Apache Corporation (NYSE: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, UBS believes most will be directed to funding its FCF deficit, which it estimates at >$1 billion/annum in 2017-18 assuming the current futures strip.
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 UBS' 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.
APA plans to update its 2017-18 guidance after closings the three transactions. As a result of the two deals announced today, the firm lowered its 2017E prod'n by ~19 MBoed to ~476 MBoed, and 2018-19E prod'n by ~50 MBoed to ~512 MBoed & ~577 MBoed, respectively. UBS also reduced its 2018-19E CFPS by $0.35/$0.50 to $8.20/$10.25, with 2P NAV little changed at ~$59/share. The firm estimates 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. $48 PT assumes 6.8x normalized 2018E DACF, above hist. avg. on improved portfolio