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Running with the Big Dogs

By Roger S. Conrad on Apr. 25, 2015

Scale can be a big advantage during down-cycles in the energy sector, as a diversified asset base can afford some protection against the worst of the pain inflicted by lower commodity prices.

These names also may have more levers to pull in terms of monetizing noncore assets and sometimes boast stronger balance sheets than smaller independent operators.

We kick the tires on some of the larger independent exploration and production companies in the US to see which ones might be worth your while.

Apache Corp (NYSE: APA)

APA Price Graph

The good news for Apache Corp’s shareholders is that management has moved swiftly to adjust to lower oil prices. The bad news is that the company moved slowly during the shale oil and gas revolution and may need to take more action before the cycle turns.

Apache has completed about $5 billion in asset divestitures so far in 2015.

On April 10, the firm closed the US$2.8 billion sale of its interests in two liquefied natural gas (LNG) export projects to Woodside Petroleum (ASX: WPL, OTC: WOPEY):

  • Wheatstone LNG: An Australian export terminal slated to start up in mid-2016; and
  • Kitimat LNG: A proposed export facility on Canada’s West Coast that would come onstream at a much later date—if the project moves forward.

Apache followed this long-awaited transaction with the US$2.1 billion sale of its Australian exploration and production business to a consortium of private-equity funds.

This deal sheds assets that account for about 7 percent of the company’s total hydrocarbon output and had grown their production at an annual run rate of about 12 percent.

The North American onshore market now accounts for about 70 percent of Apache’s production, while its international portfolio consists of operations in Egypt and the North Sea.

This series of transactions has helped Apache to eliminate all its debt maturities through January 2017. Nevertheless, Moody’s Investors Service cut the company’s credit rating to Baa, citing its reduced scale, elevated leverage metrics and higher finding, development and acquisition (FD&A) costs of $32 per barrel of oil equivalent—more than double the FD&A costs of EOG Resources (NYSE: EOG).

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