For Apache in Egypt, the oil keeps flowing

egyptian-oil-apache By Shelley DuBois, reporter

FORTUNE -- As the political unrest in Egypt continues, corporate America is watching and holding its breath. Already, many companies with operations in Egypt have had to adjust. Procter & Gamble (PG, Fortune 500), for example, had to close its Cairo facilities and evacuate foreign national employees. The protest is affecting the worldwide commodities markets too -- oil prices spiked to $100 this week and have stayed high on the assumption that the conflict in Egypt could disrupt crucial oil transit routs.

While most companies are concerned about the transit routes in and out of the country, several are producing energy in Egypt now. They're exposed to risk right now, since the consequences of political upheaval are unpredictable, and could possibly reach energy assets far from the protest in Cairo.Yet, so far, they're neither overly worried, nor should they be: Things for energy companies working in Egypt aren't bad.

One independent, Apache Corp (APA, Fortune 500), has a large stake in Egypt -- about 21% of the company's total assets are there, according to an analyst report by HSBC Global Research. Apache's stock took a hit on Thursday dropping by about 4.7% based on news about the conflict, paired with the company's decision to shut down its Australian oil fields because of hurricanes there.

The conflict in Egypt could of course hurt Apache, but it probably won't. If it does, it's unlikely to damage the company in any lasting way. Apache is still producing from its assets in Egypt, and therefore still raking in a profit from them. While that could change, there's a good chance that the independent oil company will continue production during the upheaval and emerge relatively unscathed.

In fact, as is typical in equities, one investor's panic is another's opportunity: Several analysts claim that the drop in Apache's stock price due to concern over Apache's large stake in Egypt created an opportunity to buy newly undervalued Apache stock.

Apache has over 11 million acres in Egypt that produced over 150,000 barrels of oil equivalent per day during 2009. Most of the Apache's oil fields are in Egypt's Western Desert, many, over a hundred miles from the conflict in Cairo. While national conflict can spread anywhere, the biggest threat to Apache depends on the government.

Apache has ties to the government that's currently getting overthrown, since its partner in Egyptian projects is a company called the Egyptian General Petroleum Corporation, is a national oil company. That does create some risk for the company. Experts say that Apache's worst-case scenario would be that the current government gets overthrown and the new regime would nationlize all of Apache's assets.

But that probably won't happen.

In times of conflict, "generally speaking, one of the things most nations want to do is keep the energy flowing, in order to meet its demand," says John Kollar, an analyst with HSBC.

Apache is crucial to Egypt, according to a UBS Investment Research report. The company drills half of the wells in the country, employs between 4,000 and 5,000 Egyptians and pays over $11 million per day to the national treasury. Whoever takes charge of the country probably wouldn't want to put the brakes on such a key source of energy and income.

It's a basic point, but oil, in general, is extremely profitable. Right now, Egyptian oil is still coming out of the ground, which means that Apache will profit. In fact, Apache would have to shut down all production in Egypt for a full three months before seeing any negative impact on its credit quality, says Kollar, which doesn't appear likely.

He takes a longer-term approach to evaluating a company's stability. "I'm not all that worried about the next penny per share, I'm looking at ten and twenty-year bonds and the company's ability to pay interest and its level of credit-worthiness."

In that respect, he says, "Apache is one of the best independent exploration and production companies from credit-worthiness point of view."

Most big oil companies, in fact, are more resilient than the market would reflect. Companies such as Apache and certainly the major energy companies have a plethora of assets all over the globe. If they need to, they can sell them and spend expend less capital and stay financially solvent.

"The market's reaction is always to shoot first and ask questions later," Kollar says. But that's not the best reflection of the health of energy companies with such long-term contracts that encounter may encounter obstacles but ultimately generate a big profit. Apache's stock has started to creep back since it plummeted last week and has kept producing throughout the turmoil.

Energy plays everywhere are becoming increasingly risky. Exploration and production companies are partnering with government-linked oil companies where volatile tax and export rules, if not political conflict, are real possibilities. If the market continues to overreact, then recover, it'll keep providing investors an opportunity to buy shares of certain energy companies with short-term obstacles and long-term profit plans. To top of page

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