Apache Reduces Exposure With Sinopec Deal
BMI View: Apache's decision to sell a 33% stake in its Egyptian business to Sinopec will help reduce the firms exposure to a market perceived as increasingly risky. For Sinopec, the sale is just the latest in a string of large and diverse purchases by China's state owned oil and gas firms abroad.
US independent Apache announced that China Petrochemical Corporation (Sinoepec) would pay US$3.1bn for a 33% stake in its Egyptian oil and gas business. Egyptian operations accounted for around 2 0 % of production and 27% of revenues in 2012 for Apache . Gross production from Egypt average d 213,000 barrels a day (b/d) of oil and 9.2bn cubic meters (bcm) of gas in 2012, netting the company around 100,000b/d and 3.6bcm worth of gas for the year. Under the terms of the deal Apache will remain operator of the assets in question.
However the ongoing political crisis in Egypt has led to uncertainty with regard to oil and gas production in Egypt. While Apache was quick to say that for its operations, in remote and unpopulated areas of the western desert , the risk of future disruptions to business in Egyptian operations appears to be on the rise. Operators have already seen gas in tended to feed export terminals intended for customers under long term contracts diverted to the domestic market in the wake a growing supply-demand imbalance ( see, 'Long Term Potential Strong Despite Instability,' August 27 ).
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The deal is consistent with Apache's previously outlined strategy to focus on its selling off non-core assets to focus its unconventional acreage in the US. Reducing its exposure to Egypt will offer support to Apache's performance given the perception of risk associated with the uncertain political situation even as operations themselves have largely been unaffected.
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For Sinopec, the deal is just the latest in a series of large upstream investments as China's national oil companies (NOC) expand their presence global footprint ( see, 'Asian Money Complements Hydrocarbon Riches,' August 7). According to the Wall Street Journal, Sinopec has invested nearly US$20bn in deals across the Americas, North Sea, and Australia since late 2010.
With a higher tolerance for risks and terms that international oil companies would view as less attractive, China's state owned oil and gas firms have expanded their portfolio at a rapid pace over recent years in a bid to gain access to resources, technology, and prestige. These deals have given China's NOCs a presence in both frontier, proven, and unconventional plays across the word.
Even with moderating economic growth in China, we note that growing consumption at home, earnings gained from sales to other markets helping offset domestic losses, and access to domestic financing, will act as continued incentive to further upstream purchases by China's state owned oil companies.
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|China Oil & Gas Consumption % Change y-o-y|
Although upstream exploration continues to yield discoveries even as the political situation worsens, our view remains that instability poses significant downside risks to oil and gas production . We see risks in the immediate term and over a longer horizon as investment slows and firms with a choice between developing assets in Egypt and elsewhere select the latter. Without an improvement in the political situation, we may well see operators revaluate their position in Egypt and move to follow Apache's lead by reduc ing their exposure to the country despite its prove n and prospective resource potential.
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