Apache Corp., which has been reworking its global portfolio over the past three years to strengthen its North American base and worldwide operations, has targeted $4 billion worth of assets in its portfolio to sell by the end of the year, CEO G. Steven Farris said Thursday.
Initially, $2 billion of the projected sales would be used to reduce debt and enhance financial flexibility, he said. The remaining proceeds would allow Apache to repurchase about $2 billion worth of stock under a 30 million share repurchase program (about 7.5% of outstanding stock) authorized by the board. The asset list "exceeds" the $4 billion target, Farris said during a conference call to discuss quarterly results.
The announcement appeared to do the trick for some investors, with Apache shares advancing close to 5% on Thursday, up $3.71/share to close at $81.74. More than 9.7 million shares traded hands, triple the the daily average. Apache has a market cap of more than $30 billion, with a price/earnings (P/E) ratio of 17.7, versus the S&P 500 average of 15.6. P/E is a valuation ratio of the current share price to per-share earnings.
Apache earned $698 million ($1.76/share) in 1Q2013, 19 cents below Wall Street's consensus forecast and down from $778 million ($2.00) in the year-ago period. Adjusting for one-time items, which included lower-than-expected commodity prices, earnings were $806 million ($2.02/share), versus $1.2 billion ($3.00).
Cash from operations totaled $2.4 billion, compared with $2.6 billion in 1Q2012. Revenues also declined, to $4.08 billion from $4.54 billion.There was no lack of questions by analysts about the proposed sales during the conference call. However, if any of the U.S. onshore oil and liquids projects are on the divestiture list, it would be a surprise, considering the latest results in the Permian and Anadarko basins, as well as the CEO's comments.
"We are showing strong results from the strategic shift that we outlined in 2012, with production from onshore North American liquids plays of 165,000 b/d in the first quarter," said Farris. "We expect our onshore drilling programs will continue to contribute significantly to meeting our production targets."
Rationalizing Apache's asset base "flows naturally from more than $16 billion of acquisitions over the last three years," he said. Apache had "set out to expand our portfolio in areas that we believed could generate profitable growth.
"With this goal in mind, we significantly strengthened our onshore North American asset base through acquisitions in the Permian, Anadarko and Western Canadian Sedimentary Basins." Apache also entered the deepwater Gulf of Mexico and added "tactical extensions to our Gulf of Mexico Shelf," where it is the largest operator. Other acquisitions were made in the North Sea and Egypt.
"Importantly, during this time frame, we significantly grew our production by almost 200,000 boe/d , with 162,000 boe/d, about 82%, coming from North American onshore. Now that we've reached the end of this three-year effort, we've spent the last several months evaluating our expanded portfolio to determine which assets to keep and which assets might be more highly valued by others."
With its 50-year-plus history in the oil and gas business, "this is not the first time Apache has gone through this process," said Farris. "The sole purpose of this review was to determine which assets make the most strategic sense for us to go forward with in order to continue to do what Apache has always done best: exploit our best inventory of opportunities, rigorously allocate capital to generate attractive returns, profitably grow our production and create long term value for our shareholders."
The potential asset list is "fairly robust," but that's about as much detail Farris provided. "However, we are confident that given the number of items that we have on our list, and assuming commodity prices hold, we should be able to deliver on this plan."
The proposed project to export liquefied natural gas (LNG) from British Columbia near Kitimat isn't included in the disposal list, Farris said. Apache, which would provide upstream leverage business through its extensive acreage in the gassy Liard Basin, and the Horn River and Montney shales, is a joint partner in the undertaking with Chevron Corp. (see Daily GPI, Dec. 26, 2012). Chevron indicated in April that the project remained in the appraisal stage (see Daily GPI, April 29).
"It's not in the target," said Farris. "Obviously we're going to have to size Kitimat as we go forward. Right now we are in a position to have taken something from raw materials to wholesale, and there will be a time when it will be retail." Apache also partners with Chevron on its Wheatstone LNG project in Australia, but that project appears to be safe; Farris said "most" of the project is indexed to oil.
Apache's goal "is to come out of this with assets that we think have the potential to grow long term or short term, and that we also have assets that have great generating power to fund those programs...We have assets that are growth generators, and we have assets that are cash generators. We want to balance our cash generators with our growth generators...Our whole goal is to be more profitable and [have] more predictable growth," with the rate of return "the primary focus."
CFO Tom Chambers provided some color on what assets could be for sale. During 1Q2013, he told analysts, Apache's "production efforts directly translated into a pretax margin that continues to exceed 30% on a boe basis." Lease operating expenses totaled $771 million in 1Q2013, up 14.6% year/year. "Our operating costs, while higher than we'd like, are a derivative of our product mix, with oil and offshore properties generally more expensive to operate than natural gas properties.
"With 53% of our first quarter production oil and liquids, and approximately one-third of our production located in offshore areas, our costs per boe run higher than many of our competitors." U.S. onshore results, however, "were outstanding."
During the first quarter, worldwide production increased to 781,819 boe/d from 776,296 boe/d, driven by a 45% increase in North American onshore liquid hydrocarbons output. The first three months of 2013 were negatively impacted worldwide by interruptions associated with cyclones in Australia and third-party gas plant downtime in Canada.
Worldwide, Apache's "liquids production for the quarter averaged 416,000 boe/d, an increase of 9% from the comparative 2012 quarter," said Chambers. "A key point worth emphasizing is that not all liquids are created equal, a fact that was driven home with the significant fall in natural gas liquids prices from year ago levels."
The average realized natural gas price in 1Q2013 was $3.72/Mcf, down 2.6% from the year-ago period. Average realized crude oil prices were $101.72/bbl, down 8.5% year/year.
"For Apache, our liquids growth and drilling opportunities are primarily focused on crude oil. Over 85% of our first quarter liquids production is crude oil. In addition, our international gas portfolio has continued to bolster our realizations as natural gas prices in North America trailed our international realizations by 11% in the first quarter. For the fifth consecutive quarter, international gas price realizations outpaced those in North America."
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