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Summary

  • Market doesn't favor E&P firms that shift assets.
  • Apache has underperformed the market leaders in the last 3 years.
  • Apache's Permian and Central Basin assets have enormous resource potential.

The biggest concern with an oil exploration and production company constantly shifting assets is that the company is chasing growth instead of sticking with a proven development area. In a lot of cases, the company might sell assets that are out of favor for assets in favor. The recent decision to dump the deepwater Gulf of Mexico assets for a focus on onshore shale plays is a concern for Apache Corp. (NYSE:APA) investors though the company has a good reason to continue the shift.

The market isn't very favorable to E&P firms that constantly shifts assets. The impacts to reported growth rates and the difficulty of comparing production levels over the long-term makes it confusing to the investor base. Hence the stocks of Apache Corp and Devon Energy (NYSE:DVN) have gone virtually nowhere in a few years of explosive stock gains by other firms such as EOG Resources (NYSE:EOG).

APA Chart

APA data by YCharts

Production Declines

The biggest issue with the stock over the last couple of years is that Apache unloaded numerous assets that have completely offset the gains from onshore shale plays. The asset divestitures include the GOM Shelf, Argentina, Canada, and Egypt. The latest deal involved selling development projects in the GOM including the Lucius and Heidelberg projects that are nearing production. The deal is valued at $1.4 billion and doesn't involve any producing operations though it does include those large-scale projects about to reach production. Apache is shifting development focus to the subsalt and other deeper exploration opportunities in water depths less than 1,000 feet.

This constant divestiture of assets leaves the company with production forecasts of less than 600,000 boe/d in 2014 from a level that hit 672,000 boe/d in the first quarter when including Argentina assets. In total, the company only forecasts production reaching roughly 650,000 boe/d during 2016.

Just recently, Devon Energy again unloaded more non-core assets with the divestiture of assets in the Rockies, onshore Gulf Coast, and Mid-Continent to Linn Energy (NASDAQ:LINE). The assets were sold for $2.3 billion and include daily production of 275 Mcfe with 80% natural gas and proved reserves of 1.24 Tcfe.

Shifting For Good Reason

One needs to look no further than the domestic resource base to see why Apache is quickly shifting focus from international growth to domestic growth. In total, the proved reserves from the North America resources sit at 1.7 Bboe with a total resource potential of an incredible 14 Bboe. The number is more impressive when focused on those resource potentials in mainly the Permian and Central Basins. Both basins account for roughly 5.5 Bboe of that resource potential. In addition, the two regions are closely located suggesting focuses on other areas isn't warranted.

As an example, EOG Resources has seen the stock price skyrocket the last couple of years due to massive domestic liquids production growth that hit 33% during the second quarter. The company listed proved resources at 2.1 Bboe at the end of 2013 with plenty of resource potential from the Eagle Ford Shale and several other domestic shale plays.

Bottom Line

The stocks of Apache Corp and Devon Energy haven't responded to the constant shift in assets over the last couple of years with investors preferring the production growth from existing operations. In the case of Apache Corp, the shift towards domestic oil plays were painful with the stock not moving up during a bull market, but the resource potential provides plenty of impetus to invest in the stock now that the shift is complete and EOG Resources provides the playbook for stock gains.

Source: Apache Corp: Shifting To Onshore Production For Good Reason