Apache Corporation - Huge Potential For This American Oil Producer

| About: Apache Corporation (APA)

Summary

Apache Corporation's stock price continues to hold at 40% below the company's precrash highs despite a recent recovery in oil prices.

Apache Corporation has significant assets with an enormous value. Just 10% of the company's Permian Basin are valued at up to 25% of the company's entire market cap.

Given the company's increasing efficiency and enormous potential assets, Apache Corporation is a huge potential American oil producer.

Introduction

Apache Corporation (NYSE: APA) is a petroleum and natural gas exploration and production company headquartered in Houston, Texas. The company is worth almost $25 billion making it a significant mid-cap American oil company and it operates primarily in the United States but the company also has operations in Canada, Egypt, and the North Sea.

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Apache Corporation - Insider Monkey

Apache Corporation has had a fairly difficult time since the start of the oil crash. The company has watched its stock price drop from a peak of just under $100 per barrel in mid-2014 to lows of just over $35 per share in January-2016. At these lows, that represented a significant drop of more than 60%, significantly hurting investors in the company.

Since then, Apache Corporation's stock has almost doubled to present prices of more than $60 per share. That represents a significant recovery for shareholders. Despite this, the company's stock is still roughly 40% below its pre-crash highs. And as we will see later on, this stock price combined with the company's potential means that the company is a huge potential American oil producer.

Apache Corporation Corporate Strategy

Let us begin with an overview of Apache Corporation's corporate strategy.

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Apache Corporation Corporate Strategy - Apache Corporation Investor Presentation

Apache Corporation has strong operational flexibility with the company's primarily goal to live within its cash flow. The company has a diverse inventory of prospects and is focused on continuing to allocate capital to its projects while spending within its prospects. The company's present primary source of growth is its unconventional North America production with an extensive economic inventory in the Permian Basin.

However, the company hopes to grow this inventory of prospects using cash flow from both its International assets and its Conventional North American Assets. Combined with these cash flow assets and the company's strong financial position with more than $4.7 billion in liquidity and minimal near-term maturities, Apache Corporation expects to have the cash flow to expand its production.

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Apache Corporation Asset Breakdown - Apache Corporation Investor Presentation

Apache Corporation plans to take advantage of its impressive asset potential using this financial strength as part of its corporate strategy. In North America, Apache Corporation has significant cash flow assets with growth and future potential assets nearby. The company has identified the Permian Basin as one of its major asset sources with significant cash producing assets bordered by growth assets.

Permian Basin Update

Now that we have an overview of Apache Corporation's corporate strategy plan including how the company plans to earn the cash flow to grow, it is now time to discuss one of Apache Corporation's major sources of growth, the Permian Basin.

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Apache Corporation Permian Basin Overview - Apache Corporation Investor Presentation

Apache Corporation has an astounding 1.7 million acres in the Permian Basin making the company the #3 acreage holder and producer. In 2Q 2016, the company produced 165 thousand barrels a day from this region of which 40% was unconventional. These assets are unique in that they have a low decline. More importantly, Apache Corporation has been decreasing the cost of its Permian Basin assets allowing the company to increase its profits.

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Apache Corporation Acreage Overview - Apache Corporation Investor Presentation

In the spotlight, Apache Corporation chooses to highlight the Midland Basin, in which Apache Corporation owns roughly 190 thousand acres. Given recent acreage deals for adjacent assets, that values this land owned by Apache Corporation from $3.8-7.9 billion. Given that Apache Corporation's entire market cap is roughly $25 billion, that means that these Midland Basin assets which are 10% of Apache Corporation's Permian Basin assets alone are worth 12.5-25% of the company's entire market cap.

This should help provide an idea of how undervalued Apache Corporation is in the present market.

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Apache Corporation Increased Efficiency - Apache Corporation Investor Presentation

This next image shows the growth of Apache Corporation's wells with the x-axis being the company's wells days on production. With Apache Corporation's improved targeting and new well completion methods, Apache Corporation's production per well has reached new highs compared to the peers. In fact, the company's wells have reached the day where they are producing a staggering 125 thousand barrels per day just over 2 months into production.

Overall, combining Apache Corporation's newfound efficiency in the production of its wells along with the value of the company's assets, we can see how Apache Corporation is a huge potential american oil corporation.

2017 Future Plan

Now that we have an overview of Apache Corporation's Permian Basin plan, it is now time to discuss the company's future along with its 2017 plan.

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Apache Corporation Future Spending Plan - Apache Corporation Investor Presentation

Apache Corporation's next major identified source of growth is the company's Alpine High assets in the Delaware Basin. Here, the company plans to start by installing infrastructure in 2H 2016 moving all the way towards full-field development in 2018+ onwards. The company also plans on establishing an Alpine High midstream enterprise where the company builds midstream assets to bring increased stable revenue.

At the minimum, Apache Corporation plans to operate 4-5 rigs in the region drilling 60-80 wells per year in the region. For 2016, the company is guiding capital spending of approximately $2.0 billion with more than 25% of the spending attributable to Alpine High and roughly 40% being spent on new infrastructure. That shows the significant amount of capital Apache Corporation is dedicating towards growth in the coming years.

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Apache Corporation Future Strategy - Apache Corporation Investor Presentation

Overall, Apache Corporation plans to grow in Alpine High while focusing on decreasing costs and increasing optimization of the company's assets. The company plans to invest on sustainable production and free cash flow from both its Egypt and North Sea assets while focusing on low risk assets. Altogether, Apache Corporation plans to focus on growing while maintaining low costs and strong cash flow.

Conclusion

Apache Corporation has had an incredibly difficult time watching its stock price drop by more than 60% to its lows. Even after the company's recent recovery, its stock price is still 40% below its pre-crash cries. Despite this crash, Apache Corporation continues to be a huge potential American oil producer.

Apache Corporation also has impressive future potential. The company has been focused on reducing costs while taking advantage of its impressive assets. In the Permian Basin alone, recent transactions have valued just 10% of these assets at up to 25% of the company's entire market cap. The company has also focused on reducing costs while investing billions into future growth.

As a result of these things, I think Apache Oil Corporation is a huge potential American oil producer.

Disclosure: I am/we are long APA.

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.