Apache (NYSE:APA) is an independent energy company that explores, develops and produces natural gas, crude oil and natural gas liquids. It has been operating in six countries with a balanced portfolio of onshore and offshore oil and gas properties. The company currently holds predictable proved resources of 11.7 "BBOE" 37% of which is derived from the Permian Basin while 48% is from central resources. In this article I will be discussing the company's long term growth prospects from the Permian Basin and also the cost-cutting initiatives undertaken by the company.
Source: Investors presentation
Efficient Operations: Improvised Technology
In addition, the company is experimenting with a method of fracturing oil wells that use brackish water rather than scarce fresh water in the arid region. So far, it has drilled 50 fresh waterless wells and aims to increase the number to 70 by the end of this year.
Fresh water used to be the main ingredient used in fracking but with this technology Apache will become the first company to eliminate its dependence upon fresh water. There are certain risks involved with the technology but the success of this technology could generate huge returns for the company.
Source: Investors presentation
On the financial side, the initiative resulted in the cost saving of almost $24.5 million by the end of this year. Going forward, the company is determined to use the technology and has identified a considerable number of drilling locations in the Permian Basin. So by using the technique in these locations Apache would be able to decrease its cost by $1.15 billion in the long term.
Strategically, Apache will be the only company to have eliminated the use of freshwater from one of its Permian fields. Driving down costs in resource plays will not only improve bottom line growth but will also prove to be a strong catalyst moving forward.
Well positioned in the Permian Basin
In addition to the low cost production Apache is benefiting from the record production in the Permian Basin in West Texas. The company controls over 3.5 million gross acres with exposure across every major play in the Permian Basin. By operating more than 12000 wells in 152 fields Apache is now one of the largest operators in the Basin.
The region's year end 2012 estimated proved reserves were 800 million barrels of oil equivalent (MMboe) and represented 28 percent of Apache's total proved reserves. During the third quarter of 2013, the production in the Permian averaged a record 131,665 barrels of oil equivalent per day which is 18 percent higher than the results of the previous year's corresponding quarter.
The company's performance during the quarter remained satisfactory as the Permian Basin averaged 45 drilling rigs, spud 240 gross wells, and completed 208 gross wells. Going forward the region expects to maintain an active rig count of 44 with approximately 23 drilling horizontal wells.
Outlook Going Forward
Going forward, the company expects to increase production to 170 net million barrels of oil equivalent per day by the end of 2016.Production growth is expected from the Wolfcampand Cline shales therefore it is necessary to discuss the future outlook of these shales with reference to Apache's position.
- WolfCamp Shale
The prospects from the Wolfcamp Shale remained high for the company. The oil and gas industry expects that there are 50 billion barrels of oil yet to be drilled from the shale. Assuming the price of oil at $100 per barrel the value of the Wolfcamp Shale equals $5 trillion.
Apache is currently holding an estimated 347 million barrels of oil equivalent (MMboe) of resource potential from 971 identified drilling locations. The company seems to be well positioned to exploit these resources.
The company had drilled 56 wells by the end of the third quarter. Going forward, the company plans to spud 20 additional wells in the fourth quarter. The company also added a new gas delivery point in the region that will be handling the growing production in the region.
- Cline Shale
The Cline Shale has great potential and is estimated to have total recoverable reserves at 30 billion barrels. The huge reserves make the Cline Shale larger than the Bakken and Eagle Ford shale combined. Apache has an estimated 650,000acres prospective for Cline Shale development with an estimated 642 MMboe of resource potential from 2300 identified drilling locations.
The company has been carrying out low cost operations in the Shale. Its early well cost up to $9 million to drill and complete but Apache has managed to lower this cost to $6.5 million per well. Going forward the company expects to further decrease the cost.
Ample Upside Potential exists
During the third quarter of 2013, the company reported that the production from the US constitutes about a third of the total production which is almost 8 percent higher than 3Q 2012's results. The total production was 784,000 barrels 358,000 of which were for oil production while the remaining came from NGL and natural gas.
Moreover, with the recently concluded deal regarding Egyptian activities the company will now be able to pay off its debt. In addition, it can now have operations in more politically stable countries. To compute the intrinsic value of the stock, I believe that the multiples based valuation will be the most appropriate.
Based on the price multiples, the intrinsic value of the stock offers a nice upside potential of 15.58% from the current market price. To calculate the fair value I have assigned 35% weight to the earnings multiple, 15% each to both the book value and sales multiples and 35% to the cash flow multiple. The assigned weights are in accordance with the general practice in the industry. Given the weights, the intrinsic value is calculated to be $97.59and is 15.58% higher than the current market price of $84.44.
Another point that I believe to be of worth mentioning here is that the book value per share ($82.66)of the company is also highest among the peers. The higher book value per share not only signifies a strong financial footing but also minimizes investor's risk.
The company has achieved a CAGR of 12 percent since its first entering the international market. With the continued international expansion coupled with North American onshore liquids expansion the company has been a success story so far. Similarly, looking forward I believe that the company has the potential for success.
In addition, the successful implementation of using brackish water in the Permian Basin will not only help the company to lower its cost but will also secure a dominant position for the company. So based on the above mentioned arguments I do not believe that Apache is fairly valued.
Given its long-term growth prospects the company is undervalued based on the multiples based valuation and offers a nice upside potential of 15.58 percent from the current market value.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.