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Recently, the exploration activities of Apache's (NYSE:APA) joint venture with TAG Oil in Hawkes Bay, New Zealand were stalled due to troubles acquiring landowner consent for fracking activities. Earlier this year, New Zealand's Parliamentary Commissioner for the Environment announced that a preliminary study into the effects of fracking would be upscaled into an official investigation, the results of which will be presented to Parliament.

The study, required due to steadily increasing interest in off and onshore drilling in New Zealand's territory, will join a similar study currently in progress in the U.S. A study recently completed in the U.K. concluded that fracking poses "minimal risk" to groundwater, and if there is a similar conclusion to New Zealand's study, Apache and its competitors may have an easier time acquiring land leases.

Activities in Australia and Africa Increasing Margin, Revenue

Apache recently completed the purchase of TapOil Limited's production interests in the Harriet Joint Venture in Western Australia. This gives Apache access to greater upstream revenues, but also gives it greater exposure to ongoing litigation related to the June 2008 explosion at the Varnus Island natural gas processing plant, as Apache now has an 81% stake in the venture. After the purchase was announced but before it was completed, the state government of Western Australia dropped its case against Apache due to a technicality, but civil litigation can still proceed. Alcoa (NYSE:AA) subsidiary Alcoa of Australia is pursuing such a civil lawsuit against the joint venture for damages arising from the incident.

Australian fertilizer company Burrup Holdings sought $500 million from the Harriet Joint Venture, alleging breach of contract related to a 2006 disagreement that was exacerbated by the 2008 explosion. Apache paid $439 million for a 49% ownership stake in Burrup Holdings in February of this year and will continue supplying gas to the fertilizer plant, which was renamed Yara Pilbara as chemical giant Yara International increased its interest in Burrup to 51% at the same time as Apache's 49% purchase. This may turn out to Apache's benefit as the ammonia plant at the center of the original dispute is one of the largest in the world, with an annual production capability of 850,000 metric tons. As the plant's primary natural gas supplier through the Harriet Joint Venture and a part owner through the litigation resolution, Apache is uniquely positioned to generate both upstream and downstream revenues from the plant.

Despite continuing political instability in Egypt, Apache President and CEO Rodney Eichler is assuring shareholders that Apache is "optimistic for Apache's future in Egpyt" and is supported by its current government partners. As of the close of 2011, Apache held 9.7 million gross acres in Egypt, with proved reserves of 292 mmboe. The loss of these assets in a nationalization or a stoppage due to civil unrest would negatively impact Apache, as Egypt accounts for 365,418 mcf per day of Apache's natural gas production, or about half of what it produces from its holdings in the U.S. Apache continues to explore the development leases it acquired from BP (NYSE:BP) in November 2010, and according to its annual report Apache uncovered three new field discoveries and two new field extensions in 2011.

Rather than pulling back over the uncertainty of Egypt's political future, Apache plans to increase its efforts here, by acquiring new leases in the Western Desert which Apache believes have stacked-pay potential similar to the Permian and Anadarko basins stateside. Apache's political risk insurance specifically covers Apache's Egyptian holdings and Apache openly discusses the policy terms in its 2011 annual report, which should relieve some shareholders. However, as Apache increases its exposure here and imports more equipment as it expands, the coverage may quickly be outspent, and if Egypt's political unrest continues it is questionable whether Apache's insurers would be willing to increase their risk by amending the policy terms.

Apache may be pursuing Egyptian plays due to a considerable discount in average lease operating cost per boe compared to its other holdings. For Apache, this average cost in Egypt is $7.19/boe, compared to $11.80 in the U.S. and $13.86 in Canada. At the same time, Apache's average sale price per barrel is higher in Egypt than in other countries. In Egypt Apache averages $109.92/boe, compared to $95.51 in the U.S. and $93.19 in Canada.

BP is one of Apache's major competitors in Egypt, as BP considered Egypt one of its principal areas of production in 2011. BP has major offshore natural gas reserves in the Nile Delta, to which it added with its recent Salmon discovery. At the close of 2011, BP was producing 45,000 thousand barrels of oil per day and 444 mcf of natural gas per day from its Egyptian holdings.


Kenya's Ministry of Energy recently moved closer towards auctioning eight new off-shore blocks, and it is expected that Apache will be among the companies competing for the rights. At the end of 2011 Apache believed its offshore holdings in Kenya had unrisked potential of almost 300 mmboe. Eastern Africa is a hotspot for exploration opportunities at the moment, with recent discoveries by Total (NYSE:TOT), BP and Statoil (NYSE:STO) fueling the charge. If Apache can use its current relationship with the Kenyan authorities to win one of these preferred blocks, its explorations here have the potential to add substantially to its reserves and revenues in the coming years.

Though it has a positive outlook, Apache stock is changing hands at value levels. Currently trading around $88 per share, Apache has a price to book of 1.2, compared to BP trading around $41 with a price to book of 1.2, Total trading around $47 with a price to book of 1.2, Statoil trading around $26 with a price to book of 1.7, and Anadarko Petroleum (NYSE:APC) trading around $69 with a price to book of 1.7.

As evidenced by Apache's outline of its insurance policies in Egypt, the continuing political instability in Egypt and other African nations are a matter of growing concern for shareholders after a year of regime changes in this area of the world. Apache's willingness to address those concerns is a mark in the firm's favor, as is the fact that Apache took care to insure itself from multiple areas of risk related to potentially negative political outcomes. With these moves and its continued diversification of resources and regional asset bases, Apache is keeping itself reasonably protected against risk, measured against its capacity for further worldwide growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.