Apache's Egypt quandary symbolizes tough business call
NEW YORK/SAN FRANCISCO
NEW YORK/SAN FRANCISCO (Reuters) - Apache Corp (APA.N) faces a difficult choice in Egypt: whether to sell its substantial oil and natural gas operations in the country or wait out the recent bloodshed.
The Texas-based energy company has said it is assessing the value of its Egyptian interests, which account for roughly a fifth of its global oil and gas production and 27 percent of its revenue last year.
While production has not been affected so far by the violence, Apache's shares have fallen 5 percent since July 3, when former Egyptian President Mohamed Mursi was overthrown. Many analysts believe the turmoil contributed to the dip.
"The sooner they get the hell out of there, the better," Oppenheimer & Co analyst Fadel Gheit said. "Investors have plenty of risk in the stock market. They don't want civil war risk in their portfolios, too."
But selling now would likely mean accepting a price undercut by political uncertainty. At the end of 2012, about 7 percent of Apache's oil and natural gas assets were in Egypt, worth roughly $854.1 million. Analysts said it was hard to put a current value on the operations because of the turmoil.
"Apache is not going to resort to a fire sale," said Gheit, "But it's a long-term challenge if they decide to stay and operate there."
The quandary is not unique to Apache. More than 250 U.S. companies, ranging from Dow Chemical Co (DOW.N) to Citigroup Inc (C.N), operate in Egypt, where the army-backed government has instituted a month-long state of emergency.
Apache and other Western companies are now weighing whether the risks of operating in Egypt outweigh the rewards.
Last week, General Motors (GM.N), Electrolux (ELUXb.ST) and BASF (BASFn.DE) temporarily closed facilities in Egypt, citing the unstable security situation. BG Group (BG.L) and BP (BP.L) pulled out non-essential expatriate staff last month.
Kristian Ulrichsen, a fellow at the policy-focused Baker Institute in Houston, saw less risk in the short term for companies working in Egypt than later on, when the reverberations from the government crackdown are felt.
"The longer-term risks are a whole segment of the population being cut out of the political roadmap. That's something that will play out over years," he said, citing Algeria's bloody civil war in the 1990s as a worrying precedent. "I hope Egypt won't go down that route, but you can see the danger."
Apache, which bought BP's oilfield stake in the western Egyptian desert for $650 million in 2010, has more than $1.3 billion in insurance policies covering its Egyptian operations in the event the government confiscates its assets, cancels contracts or nationalizes the oil industry.
"We're watching the situation closely," Apache spokesman Patrick Cassidy said.
POTENTIAL VS REALITY
The Texas-based company's 9.7 million acres in Egypt, of which it so far has only developed 18 percent, promise "considerable exploration and development opportunities," according to securities regulatory filings.
A U.S. Energy Information Administration report last month singled out exploration by Apache as being responsible for many of the oil discoveries in Egypt during the past five years.
Apache declined to say how many employees it has in Egypt. Brokerage Raymond James estimates Apache has roughly 200 expatriates and as many as 10,000 local workers.
"The most important thing about Egypt is it generates a tremendous amount of cash flow," Apache Chief Executive Steve Farris said on a conference call with investors this month.
"And we just need to figure out a way to validate that value without giving up that value," he added. Analysts interpreted his comments to mean a sale of the assets was probable.
A Chinese oil company could be a likely buyer of Apache's Egyptian assets given China's long-standing interest in Africa and need for oil, said Oppenheimer's Gheit. Proceeds from a sale would allow the company to buy back shares and trim its $12.3 billion debt load, he said.
In a step largely seen as a positive for foreign oil companies, Egypt's oil ministry on Thursday named Tarek El Molla as the head of Egyptian General Petroleum Corp (EGPC), which is Apache's partner in the country. Molla, a long-time EGPC employee, previously ran the state-run company's foreign trade and operations unit. Still, he is the third head of EGPC so far this year.
Analysts at Raymond James said the fears about Egypt for Apache's stock appeared overdone, noting that all parties have an interest in maintaining stability for oil production.
"Political uprising have happened before and the company has never lost a single barrel of production," Raymond James said in a note to clients.
(Reporting by Ernest Scheyder and Braden Reddall; Editing by Edward Tobin and Leslie Gevirtz)