Apache Corporation (APA) will finish exiting its Canada operations following the closing of a sale of three sets of assets. The sale was comprised of a slate of properties in Alberta and British Columbia to Paramount Resources (ticker: POU); the sale of its Provost assets in Alberta to an undisclosed private company; and the sale of its Midale and House Mountain assets to Cardinal Energy Ltd. (ticker: CJ).
The Cardinal transaction was announced in June and closed July 6th, 2017. In its portion of the acquisition, Cardinal paid a total of approximately $300 million. Cardinal noted that the acquisition was in line with its intent to increase light oil production.
The Midale and House Mountain locations are conventional light oil plays, as opposed to the typical unconventional Montney play. Cardinal reported that the properties should add approximately 5,000 BOEPD of production to its total production, with 50 identified drilling locations.
Paramount—which recently merged with Trilogy Energy Corp.—made its acquisition for approximately $459.5 million for cash on hand, and without assuming additional debt. The Paramount and private transactions are expected to close in August, 2017.
Apache’s Canadian assets averaged approximately 300 Mmcfe per day during the second quarter of 2017.
The three transactions totaled approximately $713 million. The funds will be used for Apache’s 2017-2018 capital budget and debt reduction, the company said. In a statement Apache CEO and President John Christmann IV outlined that Apache was “streamlining [its] portfolio and focusing on assets in the United States, United Kingdom North Sea, and Egypt,” and that the exit from Canada was consistent with those goals.
Apache’s Canadian assets had been allocated $125 million for capital expenditures, which will now be re-allocated to other assets in its portfolio.
The three sales went for approximately $14,000 per BOEPD, well below the average for Canadian asset sales—which typically fall around $30,000 per BOEPD.
Revised production following sale
UBS Investment Bank noted that Apache plans to provide updated 2017-2018 guidance following the closing of the three transactions, and the bank said it had updated its own estimates for Apache. UBS’s new estimates were revised downward to approximately 476 MBOEPD from 495 MBOEPD for 2017, and the bank revised its estimates to approximately 512 MBOEPD from 577 MBOEPD for the 2018-2019 year.
Analyst Commentary
From KLR
APA ($45.77, B, $72) – Exiting Canada (Positive Optic, Negligible Value Impact) – APA announced an agreement to sell its Canadian subsidiary to Paramount Resources for ~$354 million in cash (includes properties in Alberta & British Columbia). In two separate transactions announced in June, APA agreed to sell its Provost assets in Alberta to an undisclosed private and assets at Midale and House Mountain in Saskatchewan and Alberta to Cardinal Energy. Proceeds from the three transitions total ~$713 million. In 2Q/17, production associated with the assets averaged ~300 MMcfepd (~67% gas). APA plans to reallocate planned capex for the Canadian business to other areas of the portfolio. The transactions equate to a ~$2,375 per flowing Mcfe valuation. Apache’s exit from Canada is expected to be completed by the end of August '17. Production associated with APA’s Canadian assets accounted for ~21% of the company’s 1Q/17 North American volumes. This announcement should have a negligible value impact, though we believe is a positive optic for the stock as it streamlines the portfolio and enhances cash margins on a per Boe basis (preliminarily we are modeling capital yield improves 5%+).
From Wells Fargo
This afternoon, Apache announced that it has sold its Canadian subsidiary (Apache Canada Ltd.) to Paramount Resources Ltd.. This transaction, along with 2 separate transactions signed earlier in June, marks a complete exit from Canada for Apache. Aggregate proceeds from the 3 sales total $713MM, and with total production from APA's Canadian operations at 300 MMcfe/d, the transactions appear to generally reflect PDP value (about $2,400 per Mcfe/d). Canadian properties sold include positions concentrated primarily in Alberta (Montney/Wapiti, Duvernay/Kaybob, and House Mountain) and a liquids play in Saskatchewan. APA stated that the proceeds will be used to fund its 2017-2018 capital program, to reduce debt or to improve liquidity. Apache's balance sheet is currently solid, with leverage at 2.5x post transaction. Of the 3 transactions, 1 closed at the end of June (Saskatchewan/Alberta asset sale to Cardinal Energy Ltd.) and the other 2 are set to close by the end of August 2017.
Our Take. Although on surface the overall transaction price looks a little light, we are focused more on the strategic implications rather than absolute price and we think the transaction makes sense for APA. Divesting assets allows people and resources to shift focus to other portfolio properties, as well as freeing up liquidity and capital that it can redeploy into its U.S. onshore business ($125MM allocated for Canadian capex in 2017). Additionally, the reduction in operating expense and overhead associated with its Canadian operations should result in a more streamlined cost structure, which is certainly advantageous in today's commodity price environment.
From UBS
APA agreed to sell its Canadian subsidiary to Paramount Resources. In June, APA also agreed to sell its Provost assets in Alberta to an undisclosed private company. With the previously disclosed sale of Midale & House Mountain assets in Saskatchewan & Alberta to Cardinal Energy for US$244MM, APA is completely exiting Canada for aggregate proceeds of US$713MM (C$927MM) from the 3 transactions. With 2Q production of ~50 MBoed (~2/3 natural gas), the total price implies APA is divesting its Canadian assets for just <6x EBITDX and ~US$14k/Boed, below prices in recent western Canadian deals averaging ~US$30k/Boed given APA's much lower liquids mix (31% vs 65%). While APA stated proceeds go to fund its 2017-18 capex, reduce debt, or improve overall liquidity, we believe most will be directed to funding its FCF deficit, which we estimate at >$1 billion/annum in 2017-18 assuming the current futures strip.
Strategic Canada exit improves capital allocation & bridges 2017 spending cap
The transactions are consistent with APA commentary that it expects to fund this year's cash flow outspend with proceeds from non-core asset sales which now total ~$1.14bn announced/closed YTD, completely covering our 2017E organic FCF deficit (after dividends) of ~$1.07bn under current futures strip. With higher cost Canadian assets struggling to compete for capital, a complete exit enables APA to enhance its resource allocation focusing on the Permian, North Sea, & Egypt, as it is redirecting the unspent portion of its 2017-18 Canada budget of $125MM to the aforementioned core areas.
Modestly reducing estimates but no change to debt/EBITDX
APA plans to update its 2017-18 guidance after closings the three transactions. As a result of the two deals announced today, we lowered our 2017E prod'n by ~19 MBoed to ~476 MBoed, and 2018-19E prod'n by ~50 MBoed to ~512 MBoed & ~577 MBoed, respectively. We also reduced our 2018-19E CFPS by $0.35/$0.50 to $8.20/$10.25, with 2P NAV little changed at ~$59/share. We estimate APA's 2018-19 EV/DACF widened by a modest 0.2x to 8.8x & 8.2x, respectively, at current futures strip prices, but YE18 net debt/cap shrank from 59% to 57% with debt/EBITDX unchanged at 2.8x.
