Why an Apache Deal Wouldn’t Open the Oil Floodgates
Interest in Apache probably won’t herald a wave of similar deals due to a lack of brave, deep-pocketed buyers.
There will be deals. Or will there?
Shares of oil-and-gas explorer Apache Corp. jumped by more than 10% Monday afternoon following a report by Bloomberg News of a takeover approach by an unidentified suitor. This added that the company had hired advisers to mount a defense strategy.
If so, the possible suitor isn’t all hat and no cattle. Based on available firepower, a large, integrated energy company would make most sense.
Still, the fact that none of Apache’s peers saw anything more than a brief price boost Monday morning suggests two things: that the bargains on offer among North American oil and gas producers aren’t quite compelling enough to kick off a round of consolidation and that the list of buyers is short.
For what it is worth, shares of Exxon Mobil were the weakest among its peer group midday Monday. And it has made some small acquisitions in the Permian Basin of Texas where Apache has the lion’s share of its production.
Given that company’s massive size, small deals don’t do much to move the needle. BP is another supermajor with the balance-sheet strength to do a deal easily. But an acquisition in the range of $30 billion in market value plus debt is within the realm of possibility for any of the supermajors—particularly if there is a big equity component.
The industry has been cautious up to this point amid a rout in crude prices. A deal for Apache at the current price would be eight times as large as the next-largest transaction in the U.S. exploration-and-production sector this year.
At current oil prices, though, adding a barrel of oil to reserves through the checkbook rather than the drill bit is becoming more attractive.
The enterprise value of a basket of large U.S. exploration-and-production companies tracked by Wolfe Research was equal to just under $4 a barrel of proven and probable hydrocarbon reserves. That is around half the recent peak for that measure.
Apache is about average on that measure, though the range of multiples is wide. Those vary in part based on the percentage comprised of petroleum or similar liquids versus natural gas. Nearly two-thirds of Apache’s proved reserves are liquids and realized prices per barrel of oil equivalent remain two to three times as high as that of natural gas even after the recent rout in crude prices.
With no end in sight to today’s oil-and-gas glut, it might be early for a big deal in the oil patch. But there are risks in waiting, too. As legendary oil man Jean Paul Getty supposedly said: “The meek shall inherit the earth, but not its mineral rights.”