An Unmistakable Value
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Apache (NYSE: APA) is competing against Anadarko Petroleum (APC) and Exxon Mobil (XOM) in New Zealand, where a race to secure resources is in the beginning stages. Perhaps due to the first mover pressure, Apache is moving on opportunities without allowing for resident input, which is uncharacteristic for the firm, in its hurry to set the stage for early production in its farm out agreement with TAG Oil. Certain residents and environmental groups are up in arms about a recent decision by the Gisborne District Council to defer public discussion regarding Apache and TAG's plans to establish a drilling platform in Te Karaka. The Council recently granted Apache and TAG the right to establish a drilling site, but not to perform any exploratory drilling until receipt and approval of a further application.
Though the Council's grant only covers an access track, a well conductor, and a water monitoring bore, the lack of oil development in the relatively pristine area has residents concerned about the start of construction. Members of New Zealand's Green Party want to declare a moratorium on fracking until the technique is studied further, even though TAG is already fracking in Taranaki, on the southwest coast of New Zealand, where an auditor for TAG estimated unproved reserves could be between 1,316 and 2,513 mmboe. Its expected potential in the Taranaki Basin is considerably smaller, at 100 mmboe, but especially with Apache as operator this smaller resource is likely economically viable. The problem is that if residents raise an outcry, the environmentally sensitive government of New Zealand is likely to intervene which could push back Apache's plans for producing out of this promising basin.
Growth in the U.S. Stable and Promising
Though there is promise in New Zealand, Apache's CEO Steve Farris is indicating that Apache's growth through 2016 will be driven by shale plays in West Texas and the Central U.S., where Apache made many early investments which are now beginning to pay off. Farris says that Apache has the acreage and inventory to "really move the needle" on production, and backs it with the company's prediction that its production in the Permian Basin will grow at a 13% annual compound rate, while its production in the Central U.S. will grow 24% annually. This would allow the company to produce 1 mmboe per day by 2016. If this seems optimistic, just look back to 2010 when Apache first entered the Permian, with a mere 50 mboe per day of production; by the close of 2011, Apache was already up to 100 mboe per day of production here, more than doubling its capacity. It is now in second place on the play by nearly any measure of production or operations, beating out companies like Chesapeake Energy (CHK) and EOG Resources (EOG) that despite a longer history on the Permian don't have resources like those of Apache to marshal.
Apache is also entering the Mississippi Lime in a big way, one of the first mid-majors to do so. Small caps and majors like SandRidge Energy (NYSE: SD), Devon Energy (NYSE: DVN), and Royal Dutch Shell (RDS.A) are also setting up operations on this play, in some cases after years of careful acquisitions. Over the last two years, SandRidge has acquired 2 million acres in the Mississippi Lime. Devon Energy, meanwhile, expects to participate in 50 wells in the Mississippi Lime acreage by the end of this year. Apache is entering practically overnight with a new 580,000 net acre holding, which it hopes contains up to 2 bboe. Since its economics on the play are favorable, with an estimated per well cost at $3.5 million, this could lead to a substantial operating margin for Apache.
A Little Infrastructure in the Cook Inlet Could Take Apache a Long Way
Apache also likes its chances in the Cook Inlet, where it estimates there may be as much as 1.3 bboe undiscovered in the inlet, even after decades of production in the area. In fact, Apache's analysis of the field indicates that the Cook Inlet is underexplored. To remedy the situation, Apache is deploying previously underutilized, more modern 3D seismic exploration in the area, and expects to plant its first well spud in the third quarter of this year.
The Cook Inlet is an appealing target for Apache not just due to its potential, but because of its access to existing infrastructure for oil and gas, both of which resources the play has in abundance. Surprisingly, though there are multiple processing facilities on the east side of the bay, to transport the main production on the west side tankers are still utilized since a pipeline does not exist for the purpose. There are plans to change that with an additional new underwater pipeline, as well as a reopening of Hilcorp Alaska's Draft River terminal, all due to the renewed interest in Cook Inlet production by multiple producers.
Infrastructure for natural gas in particular is sorely needed, since as it stands most of the natural gas pipelines either supply southern Alaska's energy needs or supply ConocoPhillips' (NYSE: COP) liquid natural gas processing facility at Kenai. Since Apache plans to open a liquid natural gas processing plant across the Gulf of Alaska in Kitimat, British Columbia, Apache would particularly benefit from a pipeline that connects the Cook Inlet with the lower 48 states, passing through British Columbia where it could introduce a spur to Kitimat. Otherwise, its most economical options are to focus on oil or process liquid natural gas through competitor ConocoPhillips.
Apache is currently trading around $84, with a price to book of 1.2 and a forward price to earnings of 6.7. For a company on Apache's track, I think this is remarkably low. With earnings per share growth at 76.4% over the past three years and an operating margin standing at 44.2%, Apache is leaving most of its competitors in the dust. Add to this the company's solid plan for continued growth and expanding revenues based almost entirely on oil, and you have a value winner with Apache.
jordobivona has no positions in the stocks mentioned above. The Motley Fool owns shares of Devon Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.