Implications of Apache’s Asset Sale

Apache, one of the largest oil producers and US investors in Egypt, recently announced that it has sold a 33 percent minority interest in its Egypt operations to China’s state-owned petroleum company Sinopec International Exploration and Production Corporation. This caused some to wonder if this is the first sign of oil and gas companies fleeing Egypt due to political turmoil. Optimistically however, the deal may actually mark another trend, China’s growing influence in Egypt’s energy sector. 

Impacts of Egypt’s Turmoil
Even though Egypt’s recent unrest has not directly affected petroleum production, political instability still had a negative impact on the country’s energy sector. According to Tom Quinn, a research analyst for Wood Mackenzie, “A number of operators have evacuated their non-essential expat employees from the country. Upstream investment has been delayed by administrative hold-ups brought about by a lack of clear leadership at regulatory authorities EGPC, EGAS and the Oil Ministry. Delayed payments to international oil companies also continues to be a source of concern.” According to Mark Hanson, an equity analyst for Morningstar, some companies have also experienced minor delays in production.

Apache, which has invested more than USD 10 billion in Egypt’s energy sector since 1995 while producing 100,000 barrels of oil and 350 million cubic feet of gas per day over the last year, says its exploration and production operations have not been affected by the recent political turmoil. Despite this, the company announced on August 29th that it sold a 33 percent minority interest in its Egyptian operations to Sinopec for USD 3.1 billion. The deal creates a joint venture between the two companies in Egypt under which Apache will remain the operator. As a result of the sale, the share of Apache’s oil and gas production from Egypt is expected to fall to 15% from the current 20%, whereas Sinopec’s production will grow by 9%.

According to analysts, the deal stems from the fact that Apache’s stock performance had recently lagged its peers as investors considered its Egyptian business risky due to political turmoil. Region Vice President and General Manager of Apache Egypt Thomas M. Maher explained, “Steve Farris, Apache’s chairman and chief executive officer, said many times that we were looking for ways to validate the value of our Egyptian assets because investors have not recognized the importance of this asset to Apache. This transaction permitted Apache to bring in a strong partner while retaining a 67 percent interest and operatorship.” Brian W. Foote, a global E&P analyst for Clarkson Capital Markets, commented, “They believe that the stock market was not giving a proper valuation to their Egyptian assets.”

Apache said that the sale was a part of its boarder strategy to sell USD 4 billion in assets by year-end in order to reduce its debt and provide cash for developing its US oil plays. According to Thomas M. Maher, “Apache’s successful exploration and development programs in Egypt have been an important contributor to both growth and cash flow for many years. We are also taking meaningful steps to rebalance our portfolio to better deliver the full potential of our deep North America onshore resource inventory.” It is one of the several US-based energy companies that are divesting assets abroad in order to concentrate their efforts on North America.

Apache has expressed their optimism for the partnership with Sinopec, as well as the possibility of cooperation on future projects. Thomas M. Maher stated, “This transaction marks the first step in a global partnership with Sinopec. We look forward to the growth and value generation ahead for both companies through the expansion of our collaboration to other projects. This will be a strong partnership. Sinopec’s technical expertise compliments our 20 years of experience operating in Egypt and creates an alliance that will continue to explore and deliver the tremendous hydrocarbon resources in the Western Desert.” Maher stressed that Apache will continue to undertake projects in Egypt, pointing out, “Apache is the most active driller in Egypt. In the second quarter, we reported seven oil and gas discoveries that indicate to us that there are significant hydrocarbon resources still to be discovered and produced across concessions that total 9.7 million acres.”

Sinopec has said that it is aware of the political uncertainties in Egypt but is focused on long-term development in the region. Robert Christensen, an analyst for Canaccord Genuity, noted that the company also has Egypt’s unconventional resources in mind, adding that the joint venture with Apache provides Sinopec with valuable learning opportunities.

Investors Surprised by the Deal
After the sale, several analysts expressed surprise at how quickly Apache had managed to strike a deal, considering the current political uncertainties in Egypt. “The price was far higher than many investors had contemplated,” added Christensen. At the end of 2012, Apache had 124 million barrels of oil and 900 billion cubic feet of gas in proven Egyptian reserves.

When Apache bought Egyptian assets from BP for USD 650 million in 2010, while the reserves were smaller, it paid USD 32.5 a barrel, whereas in the deal with Sinopec the price was USD 33 a barrel. “We think it is a fair market price,” noted Quinn. “The deal does give a signal to the stock market that these assets are both productive and profitable,” said Foote. Accordingly, Apache’s shares jumped 8.4% after the sale, its sharpest intraday hike since March 2009. The deal led several analysts to reconsider the value of Apache’s remaining Egyptian assets.

The sale can of course have a positive impact for other oil and gas companies with significant exposure to Egypt, such as BG and Eni, by raising the confidence of their investors. “This deal shows that there is still an appetite for investment in Egypt, especially by companies with long-term views on the country’s vWWW stability,” said Quinn.  He added that the attempts of some operators to pare down their interests in Egypt over the past year have been largely a result of the country’s economic problems rather than the current political crisis.  For now, Egypt’s economic woes also seem soothed by the aid that some Gulf countries have pledged to it and recently the government said it was also agreeing to a schedule for repaying its USD 6 billion in outstanding debt to foreign oil companies. “Right now the rescheduling of the debts is under review in exchange for the companies investing in drilling and exploring for oil as well as increasing production and such things,” informed Finance Minister Ahmed Galal.

According to Hanson, guarantees that the oil and gas sector will not be nationalized or contracts will not be re-negotiated, would also go a long way to reassure companies. Christensen believes that Egypt’s future governments will leave the sector relatively untouched, considering its significance to the national economy. The confidence of some in Egypt’s energy sector is also reflected by the fact that Total recently agreed to buy Chevron’s service station network in the country. “Total’s vision of Egypt over the medium-to-long term is positive,” said the company’s CEO, Christophe de Margerie.

More Chinese Investments to Come
Rather than a sign of energy companies fleeing Egypt, the Apache sale also clearly marks another trend, namely the growing influence of China in the oil and gas sector. Over the past five years, Chinese companies have made 83 overseas oil and gas purchases worth USD 100.7 billion. In February, CNOOC brought the Canadian firm Nexen for USD 15.1 billion, which is China’s biggest overseas energy acquisition ever. However, after CNOOC burned its fingers in 2005 with a USD 18.5 billion takeover bid for the US firm Unocal, which was withdrawn due to political objections, Sinopec has focused on acquiring minority stakes in overseas companies rather than takeovers.

Wood Mackenzie forecasts that China’s oil imports will rise from 2.5 million bpd in 2005 to 9.2 million bpd in 2020, whereas US imports will fall from 10.1 million bpd to 6.8 million bpd in the same period. While the US is set to become more independent of Middle Eastern oil thanks to its shale boom, China’s dependence on the region’s energy is growing. The Middle East already accounts for 60% of China’s oil imports with the largest upstream projects of China’s national oil companies in the region being in Iraq and Iran. Sinopec and CNPC were quick to invest in Iraq’s oil assets in the aftermath of the 2003 US-led invasion. The Rumaila oil field, which CNPC is developing together with BP, accounted for about a third of Iraq’s oil output last year and is also the top-producing overseas project of the Chinese company.  Conversely, PetroChina is in talks with ExxonMobil to jointly develop the West Qurna-1 oil field.  It is important to note, however, that the activities of Chinese energy companies in Iran have been hampered by the international sanctions imposed on the country. The Iranians also suspended the contract of CNOOC for the development of the North Pars gas field in 2011 due to lack of progress, and CNPC withdrew from developing Phase 11 of South Pars last year for the same reason. Additionally, CNPC’s development of the Azadegan oil field and Sinopec‘s work on the Yadavaran oil field have suffered delays.

Egypt’s petroleum sector was, until the Sinopec’s purchase, largely untouched by the Chinese but (given the issues experienced in Iran) diversification into North Africa makes a great deal of strategic sense. The purchase marks Asia’s largest oil refiner and China’s second-biggest oil producing firm’s entry into Egypt’s upstream sector.  In addition, the sale is the company’s biggest deal in the Middle East. “I think the motivation of both Chinese and Indian firms to secure supplies will drive additional purchases in Egypt and elsewhere in the world going forward,” said Hanson. However, Quinn is doubtful if the Chinese have significant interest in investing throughout Egypt’s petroleum sector. “Chinese oil companies have generally been interested in the past in acquiring large producing assets to increase their production streams. With much of Egypt’s upstream sector consisting of small to medium sized assets, there may be less scope for this type of investment, unless they can consolidate by combining several assets,” he explained. “This is the first major investment of the Chinese (in Egypt),” noted Christensen. He continued to state that, “Other Chinese companies will be observing how this investment is being treated and taking their cues from it.

If they get positive cues, we could see more Chinese investments coming to Egypt in all forms.” Egypt, as well as Saudi Arabia are hopeful that China will invest in their renewable energy sectors. “We hope Chinese companies will visit Egypt’s renewable energy projects and establish joint ventures and exchange experiences,” said Mahmoud Mustafa, a senior official at Egypt’s Ministry of Electricity and Energy.

Unless Egypt’s political turmoil gets worse, it is not likely that oil and gas companies abandon the country.  This is a sector well versed in operating under conditions of relative uncertainty.  Given patterns of global demographic change and economic development as we slowly exit the recession, Egypt may in fact receive additional investments from China in the future.  These will likely boost the development of its energy sector and macroeconomy at large. The experts to whom Egypt Oil & Gas spoke noted that there are no particular risks related to the growing Chinese influence in Egypt’s petroleum sector. According to some analysts, Apache’s Egyptian business may see more investments in exploration thanks to this deal with Sinopec. Otherwise, they do not expect significant changes in day-to-day operations.

By Laura Raus


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