Apache’s liquefied natural gas projects in Canada and Australia

Market Realist

Overview: JANA's activist position in Apache Corp. (Part 3 of 6)

(Continued from Part 2)

Liquefied natural gas projects

Last month, activist investors’ hedge fund JANA Partners LLC disclosed a stake worth $1 billion in Houston-based independent exploration and production company Apache Corp. (APA). It’s pushing the company to divest its international holdings.

JANA’s second quarter investor letter, which was cited by the Wall Street Journal, said the fund wants the company to focus on U.S. shale opportunities and exit its liquefied natural gas (or LNG) projects and the international portfolio. The fund believes that the LNG projects require a lot of investment and take years to develop. By divesting these projects, Apache can lower its spending risk and generate free cash which can further be utilized for share repurchases. JANA noted that if Apache’s management fails to pursue the initiatives to unlock shareholder value, the company could be targeted for an acquisition.

Under pressure from the activist hedge fund, Apache recently agreed to exit two of its international LNG projects in Canada and Australia. In its latest 2Q14 earnings release, the company said, “Consistent with the company’s ongoing repositioning for profitable and repeatable North American onshore growth, Apache intends to completely exit the Wheatstone and Kitimat LNG projects. In addition, Apache is evaluating its international assets and exploring multiple opportunities, including the potential separation of some or all of these assets through the capital markets.” According to Apache’s 2013 annual report, ~$2.4 billion of its 2014 capital was to be invested in the Kitimat and Wheatstone LNG projects.

Kitimat LNG plant

In February, 2013, Apache entered into an agreement with Chevron Canada under which each company owned a 50% stake in the Kitimat LNG plant, the Pacific Trail Pipelines Limited Partnership (or PTP), and 644,000 gross undeveloped acres in the Horn River and Liard basins in northern British Columbia. The Kitimat project is one of the “Big Three” projects envisioned for British Columbia with the other two being Petronas’ Pacific NorthWest LNG and Shell Canada Energy LNG Canada joint venture that will export LNG. The report added that while Petronas and Shell had secured Asian buyers for its LNG, Kitimat LNG has faced difficulty gaining buyers for its resource. A news report earlier this year cited Apache CEO Steven Farris. It noted that the company was seeking partners for the Kitimat project as costs were surging. Apache had planned to invest ~$1 billion of capital in the Kitimat project, which included the LNG plant as well as its upstream assets in the Horn River and Liard basins, according to the company’s annual filing.

Wheatstone LNG project

Apache’s website states that Wheatstone is the first LNG project in Australia to support large volumes of third-party supply gas. In 2009, Apache and Kuwait Foreign Petroleum Exploration Co. (or KUFPEC) agreed to join with Chevron (CVX) to develop the Wheatstone LNG hub. Apache and KUFPEC signed agreements to supply gas from the Julimar and Brunello discoveries and become foundation equity partners in the Chevron-operated Wheatstone facilities. The first phase of the Wheatstone Project comprises an offshore central processing platform, a 225-kilometer, 140-mile, pipeline to shore and onshore gas liquefaction consisting of two processing trains with a combined production capability of ~8.9 million tonnes of LNG per year.

The company’s annual filing said it has a 13% interest in the project and expects to invest approximately $4 billion over five years for the field and LNG facility development. Apache was to supply gas to Wheatstone from its operated Julimar and Brunello complex. A 65% interest in the Julimar development project was expected to generate average net sales to Apache of ~140 million cubic feet per day (or MMcf/d) of gas—equivalent to 1.07 million mtpa of LNG—at prices pegged to world oil markets, 22 MMcf/d of sales gas into the domestic market, and 3,250 barrels of condensate per day. The first production was projected for the end of 2016.

Australian LNG developers see spiraling project costs

Apache had planned to invest ~$1.4 billion of its additional 2014 capital in the Wheatstone development project, according to the company’s 2013 10K filing. A UBS analyst valued Apache’s 13% stake in Wheatstone at $2.5 billion and noted in a news report earlier in July that Apache’s stake could attract interest from Chinese buyers. Wheatstone is a one of the seven LNG ventures worth around $190 billion in Australia that are being built to fulfill the rising demand from Asia. However, rising costs of construction coupled with a stronger Australian dollar have impacted project developers including BG Group, Chevron (CVX), ExxonMobil (XOM), ConocoPhillips (COP), and France’s Total SA (TOT). The Australian Senate’s decision in July to repeal a carbon pricing scheme, also known as the carbon tax, was welcomed by the Australian Petroleum Production & Exploration Association (or APPEA) because this will lower the cost burden on LNG exports.

For more on this, please read Overview: Implications of Australia’s carbon tax repeal on the Market Realist website.

Continue to Part 4

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