Will Apache Be Impacted By Kirchner’s Reelection?
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
At Apache's (NYSE: APA) third quarter earnings conference call, it was announced that the company has progressed in Argentina. The country is in the news at the moment because of the protests against Cristina Kirchner, who has held power for the last five years. Argentineans have been protesting at the possibility of Cristina being reelected. Going forward, I will examine how a Kirchner reelection would impact Apache, which has a considerable stake in the country's oil and natural gas production.
G. Steven Farris, Chairman, Chief Executive Officer, and Member of Executive Committee at Apache noted that the company has been successful worldwide. He also revealed that Apache's drilling momentum has accelerated and production has increased quite a bit too. He suggested that there has been an extraordinary progress in Argentina, where the company completed its first Vaca Muerta horizontal well. The well was a relatively short lateral and measures about 1,900 feet with just 7 fracs. The well is still in an initial stage, but he assured investors that the results have been very encouraging.
Mr. Farris also noted that Apache has been able to set the economics of the play, suggesting that the company has ample freedom to work within Argentina at the moment. Apache has planned 4 additional horizontal tests in the next 6 months and with more than 450,000 net acres to consider, the company has a lot of area to explore, drill, and operate. While Apache's fundamentals and numbers have been particularly impressive, many investors and observers have noted that its confidence when it comes to Argentinean operations may be questionable.
These doubts are valid, and need to be addressed in order to understand the risks of Apaches business in Argentina. Cristina Kirchner has been quite supportive when it comes to oil companies that operate within Argentina. Her only grouse is that she wants to pretend that the Falkland Islands belong to Argentina, in order to appeal to the popular vote. She has also threatened to penalize American oil companies that forge a relationship with the Falkland Islands government, and Noble Energy (NBL) is one of them. Noble has managed to sign deals with the Falkland Islands government, attracting the ire of Cristina.
However, the company has not cared much about her empty rhetoric ad plans to drill by 2015. Now, Apache has remained mum about its position in the Falkland Islands. I do not think the company has any interest in entangling itself in a mess in the Falkland Islands. For all we know, Apache might just stick to Argentina at the moment and even revel in its privileged position within the country, as it has tried to stay away from regional politics.
If Cristina Kirchner is reelected, Apache will continue to enjoy its privileged position in Argentina. If she loses the election mid-next year, Apache will be able to not only assert its privileged position with the next government but also look for possibilities in the Falkland Islands. It would be very interesting to see how Apache will play the game, in either of the cases. In my opinion, Cristina will not win this election as the protests are continuing to rage on the streets of Buenos Aires. She may lose the election to a far more rational and pro-international government which will ultimately prove to be beneficial to Apache yet again.
No matter what the outcome of this election is going to be, Apache will continue to maintain its privileged position and that will surely affect the company's fundamentals and numbers. Cristina has faced a lot of criticism for opting a very populist tone, while the Argentinean economy is in shambles. Her empty rhetoric against capitalism, her claim towards the Falkland Islands, and the way she has treated her opposition have all led to a seething resentment against her. Current opinion towards Cristina Kirchner is very negative in Argentina.
Many months ago, it was reported that Anadarko Petroleum (NYSE: APC) is eyeing oil fields in the Falkland Islands. However, we have not heard about that until now and Anadarko may not be particularly interested in the Falkland Islands, considering how messy the political scenario is in the Falkland Islands. When we talk about political confusions related to oil companies, we must also consider the problems that Chevron (NYSE: CVX) and ExxonMobil (NYSE: XOM) find themselves in Russia. Vladimir Putin has been very cooperative and welcoming towards foreign oil companies. He allotted ExxonMobil areas in the Northern Russia, while Chevron has major oil and gas projects in the southern region. Putin has successfully avoided conflicts between Exxon and Chevron by allotting completely different geographical regions. If Cristina is reelected in Argentina, she should follow this model and allot newer oil companies areas that are not currently operated by Apache.
If we look at Apache's numbers, it is doing quite well. The company's price to book ratio is 1.04 and its price to sales ratio is 1.83, which suggests that it is doing fairly well. However, I would say that when compared to its peers, it is not doing exceptionally well. Its stock trades at $79. With a profit margin of 15.04% and an operating margin of 43.71%, it is one of the best stocks to consider if income is an important consideration. Apache has an operating cash flow of $9 billion and a total debt of $11.63 billion. I will not consider that as a major liability, but it might be a crucial factor to consider. If Cristina is reelected in Argentina, Apache can expect another four to five years of stable and secure growth. If she is not reelected, it paves the way for a successful oil and gas business in the Falkland Islands as well.
jordobivona has no positions in the stocks mentioned above. The Motley Fool owns shares of Apache and ExxonMobil. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!