Apache (APA) added to its holdings in the Cook Inlet last week, winning bids for seven tracts for exploration. According to Lisa Parker, Apache Alaska's Government Relations Manager, the tracts are "filling in where we've got some holes in the acreage that we picked up in the past". Apache Alaska is a wholly owned subsidiary of Apache Corporation, and manages the company's Alaskan operations. According to Apache CEO Rod Eichler, the Cook Inlet "is a play that is just ripe for exploitation utilizing modern seismic technology".
Further Exploring Potential of the Cook Inlet
According to the United States Geographic Survey, the amount of undiscovered resources in the Cook Inlet could be as high as 600 million barrels of oil, 19 tcf of natural gas, and 46 million barrels of natural gas liquids. Apache believes its share of Cook Inlet reserves have between 70 and 400 mmboe potential.
Though the seven tracts added to its acreage are a win for Apache, it must be said that there was not much competition for the 44 tracts. According to Bill Baron, director of Alaska's Division and Oil and Gas, there are just three primary companies competing here: Apache, Hilcorp Energy, and Cook Inlet Energy, a subsidiary of Miller Energy Resources (MILL). Most of these players' activities are centered around "fill-in work around some of their existing lease", according to Baron.
Apache only recently started its operations in the Cook Inlet, beginning on the west side of the basin in 2011, but is already the biggest leaseholder in the Cook Inlet, with over 800,000 acres. The company plans to drill its first two wells here this year. The area is notoriously difficult to drill, known for regularly chewing up polycrystalline diamond compact bits within 150 to 1,000 feet - well short of the best known payouts, which are between 7,300 and 10,000 vertical feet. To overcome this challenge, players in the Cook Inlet are using new bit combinations along with new drilling techniques.
The unpredictable weather and environment of Alaska can also make it a challenge for producers. Hilcorp is currently struggling with regulators to re-open a tank farm in the western Cook Inlet after the farm was shuttered in 2009 due to a nearby volcanic eruption. No oil was spilled in the event, but runoff from the eruption did reach and accumulate below the berms that protect the farm from such incidents. Additionally, currents in the Cook Inlet can reach 6 knots, and for half of the year ice floes are a threat to drilling platforms in the northern reaches of the play. This unpredictability also effects equipment, both on- and off-shore. These challenges make the Cook Inlet less profitable than inland plays, but with Apache's reserves, its development here should still lead to revenue increases.
Competitors on the Cook
Like Apache, competitor Hilcorp, which is not traded, entered the Cook Inlet play in 2011, when Hilcorp purchased most of Chevron's (CVX) assets in the area. Hilcorp then expanded its position by purchasing proven assets from Marathon Oil (MRO) in January 2012, with an estimated 17 mboe transferred to Hilcorp in the transaction. Though its holdings are substantially smaller than Apache's, if Hilcorp is successful, it has the potential to grow and possibly become traded in the next few years, at which point Apache would need to view Hilcorp as a deep competitor.
Anadarko Petroleum (APC) also has assets in the Cook Inlet, though its assets there are onshore. Anadarko is primarily focusing on its holdings in Alaska's National Petroleum Reserve further north, where it bid on 125 blocks earlier this month, winning 99 of the bids. 92 of these bids will be operated under a 22% working interest for Anadarko, and the remaining seven will see Anadarko as 100% owner and operator. Should Anadarko decide to expand its operations in the Cook Inlet, it could become a serious competitor for Apache, as Anadarko has excellent leverage through its relations and agreements with the state, begun in 1998.
The downside for Apache's Cook Inlet activities is a lawsuit recently filed against Apache's exploration in the Inlet. The suit seeks action preventing further exploration activities like underwater airguns, which could potentially disrupt the endangered beluga whale population. The suit also contends that the exploration permits issued to Apache by the National Marine Fisheries Service violate federal law. Royal Dutch Shell (RDS.A) faced similar action from activists over the bowhead whale in the Beaufort Sea, and ultimately made concessions in order to protect its ability to drill. I believe it is likely that Apache will be required to make similar compromises with its operations.
While the Cook Inlet holds undiscovered potential, Apache is already seeing profit in the North Sea off the shores of the U.K. On May 17, it announced an extension well drilled in the Beryl field was producing 11,625 barrels of oil and 13.1 mcf of natural gas per day - the highest pay any well drilled in the area encountered since 2001. The company expects this success to lead to further development. Indeed, since acquiring Mobil North Sea Limited in 2011, production on the play for Apache is up 41% in the first quarter from the quarter before, and 67% from a year prior. I think these are extremely strong results, and represent a bright spot in an earnings season that was otherwise dampened by current U.S. natural gas prices and lower than expected earnings for many players.
Apache credits its approach to balanced growth while other players were rushing into North American gas with its continued profitability. Just 14% of its 2011 revenue came from North American gas, compared to 63% from oil. It anticipates production growth between 7 and 13% in 2012 based on its plays in the Cook Inlet, the North Sea, and elsewhere. I certainly believe that Apache will realize results on the high end of its guidance for this year, given its stability and focus on the long-term.
Should natural gas prices return to normal within the next eighteen months, Apache also has the capability to expand its natural gas drilling programs in many gas-rich areas, which would push its revenues above predictions. Even if this does not happen, Apache has a strong growth strategy with its current oil exploration and production program. At $82 a share with a price to book of 1.1 and a forward price to earnings of 6.1 and the stock trading close to its historic support level, I think Apache is a great buy. Based on Apache's strong growth outlook, I anticipate the stock will break $100 by 2013.