In the big picture, I rather like that APA is entering into a less regulated business with higher profit potential in future years. In the short term, I wonder if this move will pressure the share price lower than the offer price of the secondary.
The problem is the existing revenue streams are extremely stable and regulated. That alone is the reason people tolerate such high levels of debt. If they are going to enter higher risk businesses, where pricing could theoretically could drop below cost, that suggests that the market will want a steeper discount to absorb the risks associated with higher debt levels.
It's not the $300M investment alone that is at issue. The $300M investment makes one wonder if in 10 years they might have 1/2 of their cash flows generated by such higher risk assets. Is there a change of business model, not just an isolated investment?
I am not sure how to revalue the enterprise at this point. Just for arguments sake, assuming that 50% of their cash flows came from unregulated assets how would you value that differently? Maybe that should get a 8x EBITDA multiple instead of a 10x+ multiple?
APA Price at posting:
$3.95 Sentiment: None Disclosure: Not Held
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