Australia's Largest Oil Discovery For 20 Years Is A Massive Scoop For Apache Corp

Aug.26.14 | About: Apache Corporation (APA)

Summary

The Caning Basin, just off Western Australia coast, is estimated to hold a mammoth 300 million barrels of oil.

Australia was responsible for $1.2 billion of APA’s total revenue in the year 2013.

The discovery would help enhance the lure of an ‘international portfolio’ for buyers.

Apache Corp (NYSE: APA), the American oil producer that has been planning on selling its global assets amidst increasing pressure from investors, has managed to conjure a massive scoop by announcing Australia's largest oil discovery for 20 years. The Caning Basin, just off Western Australia coast, is estimated to hold a mammoth 300 million barrels of oil. These estimates are made in accordance with six samples taken from a well 180 kilometers north of Port Hedland.

APA has a stake of 40 percent in the area in and around Port Hedland. The area also has the Phoenix South-1 well, which adds to its opulence. Carnarvon Petroleum (CVN), which is one among APA's partners, witnessed the biggest stock price hike in nearly quarter of a century in the immediate aftermath of the news.

The Opulent Phoenix South-1 Well

The drilling results from Canning Basin's Phoenix South-1 well should herald the return of oil exploration in the region. Oil giants that had abandoned the region years ago after witnessing dry wells could soon be seen queuing up vying to get a slice of the massive oil cake.

The quality of the oil that has been extricated from the Phoenix South-1 well vindicates the claim of it being a commercial discovery. If further drilling produces similar results, Phoenix South could just as well be touted as Australia's new "oil province". However, the word is that it would take a couple of months to pinpoint the exact volumes of oil that can be extracted from the region. But there's no doubt that the early estimates are promising.

The 300 million oil barrel estimate is in synchrony with the gargantuan volume discoveries in Australia. Exmouth Basin, where Woodside Petroleum started drilling eight years ago, had 127 million barrels in reserve. Barrow Island has been able to produce a humongous 322 million oil barrels via Chevron, since the 1960s.

Australian oil production is prognosticated to increase to around 385,000 barrels per day by the end of second quarter next year. And this number is expected to rise in the future with the discovery in Canning Basin, which is the biggest oil maneuver in the North West of the country since the discovery of Exmouth Basin.

Impact on APA

APA has been involved in exploration activities all around the globe. As far as Australia is concerned, the country was responsible for $1.2 billion of APA's total revenue in the year 2013, which is around 7.5% of the company's total revenue. Last year also saw APA augment its investment in Australia, resulting in a three-year CAGR of 25.1%, taking the figure to $6.84 billion worth of investment.

The total investment in the Canning Basin project is expected to be around $1.5 billion, which in turn would help the company produce around 25,000 barrels per day. The production from Canning Basin would be around 3.3% of APA's total production.

As recently as last month, APA was planning on selling its stake in a couple of natural gas projects, one of which was in Australia. It has also been under escalating pressure to sell or separate international assets. New York based Jana Partners LLC had earlier disclosed a stake worth $1 billion in APA, and had been eying a split to make room for some cash to reduce the risk of spending and increase share buybacks.

The Canning Basin reservoir is nothing but a lifeline for a company on the verge of capitulation.

Stock Evaluation

Previous Monday, August 18 - the day the Canning Basin oil discovery was announced - saw APA fall by $0.18 to $98.50. The following day saw a 1% increase to $99.76. Even so, the buoyancy expected from the oil discovery announcement hasn't exactly been as much as one might expect - the reason being APA's history.

APA struck $77.31 in February this year. Its earnings per share have plummeted down 18% from last year, with almost an identical drop in revenue percentage manifested in the company's Q2 report. Furthermore, while the oil estimates in Canning Basin are huge, another factor worth considering is that normally around 20% of the oil estimates ends up being extricated by explorers.

For APA this means around 60 million barrels, which despite being of crucial importance for the company, isn't as groundbreaking a number. Even so there is much cause for optimism for investors.

Despite the mediocre earnings APA has managed to outdo both Energy Select Sector SPDR ETF (NYSEARCA:XLE) and SPDR S&P 500 ETF (NYSEARCA:SPY), and while the general market trends seemed to favor APA moving international assets towards North America, the Canning Basin discovery could herald a shift in that trend.

For, while APA might have traced its nadir at $77.31 earlier this year, it has managed to conjure a 30% recovery, with numbers all set to increase once exact oil estimates are announced in Canning Basin.

The discovery would help enhance the lure of an 'international portfolio' for certain buyers. It is expected that APA's value could increase by up to $2 per share in the immediate aftermath, with another hike to follow after the oil estimate announcement in a couple of months' time. If the second announcement vindicates the optimism, APA could prove to be a lucrative buy in the future.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.