Apache CEO's Abrupt Exit Could Start A Wave Of Oil Company Deals

Apache Corp. has been in restructuring mode a long time. But today brought arguably the biggest restructuring yet -- the sudden and immediate departure of longtime CEO Steven Farris. Considering the work Apache has been doing to clean itself up and focus on core operations, a Farris exit has the potential to pave the way for a long-awaited spinoff of Apache's international operations or even an outright sale.

His replacement is John Christmann, 48, who has been leading Apache's efforts to develop the company's core asset: 6 million net acres of unconventional oil-rich acreage across North America. The keystone of that is 1.7 million acres in the Permian basin of west Texas, where Apache has doubled its output since 2010 to 160,000 barrels per day.

These assets may not look so great after oil prices have fallen 60% (WTI closed at $46.39 today). But they represent the future of Apache. Apache last year booked 900 million barrels of proven reserves under its Permian acreage. Only Exxon Mobil , Chevron and Occidental Petroleum have bigger positions there.

Houston-based Apache, prodded on by activist investors like Jana Partners, has been working to focus its company around onshore North America after a series of questionable international ventures caused the company to lag far behind its peers like Anadarko Petroleum and EOG Resources. Since a 2012 decision to pare itself down, Apache has sold off its Gulf of Mexico shelf fields (for $3.7 billion), a third of its assets in Egypt ($3 billion), stakes in LNG projects ($2.75 billion), stakes in the deepwater Lucius and Heidelberg fields and 11 other Gulf of Mexico exploration blocks ($1.4 billion), its entire Argentina portfolio ($800 million), dry gas fields in western Canada ($300 million).

In 2009 Apache got 184,000 barrels of oil (and equivalent gas) per day from onshore North America. That has since doubled to 360,000 boepd, out of roughly 760,000 total boepd. Last fall CEO Farris explained to investors that the plan was to spin off Apache's international assets as a separate company.

Apache won't comment on Farris' departure, the timetable of a spin-off, or rumors around Houston that a deal to sell the whole company has been all but worked out. Already new CEO Christmann has set up a satellite office in San Antonio to lead unconventional drilling efforts. At just 48 years old Christmann is young for a big oil company CEO.

So what would a potential acquirer get? First off, they'd get a deal relative to what Apache was worth 6 months ago, before shares fell 40%. Having closed Tuesday at $60.16 per share, down 2.97%, Apache's market capitalization is $23.5 billion. Add in roughly $10 billion in long-term debt plus a modest premium and an acquirer would be looking at a bill for around $38 billion.

Whether that's a lot or a little really depends on oil prices. Over the past five years (before the bust) Apache has averaged pre-tax income of about $5.5 billion and net income of about $2 billion a year. Unlike a great many more high-profile shale drillers (i.e. Chesapeake Energy and Continental Resources), Apache has a history of generating free cash flow.

Exxon, Chevron or Occidental could swallow Apache outright and consolidate mightily in the Permian basin. Occidental is unlikely, as it's just emerged from the spin off of its California oil fields into publicly traded California Resources Corporation (NYSE:CRC). Exxon, for its part, is still far from having convinced investors that its 2010 acquisition of XTO Energy for $40 billion was a good idea. Chevron doesn't need any acquisitions, as it is already building out lots of organic growth, and also has a very low cost basis on its legacy acreage in west Texas. Even so Chevron does make the most sense as an acquirer. It's the operator of those two LNG projects (Kitimat, B.C. and Wheatstone in Australia) that Apache sold out of. It's also already has a big position in Argentina, so wasn't interested in that, or any of the stuff Apache sold in the Gulf of Mexico. Chevron does operate several fields in the North Sea and so could consolidate Apache's operations there.

Among other giants, Royal Dutch Shell is an unlikely buyer considering the trouble it has already had making a go of it in America's shale plays. BP is out of the question as it's still seeking to spin out its own U.S. onshore business. ConocoPhillips is a possibility, as the company already has a broad and deep portfolio across the United States including about 1.1 million Permian acres.

We could also see a merger of near-equals between Apache and EOG Resources, which is as big in the south Texas Eagle Ford as Apache is in the Permian. This would create a real Texas powerhouse.

It's all just idle speculation, of course. But lots of pieces have already been in motion at Apache, and with Farris out of the way, it's very possible that there's even bigger moves yet to come. That likelihood might make it worthwhile for the brave investor to take a flyer on Apache shares as an alternative to other Permian-leveraged operators like Pioneer Natural Resources or Concho Resources.

A wave of consolidation is likely in the wake of oil's plunge. It could all start here.