The half dozen or so low-rise buildings that house Apache’s (APA) Egypt headquarters don’t stand out from the Cairo neighborhood. The fleet of SUVs parked under the trees on the narrow residential street are the only clue that dozens of geologists and engineers are working inside. The modest rented digs “allow us to keep a low profile,” says Thomas E. Voytovich, Apache’s Egypt chief.
The Houston company may be trying to downplay its presence, but it is the biggest American investor in Egypt, according to the U.S. embassy in Cairo, and the political future there remains murky. Since the mid-1990s, Apache has pumped $8 billion into oil ventures in Egypt, which now accounts for about a quarter of the company’s revenues.
Egypt may need Apache as much as Apache needs Egypt. The U.S. oil company’s joint ventures with state-owned enterprises employ some 8,000 people there and pump more than 200,000 barrels a day, roughly a quarter of Egypt’s total output. Apache’s exposure to a country in the midst of a tricky political transition, following the resignation of longtime President Hosni Mubarak in February, is depressing the company’s stock by as much as 20 percent, says A. Haag Sherman, managing partner of Houston investment firm Salient Partners. Says Sherman, “The perception [of potential trouble] right now is greater than the risk, but there is a real risk,” although he remains bullish on the stock.
How Egyptian politics will play out in coming months is difficult to predict. Groups covering the political spectrum from Islamists to leftists are preparing to compete for power in elections expected this year, and some businessmen and former government officials are in jail. The Muslim Brotherhood could wind up with a strong voice in any government, though the Islamist group says it doesn’t oppose foreign investment. The biggest fear is that the favorable terms under which Apache produces oil—roughly a 50/50 split with the government—could worsen. And one Apache executive says he’s worried that the military, which controls access to the desert land where the company operates, could make it more difficult to get permits for drilling and seismic work. “There’s sort of a cloud of who-knows-what-can-happen for the foreseeable future,” says Leo Mariani, an analyst with RBC Capital Markets in Austin, Tex.
Apache was started in Minneapolis in 1954 by a group of investors who ponied up a total of $250,000. Since then the company has grown to become the No. 1 independent U.S. oil and gas concern, or one that doesn’t do its own refining or distribution, as the so-called majors do. Apache’s production has climbed almost fivefold since the mid-1990s, to 730,000 barrels per day. Last year, the company had net income of $3 billion on $12 billion in revenues, vs. a loss of $292 million and sales of $8.6 billion in 2009. “I don’t think they have made a disappointing investment in the last 20 years,” says Fadel Gheit, an analyst at Oppenheimer (OPY) in New York.
Calling the shots during much of that time was G. Steven Farris, a former Oklahoma State University linebacker who took over as CEO in 2002 after eight years as president. Farris, 62, says that last summer, when BP (BP) was desperate to raise cash to pay for its Gulf of Mexico oil spill, he received a call from an intermediary who told him the British company was looking to unload assets: “Can you put $10 billion in the bank by July 31?” the person said. Farris gave the nod and picked up BP properties in Egypt, Canada, and the Permian Basin region of West Texas for $7 billion. Apache spent another $4 billion last year buying other oil and gas fields, taking advantage of what Farris says were bargain prices. “If there is a deal to be made, Farris will make the deal,” says Faron Thibodeaux, drilling manager at Apache Egypt.
Figuring that as technology evolves it will be possible to wring more crude out of maturing fields, Farris is particularly drawn to places where oil has been produced for decades. The Texas Permian Basin, where the first well was drilled in the 1920s, is prime Farris country. Apache’s chief executive has spent years accumulating properties ceded by BP, ExxonMobil, Hess, and others, and now controls some 3 million acres in the area. Using methods such as horizontal drilling and hydraulic fracturing, Apache has ramped up its production in the Permian to 84,000 barrels per day, from 54,000 a year ago.
The company is now trying out technologies pioneered by the shale oil industry in North America in a new well it is drilling in Sinai. If successful, Apache’s experiment could someday lead to a big increase in Egypt’s output. “We’re sitting on a great asset base at a time when technology has hit an inflection point,” says John J. Christmann, who oversees Apache’s operations in the Permian.
Farris says he was first attracted to Egypt because “it looked just like West Texas to us.” Yet there’s far less competition in Egypt; when Apache first got into Egypt’s western desert, other foreign oil companies were leaving. The U.S. company acquired its Khalda concession from Spain’s Repsol in 2001 and has since quintupled production there. It has also found a monster gas field called Qasr. “Their presence in Egypt is an advantage for them and us,” says Ibrahim Zahran, former chairman of Khalda Petroleum, the joint venture that operates the concession.
Though Farris was on good terms with Mubarak’s regime, he has embraced Egypt’s revolution. While other investors are scoping out the exits, Farris is holding fast on plans for 250 new wells this year, an increase of almost 25% over 2010. Says Farris: “We either cry in our beer or we celebrate, and then we go out and try to do it again.”