Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Apache isn't desperate, but it should be more willing to entertain suitors.

The $20 billion oil explorer rejected a takeover approach from an unidentified buyer and is working with Goldman Sachs on its defense strategy, according to a Bloomberg News scoop that cited unnamed people familiar with the matter.

The rebuff makes sense to some extent. Apache has attractive assets in the Permian Basin and a strong enough balance sheet to weather the downturn in oil prices. It's been doing all the right things -- slashing costs and idling rigs. Any buyer is being opportunistic by approaching the oil and gas explorer at a time when is fresh off an almost 12-year low.

At the same time, Apache wasn’t performing all that well even before the drop-off in oil prices. In the five years leading up to crude's pre-slump peak in June 2014, Apache shares rose about 34 percent, compared with almost three times that amount for the Standard & Poor's 500 energy index. Investors weren't big fans of the company's costly investments in natural gas projects and the political unrest threatening its Egyptian assets.  

On the Lows
The recent takeover approach is opportunistic, but Apache still has reason to consider a sale
Source: Bloomberg

To its credit, Apache has been selling off some of these businesses. Stakes in liquefied natural gas projects, legacy acreage in the U.S. and Apache's Australian energy business have all gone on the block. But the company still isn't as focused as many of its peers, with big positions remaining in the North Sea and Egypt. All oil and gas explorers are cheap right now, but there's a reason why Apache is one of the cheapest among peers.

Back in June, analysts were predicting that Apache would generate up to $1 billion of cash flow in 2015. Those projections have come down some, and are now down around $240 million after another dip in oil prices. One big thing keeping Apache's cash flow positive this year is the asset sales. It can't sell assets forever though, and the debt markets are getting tighter. Being part of a bigger company would be an advantage, even if it's not a must.

Calls for a bottom in oil prices over the summer turned out to be wrong, and they could likely be wrong again. The point is no one really knows how long the pain will last. The uncertainty means it's worth considering all options to increase shareholder value. An all-stock combination with an oil major would give Apache investors a stronger boat to weather the storm and a shot at some upside if oil prices increase. Not a bad deal in times like this.  

That's not to say Apache should take a low-ball offer. But the just-say-no strategy is a luxury that even strong exploration and production companies can't afford.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net