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Apache Shares Surge on Egypt Oil Deal

Tickers in this article: APA SHI

NEW YORK ( TheStreet) -- Apache shares were rising about 8% in early Friday trading after the oil driller said it would sell a 33% stake in its Egyptian business, Apache Egypt, to Sinopec, a state-backed Chinese energy giant.

The deal will allow Apache to further shift its energy portfolio toward U.S. onshore drilling markets after buying Cordillera Energy Partners in early 2012, while also raising significant capital for the company.

Sinopec will pay $3.1 billion in cash for its minority stake in Apache Egypt. Apache will continue to operate its Egypt upstream oil and gas business, the company said in a press release.

Apache's deal comes amid a wave of regime change in the Middle East and an escalation of civil unrest in Egypt in recent months. Rising geopolitical tensions in energy producing Middle Eastern states such as Egypt, Libya and Syria have also led to a sharp rise in oil prices.

Friday's announcement of a partnership with Sinopec also comes as Apache works hard to re-balance its portfolio of energy assets toward U.S. onshore markets. Apache says it is focusing on energy assets with predictable growth rates and attractive rates of return.

The company said oil and gas from the onshore North American market was 55% of its overall energy energy production in the second quarter, when factoring in the Sinopec partnership and Apache's recent sale of its Gulf of Mexico shelf assets. Only 15% of the firm's production would have come from Egypt.

In 2010, Apache's Egyptian business represented a quarter of the company's total energy production, while onshore North American operations contributed just 31% of overall production.

"Our successful exploration and development programs in Egypt have been an important contributor to both growth and cash flow for many years. With today's partnership, we are ensuring they can continue this contribution in the future," Steven Farris, Apache's CEO, said in a statement

Apache shares were rising nearly 8% to $84.86 in early Friday trading. Apache shares have underperformed broader markets year-to-date and over the past 52-weeks.

Deutsche Bank analyst Stephen Richardson called Apache's announcement Friday of the partnership with Sinopec a "gamechanger" that further indicates transformation at the struggling oil and gas driller. The deal also "secures value from a key asset that the market was significantly discounting due to political unrest in country," Richardson wrote in a note to clients.

The analyst expects proceeds of the sale will likely help Apache retire some outstanding debt and improve its credit metrics, while also supporting the company's 30-million-share buyback authorization.

Year-to-date, Apache has sold about $7 billion in assets, exceeding its initial target of $4 billion.

Doug Leggate, a Bank of America Merrill Lynch analyst, expects the company could continue to sell assets as a way to shift its energy production mix and strengthen its balance sheet. With other potential disposals on the horizon such as Apache's deepwater Gulf of Mexico assets, total sales could surpass $8 billion by year-end, according to Leggate.