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The Deal: Sinopec Strikes $3.1B Deal With Apache in Egypt

NEW YORK ( The Deal) -- China Petrochemical Corp. (SNP - Get Report) has agreed to pay $3.1 billion for a 33% stake in Apache (APA - Get Report) Egyptian oil and gas business, reducing the Houston-based seller's exposure to the troubled country and providing further evidence of China's willingness to take on political risk to expand its oil reserves.

Beijing-based China Petrochemical, known as Sinopec, will be entitled to a one-third share of Apache's daily Egyptian output of about 100,000 barrels of oil and 354 million cubic feet of natural gas. Apache will retain a 67% stake in the operation and continue in its role as the site operator.

"A game changer transaction in our view as it further bolsters the momentum for change at APA [Apache] and secures value from a key asset that the market was significantly discounting due to political unrest in country," noted Deutsche Bank AG analysts Stephen Richardson and Ryan Todd.

The sale leaves Apache with an unexpected surplus to its targeted $4 billion of assets sales that were announced in May as part of a plan to raise cash and rebalance its portfolio. Apache in July agreed to sell Gulf of Mexico assets to private equity-backed Fieldwood Energy for $3.75 billion, not including about $1.5 billion of asset retirement obligations linked to the assets.

The deal values the Apache's Egyptian oilfield assets at $6.2 billion, or 4.2 times their forecast cash flow for 2014, Morgan Stanley analysts Evan Calio, Benny Wong and Jacob Dweck wrote in a note published Friday, Aug. 30. "We believe [Apache] shares should now trade at a higher multiple given that some Egyptian overhang is now alleviated."

The acquisition does not include about $1.2 billion of assets, such as working capital and inventory, associated with Apache's Egyptian operations.

Apache will use the cash "to pay down debt in order to maintain its current credit ratings and buy back shares under a 30 million share repurchase authorization, as well as fund future capital expenditures including international projects," the company said.

Those capital expenditures are likely to flow into nascent Canadian assets, which Apache's management has said it would like to convert into a new growth region, and into shale gas operations in the west Texas Permian Basin.
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