Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

With successful oil mergers, it is less a case of striking while the iron is hot and more one of kicking the target when it is down.

Which brings us to Apache.

Bloomberg News broke the story this weekend that the U.S. oil company had recently received, and rejected, a takeover approach. The stock duly jumped about 10 percent Monday morning.

In that respect, though, Apache stuck out like a not-so-sore thumb, with the rest of the exploration and production sector relatively quiescent. That is one clue this isn’t the bugle call for widespread oil M&A that has been anticipated since prices crashed around a year ago. Otherwise, stocks like Murphy Oil, Anadarko Petroleum, Occidental Petroleum and Hess ought to have perked up. They haven't.

Like the companies just mentioned, Apache occupies that middle ground between small E&P companies and the vast, diversified majors. It made its name picking up old assets discarded by the majors, like BP’s Forties field, and reinjecting some vim into them. The company is a mini-major, with a large onshore U.S. operation centered on the Permian shale basin, but also some big positions in Canada, the North Sea and Egypt.

This model can appeal to investors with the right balance of assets and scale: Oxy is a good example. With Apache, though, it isn't clear which class of investor would feel particularly motivated to own it. Focused E&P companies usually offer more growth and a simpler story, while the majors offer true scale and diversification.

Accordingly, Apache has been shifting strategy to be more focused. That offers some appeal as a turnaround story. But the company isn’t there yet, and so the stock has sat unloved in the bargain bin for a while. Even after Monday’s pop, it trades at less than 5 times 2016 cash flow, versus 6 to 10 times for Hess, Oxy and Anadarko.

Down, Not Out

So, like Suncor’s recent hostile bid for Canadian Oil Sands, whomever approached Apache did so because of its specific vulnerabilities. That isn’t to say Apache is begging for favors. Its third-quarter results, released last week, weren’t great but weren't terrible, either. The balance sheet is in decent shape, and the company is making the right noises about committing to live within its means amid the rout in oil prices.

But this means growth next year looks unlikely. So we get back to the question of why an investor would choose to ride out the storm in Apache’s boat when there are bigger boats in the form of the majors or faster boats in the form of E&P standouts such as Pioneer Natural Resources or EOG Resources.

As for who the mystery bidder could be, the list of suspects is likely to be relatively short. Tacking on a 30 percent takeover premium for Apache would get you to a price tag of about $30 billion, including assumed debt. Any deal would need to be mostly paid in stock. Apache’s shareholders wouldn’t want to sell for cash at this point and miss out on a recovery down the road. Equally, not even the majors could pay that much cash and hope to get it past dividend-hungry shareholders at this point.

Exxon Mobil could maybe use Apache’s Permian assets and live with its international exposure. BP is another potential acquirer, although in some ways it would just be buying back a bunch of assets it sold to Apache over the past decade or so. Total also seems plausible. Both Royal Dutch Shell and Chevron look too preoccupied with their own problems right now, though.

Beyond them, the list dwindles quickly. Statoil mentioned on its own results call last month that its leverage target wasn’t "sacred" if the right M&A opportunity came up, and buying Apache would bolster the Norwegian major’s position in two core regions for it, the U.S. onshore and the North Sea.

It is also possible that one of the other mini-majors, such as Anadarko, might want to bulk up in order to preserve their own independence. Why their shareholders would welcome further diversification into sketchy neighborhoods like Egypt and the loss of a takeover premium in their own stock isn’t clear, though.

One noteworthy development in recent weeks is the hoopla Apache has been making around its recent discoveries in the North Sea, going so far as to schedule a special presentation later this month to brag about it. That is one way of getting investors scratching their heads about the portfolio to appreciate some hidden strengths -- and maybe also force any potential suitors to really open their wallets. Either way, it suggests Apache’s frisson of excitement centers on its low price, and the long-awaited bidding frenzy in the oil patch is yet to begin.

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

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net