Apache has spent $2.85 billion to buy the privately owned Cordillera Energy, doubling its exposure in the Anadarko basin. This is another in a long list of majors buying more and more domestic natural gas shale assets in the past three years. But for Apache, this acquisition is different in two important ways.
First, by increasing its exposure into Oklahoma and Texas, Apache is in effect diluting its exposure to Egypt, a connection that cost shareholders dearly in 2011 during the conflict of the Arab Spring. While that exposure even before this acquisition was a very manageable 17%, management at Apache must still believe that transfer into domestic assets is a more reliable move over the long term. It's hard to argue with that.
Second, plays in the Anadarko basin shale are relatively more productive for natural gas liquids than for the more traditional "dry" gas that is represented by the $2.40 price on the Nymex. These "wet" products -- such as butane, hexane and heptane -- are still at very strong prices in open markets and represent great production margins, enough to keep some exploration & production companies working in fields even with battered "dry" gas pricing in place.
But the bottom line on Apache is that this deal shouldn't matter much; the purchase was at a reasonable premium, in areas Apache is already well established. Still, I have long believed Apache shares are wildly undervalued. We'll see whether this deal provides a catalyst to further interest and upside.
Chesapeake made an incredible "update" announcement this morning: It is cutting all natural gas drilling by nearly half, dropping almost 1bcf/day of production because of low prices and moderate temperatures for the winter season so far. Chesapeake is the largest domestic producer of nat gas, so obviously its plans for sequestering of assets can have a real effect on prices and therefore margins.
This is a mixed bag for Chesapeake: It has enormous debt it needs to service, and this shutoff of flow will put pressure on that. This move also proves that aggressive hedging of forward positions cannot protect a big producer from cratering prices, no matter what the CEO says.
For Chesapeake's share price, however, this drilling slowdown should help. At $21, shares were quite oversold and beaten, waiting for any positive to move higher. For other shale producers at the whim of market prices for nat gas, this production slowdown should have even more positive effect, particularly the speculative takeover shale stocks that have gotten hit recently with Chesapeake -- companies like Range Resources (RRC), Cabot Oil & Gas (COG) and Southwestern Energy (SWN).
Do either of these news stories create great buying opportunities? I think Chesapeake could pop in the short term, as its shares were hammered recently and could easily bounce to $25 a share without much more impetus. Apache shares remain just plain cheap.