Apache's Egypt quandary symbolizes tough business call

Apache Corp Chairman and CEO Steven Farris speaks during the CERAWeek energy conference in Houston in this March 8, 2012 file photo.

Credit: Reuters/Richard Carson/Files

By Ernest Scheyder and Braden Reddall

NEW YORK/SAN FRANCISCO | Fri Aug 23, 2013 3:46am EDT

NEW YORK/SAN FRANCISCO (Reuters) - Apache Corp (APA.N) faces a difficult choice in Egypt: whether to sell its substantial oil and natural gas operations in the country or wait out the recent bloodshed.

The Texas-based energy company has said it is assessing the value of its Egyptian interests, which account for roughly a fifth of its global oil and gas production and 27 percent of its revenue last year.

While production has not been affected so far by the violence, Apache's shares have fallen 5 percent since July 3, when former Egyptian President Mohamed Mursi was overthrown. Many analysts believe the turmoil contributed to the dip.

"The sooner they get the hell out of there, the better," Oppenheimer & Co analyst Fadel Gheit said. "Investors have plenty of risk in the stock market. They don't want civil war risk in their portfolios, too."

But selling now would likely mean accepting a price undercut by political uncertainty. At the end of 2012, about 7 percent of Apache's oil and natural gas assets were in Egypt, worth roughly $854.1 million. Analysts said it was hard to put a current value on the operations because of the turmoil.

"Apache is not going to resort to a fire sale," said Gheit, "But it's a long-term challenge if they decide to stay and operate there."

The quandary is not unique to Apache. More than 250 U.S. companies, ranging from Dow Chemical Co (DOW.N) to Citigroup Inc (C.N), operate in Egypt, where the army-backed government has instituted a month-long state of emergency.

Apache and other Western companies are now weighing whether the risks of operating in Egypt outweigh the rewards.

Last week, General Motors (GM.N), Electrolux (ELUXb.ST) and BASF (BASFn.DE) temporarily closed facilities in Egypt, citing the unstable security situation. BG Group (BG.L) and BP (BP.L) pulled out non-essential expatriate staff last month.

Kristian Ulrichsen, a fellow at the policy-focused Baker Institute in Houston, saw less risk in the short term for companies working in Egypt than later on, when the reverberations from the government crackdown are felt.

"The longer-term risks are a whole segment of the population being cut out of the political roadmap. That's something that will play out over years," he said, citing Algeria's bloody civil war in the 1990s as a worrying precedent. "I hope Egypt won't go down that route, but you can see the danger."

Apache, which bought BP's oilfield stake in the western Egyptian desert for $650 million in 2010, has more than $1.3 billion in insurance policies covering its Egyptian operations in the event the government confiscates its assets, cancels contracts or nationalizes the oil industry.

"We're watching the situation closely," Apache spokesman Patrick Cassidy said.

POTENTIAL VS REALITY

The Texas-based company's 9.7 million acres in Egypt, of which it so far has only developed 18 percent, promise "considerable exploration and development opportunities," according to securities regulatory filings.

A U.S. Energy Information Administration report last month singled out exploration by Apache as being responsible for many of the oil discoveries in Egypt during the past five years.

Apache declined to say how many employees it has in Egypt. Brokerage Raymond James estimates Apache has roughly 200 expatriates and as many as 10,000 local workers.

"The most important thing about Egypt is it generates a tremendous amount of cash flow," Apache Chief Executive Steve Farris said on a conference call with investors this month.

"And we just need to figure out a way to validate that value without giving up that value," he added. Analysts interpreted his comments to mean a sale of the assets was probable.

A Chinese oil company could be a likely buyer of Apache's Egyptian assets given China's long-standing interest in Africa and need for oil, said Oppenheimer's Gheit. Proceeds from a sale would allow the company to buy back shares and trim its $12.3 billion debt load, he said.

In a step largely seen as a positive for foreign oil companies, Egypt's oil ministry on Thursday named Tarek El Molla as the head of Egyptian General Petroleum Corp (EGPC), which is Apache's partner in the country. Molla, a long-time EGPC employee, previously ran the state-run company's foreign trade and operations unit. Still, he is the third head of EGPC so far this year.

Analysts at Raymond James said the fears about Egypt for Apache's stock appeared overdone, noting that all parties have an interest in maintaining stability for oil production.

"Political uprising have happened before and the company has never lost a single barrel of production," Raymond James said in a note to clients.

(Reporting by Ernest Scheyder and Braden Reddall; Editing by Edward Tobin and Leslie Gevirtz)

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Acer will have a tough time using Chrome OS and Android to offset sliding PC sales

Amazon has spilled the beans on the first small Windows 8 tablet we've seen, Acer's 8.1-inch Aspire W3-810.

In response to a surprise second quarter loss of NT$343 million (US$11.4 million), Acer CEO JT Wang said in a conference call with investors on Thursday that the company is going to increase its range of Android and Chrome OS products, while offering fewer Windows-powered products.

The loss was caused by a combination of higher costs and lower sales and compares with a NT$56 million profit in the same quarter last year. Last year, Acer said that it would attempt to produce fewer, better PC products to move upmarket. This has caused higher design and marketing costs, but apparently hasn't been sufficient to offset the broader slowdown in the PC market.

As a result, Wang said that Acer is "trying to grow our non-Windows business as soon as possible." While Acer once flirted with non-Google alternative operating systems, pressure from Mountain View has forced the Taiwan company to stick with its operating systems, both Android and Chrome OS. Wang argues that both of these will have a role, noting that "Android is very popular in smartphones and dominant in tablets" and that he sees a "new market" for Chromebooks.

Currently, around 3 percent of the machines Acer sells are Chromebooks running Google's Chrome OS. Wang said that machines running both of Google's operating systems will contribute about 10 to 12 percent of Acer's revenue by the end of the year, and as much as 30 percent next year.

Wang argued that "the Windows camp has to do something to re-establish or reinforce confidence among PC users. People are reluctant [to buy] and are holding [off] their purchasing decisions."

Though the success of Android is inarguable, the ability to profit from it is much harder to come by. In the smartphone market, Samsung is dominant, with other players struggling to win sales or eke out a profit. HTC, for example, scored a critical hit with the One but has faced falling revenue (down 22 percent year on year to NT$70 billion/US$2.35 billion for the second quarter) and slumping profit (down 83 percent to NT$1.25 billion). The company has warned that next quarter, it will make a loss.

The tablet market is arguably less mature and more open to new entrants; nonetheless, success could prove hard to come by. Critical consensus is that the best tablets available are the ones sold at essentially no profit: Amazon's Kindle Fires, and the Google-branded Nexus 7 and Nexus 10 (built, respectively, by Asus and Samsung). How this critical consensus translates into sales isn't immediately clear; Samsung and Asus are the number two and number three tablet builders (behind Apple), with some split between their own brands and Google's.

One thing is clear: companies are working hard to suck the profit out of the tablet market. This took decades in the PC market, and it looks like it will take a matter of years for tablets. Even Apple, a company notoriously defensive of its margins, has had to accept lower profitability with the iPad mini. Tablets may be where the sales growth is, but for a company seeking a return to profitability, the tablet market is a challenging place to venture.

As for the Chromebooks, it's hard to see why they would show any particular growth. Android has grown to dominate the smartphone and tablet markets, but Chrome OS has, thus far, had much less impact in the PC market—not least because Android tablets cost about the same, and do so much more. Unless Google does something to radically change the nature of Chrome OS (or Android), the relative lack of success of Chrome OS is likely to continue.

Even with the greater emphasis on Android and Chrome OS, Acer expects that the lion's share of its revenue will continue to come from Windows machines. As a member of the "Windows camp," the company must surely shoulder at least some of the blame for the lack of confidence within the market. The company's PC efforts are decidedly mixed. Machines such as the Aspire S7 are a (flawed) step in the right direction toward the high-end, but weird devices such as the Aspire R7, not to mention outright horrible gadgets like the Iconia W3, undermine the company's high-end claims.

Acer isn't alone in facing the difficult consequences of a declining PC market. But unfortunately for the industry, there's no easy replacement for the Windows PC that offers both high sales and healthy margins. Pushing Android and Chrome OS is certainly different from pushing Windows—but there's no guarantee that it's going to be any more successful.

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