Protests in Egypt sparked a sell-off in Apache Corp. (NYSE: APA) shares as investors feared disruption in operations, said an analyst at RBC Capital Markets.

Nearly a week of protests against Egypt's current regime led by President Hosni Mubarak pushed the country into a crisis state. Egypt's military was deployed on the streets of Cairo and Egyptian police used tear gas and water cannons in an attempt to break up demonstrators seeking an end to Mubarak's rule.

In an effort to pacify growing civil unrest, Mubarak asked his cabinet to resign and claimed that he would push forward with reform but has shown no intention of relinquishing control.

The turmoil in Egypt has reportedly become of great concern to Israel, with military officials engaged in strategy sessions, trying to determine what to do in the event Mubarak is deposed from power.

Meanwhile, some via Twitter are saying CNN reported the army is driving through the streets of Alexandria and firing heavy machine guns while helicopters hover over protesters. It is unclear if they’re firing at protesters or some other target. If the army is actually firing at protesters, it would be a huge development.

Moody's Investors Service said it has downgraded Egypt's government bond ratings to Ba2 from Ba1 and has cut the outlook to negative from stable warning that the escalating political tensions may dent the country's public finances.

Egypt represents nearly 15 percent of Apache's value. We estimate that Egypt accounts for roughly 22 percent of Apache's 2011 production and about 11 percent of the company's reserves. More importantly, we attribute $16 of our $119 net asset value (NAV) to Egypt, said Leo Mariani, an Energy analyst at RBC Capital Markets.

Egypt also represents an important source of upside potential as Apache holds nearly 8 million net acres in the country. Egypt is also Apache's greatest source of exploration success in recent history. According to Apache, there are no current supply disruptions, and Mariani is not adjusting his production estimates at this time.

However, the risk to Apache's production in the region has increased and will be closely followed in the coming days. Apache sells a majority of its crude production to Egyptian General Petroleum Corporation (EGPC), whose operations may be at risk if there is a regime change.

Egyptian uncertainty increases country's risk profile but still it's too early to gauge the magnitude.

We believe there are four likely scenarios for Apache's operations in Egypt. The worst case scenario is a regime change followed by an expropriation of assets from companies, which we view as unlikely. The second scenario is a regime change followed by a more onerous tax structure for foreign operators. Finally, the existing regime or a new regime could maintain the status quo in the oil & gas industry, which we believe is the likely scenario, said Mariani.

Stock performance of Apache has lagged during the Egyptian crisis. Apache stock was down 8.7 percent on the week and underperformed its peers by 780 basis points as investors sold the headline news. Mariani expects that the stock is likely oversold and represents a decent value at current levels if the Egyptian crisis results in no change to the petroleum industry.

The brokerage maintained its 'sector perform' rating on shares of Apache with a price target of $113.

Mariani said there are two major impediments to his price target for Apache. The first impediment is commodity prices ending up higher than his expectations on a sustained basis. The second impediment has to do with the performance of the company's drilling program. If Apache doesn't do a very good job of adding reserves through the drillbit this year, Mariani believes this will likely have a negative impact on the stock.

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