Buy This Energy Stock Now!
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Apache (NYSE: APA) achieved record production in the third quarter, primarily based on higher rig counts and completed infrastructure in its Permian and Anadarko Basin operations. For the three-month period ending September 30, Apache reported production of 771,000 barrels of oil equivalent per day, up approximately 18,300 boepd, or 2.4%, from the same period in 2011. Deferred production impacted third quarter volume by an estimated 25,000 boepd.
Earnings for the third quarter were $161 million, or $0.41 per diluted common share, after taking into account a non-cash, after tax write-down of $539 million in the carrying value of its properties in Canada due to lower natural gas prices. For the same period in 2011, Apache reported earnings of $983 million, or $2.50 per diluted share. Adjusted earnings excluding the write-down of the Canadian properties and other one-off items were $861 million, or $2.16 per diluted common share as the benefits of higher production was offset in part by lower prices for natural gas and natural gas liquids. In the same quarter of the previous year, Apache had reported adjusted earnings of $1.16 billion, or $2.95 per share. Cash generated by operations before changes in operating assets and liabilities came to $2.42 billion in the third quarter, down from $2.69 billion in the same quarter of the previous year.
The company continues to add drilling rigs and to increase activity in the Permian and Anadarko basins. The company plans to expand throughout 2013. Production in these two regions grew by 30% from the previous year, accounting for nearly 25% of Apache's overall production, compared to less than 20% in the third quarter of 2011. This growth trajectory is expected to continue in the future.
The balanced portfolio divided between North American and international assets, as well as oil and gas-producing properties, helped to offset the effects of price volatility in the energy markets. Globally, Apache achieved an average price realization of $102.62 per barrel of oil, which is a small increase from $101.71 per barrel in the same period of 2011. This realized price compares very favorably with competitors. The company also benefited from higher price realizations on dated Brent crude produced in the Australia, North Sea, and Egypt regions, and on sweet crude from the Gulf of Mexico. These high price realizations will continue into the next year, positively benefiting the company's margins and operations efficiency. The international regions saw natural gas price realizations increase on average 13% from the prior-year period to $4.21 per thousand cubic feet (MCF). North American natural gas price realizations declined 27% from the same period in the previous year to $3.51 per Mcf. International gas production accounted for 36% of the company's total gas volumes. These international operations operated as a nice hedge against the down North American market. Apache might not have achieved the natural gas revenue and profits that Cabot Oil & Gas (COG) has seen in the terrible natural gas market, but it has still performed very well relative to other natural gas producers.
Apache's Kitimat project, which the company is developing in partnership with EOG Resources (NYSE: EOG) and Encana (NYSE: ECA), will be able to produce 10 million tons a year of liquefied natural gas. This gas will be marketed to Asian consumers, and will open up further international diversification which has proven to be beneficial to Apache. Royal Dutch Shell (RDS-A), with backing from some of the largest consumers of LNG (liquefied natural gas) in Asia, such as Korean Gas and PetroChina, is providing direct competition for the company in Kitimat. Cheniere Energy (LNG) is also expediting plans for LNG export from the Gulf Coast. Meanwhile, Pieridae Energy Canada has recently announced plans for an LNG liquefaction and export center to be located in Goldboro on the eastern coast of Canada. Other energy majors, like Exxon Mobil (NYSE: XOM), are examining the possibility of exporting LNG from the North American continent. While this increased production for export might put some downward price pressure, the Asian market is energy starved and Apache will find willing buyers into the future.
Apache has grown with a strategy of acquiring developed assets, starting with Mariner Energy for $2.7 billion. At the same time, it acquired Devon Energy's oil and gas assets in the Gulf of Mexico for $1.05 billion and purchased Exxon Mobil's assets in the North Sea, including the Beryl field for $1.75 billion. This year, Apache acquired privately held Cordillera Energy Partners for $2.8 billion. The purchase gave Apache access to 254,000 acres of potential energy reserves in the Granite Wash, a region along the Texas-Oklahoma border. International operations are in Egypt, Australia, and the U.K. region of the North Sea, but Egypt still remains its largest overseas operational area. Apache now controls almost 10 million gross acres. Apache's proved reserves in Egypt totaled 292 million BOE at the end of 2011, or about 10% of the company's total. Apache is currently the largest producer of natural gas in the Western Desert and the third largest in Egypt.
Apache should continue to see solid production growth throughout 2013. The company will also focus on liquid production, in large part due to the declining natural gas market in North America. Apache represents a solid investment as it stands. But if you are bullish on the energy market, and especially if you believe there is going to be a harsh winter and natural gas prices will rebound, then I expect the stock to break its 52-week high of $112 per share. If the market stays depressed, I believe the stock will still crack the $100 mark.
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