Canada
($300 million).
In 2009 Apache got 184,000 barrels of oil (and equivalent gas) per
day from onshore North America. That has since doubled to 360,000 boepd,
out of roughly 760,000 total boepd. Last fall CEO Farris explained to
investors that the plan was to spin off Apache’s international assets as
a separate company.
Apache won’t comment on Farris’ departure, the timetable of a
spin-off, or rumors around Houston that a deal to sell the whole company
has been all but worked out. Already new CEO Christmann has set up a
satellite office in San Antonio to lead unconventional drilling efforts.
At just 48 years old Christmann is young for a big oil company CEO.
So what would a potential acquirer get? First off, they’d get a deal
relative to what Apache was worth 6 months ago, before shares fell 40%.
Having closed Tuesday at $60.16 per share, down 2.97%, Apache’s market
capitalization is $23.5 billion. Add in roughly $10 billion in long-term
debt plus a modest premium and an acquirer would be looking at a bill
for around $38 billion.
Whether that’s a lot or a little really depends on oil prices. Over
the past five years (before the bust) Apache has averaged pre-tax income
of about $5.5 billion and net income of about $2 billion a year. Unlike
a great many more high-profile shale drillers (i.e. Chesapeake Energy
and Continental Resources), Apache has a history of generating free cash
flow.
Exxon, Chevron or Occidental could swallow Apache outright and
consolidate mightily in the Permian basin. Occidental is unlikely, as
it’s just emerged from the spin off of its California oil fields into
publicly traded California Resources Corporation (NYSE:CRC). Exxon, for
its part, is still far from having convinced investors that its 2010
acquisition of XTO Energy for $40 billion was a good idea. Chevron
doesn’t need any acquisitions, as it is already building out lots of
organic growth, and also has a very low cost basis on its legacy acreage
in west Texas. Even so Chevron does make the most sense as an acquirer.
It’s the operator of those two LNG projects (Kitimat, B.C. and
Wheatstone in Australia) that Apache sold out of. It’s also already has a
big position in Argentina, so wasn’t interested in that, or any of the
stuff Apache sold in the Gulf of Mexico. Chevron does operate several
fields in the North Sea and so could consolidate Apache’s operations
there.
Among other giants, Royal Dutch Shell is an unlikely buyer
considering the trouble it has already had making a go of it in
America’s shale plays. BP is out of the question as it’s still seeking
to spin out its own U.S. onshore business. ConocoPhillips is a
possibility, as the company already has a broad and deep portfolio
across the United States including about 1.1 million Permian acres.
We could also see a merger of near-equals between Apache and EOG
Resources, which is as big in the south Texas Eagle Ford as Apache is in
the Permian. This would create a real Texas powerhouse.
It’s all just idle speculation, of course. But lots of pieces have
already been in motion at Apache, and with Farris out of the way, it’s
very possible that there’s even bigger moves yet to come. That
likelihood might make it worthwhile for the brave investor to take a
flyer on Apache shares as an alternative to other Permian-leveraged
operators like Pioneer Natural Resources or Concho Resources.
A wave of consolidation is likely in the wake of oil’s plunge. It could all start here.
CREDITS:- www.forbes.com
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