Only days after Apache's (APA) announcement of a minor natural gas find off the shores of Kenya raised hopes for the underexplored region, Kenya's Energy Minister Kiraitu Murungi indicated that the deposit was not commercially viable. However, Apache intends to continue drilling exploration wells to probe the hydrocarbon layers believed to be hidden in deepwater Kenya. The natural gas deposit is the first hydrocarbon deposit ever found in Kenya, and could yield the data needed for Apache and its partners to make a profitable strike. Apache appears certain a strike of this magnitude is in order, as it estimates its Kenya prospects to hold 4.4 billion barrels net - if it can only find them.
Apache is surely hoping for a multi-trillion cubic feet find on the scale of Anadarko Petroleum's (APC) and Enersis' (ENI) finds in nearby Mozambique earlier this year. Such a find in an area with easy access to the booming Asian energy markets could propel Apache forward and compliment its other projects, notably those in Australia, meant to help fuel Asian energy needs.
Its international portfolio is a major driver of Apache's growth. Although only accounting for 27% of second quarter 2012 production, international liquids comprised a full 49% of second quarter revenue. Much of this derives from Apache's activities in the North Sea, where it is seeing success where others failed. Its success on the Forties field is particularly notable as the field continues to deliver returns far above the most optimistic predictions at the time Apache acquired it. Apache clearly believes that it can continue to drive production further in this area, since its estimates keep the North Sea contributing 8% of its total production between 2011 and 2016.
As another sign of its bullish North Sea position, Apache is currently undertaking the first field-wide survey of the Beryl in the last fifteen years, using 3D seismic applications. With the exception of the Skene field, which is condensate, all of Apache's North Sea opportunities are in oil fields. Although in the third quarter of this year production will see a slight decline due to scheduled maintenance, after its full production comes back online it expects to see an additional upside of 19 net mboe per day, for a total capacity of 90 mboe per day. This is nearly twice as much as its production from the US Central Region, which Apache considers its Canyon Wash and Anadarko Basin plays, which it reported at about 54 mboe per day for the second quarter of 2012.
Onshore US Is Also On a Growth Track
Apache is steadily expanding its US onshore holdings. Apache is operating more US onshore rigs than any other competitor save one, and is maintaining a heavy focus on Permian oil. Over the last two years, Apache doubled its net acreage in the play, which enabled it to produce 104.5 mboe per day net in the second quarter, a year over year production increase of 14%. A large part of that increase is due to its increase in rigs, of which it currently has 34 operating on the play. Even this aggressive approach will not exhaust Apache's drilling inventory soon, since it already identified 35,000 potential drilling locations.
One major differentiator between Apache and some of its competitors, like EOG Resources (EOG), is that Apache is not significantly changing its oil/gas mix in the Permian. While others are pulling out all of the stops to transition more heavily into oil, Apache's Permian production remains steadily mixed at about 25% natural gas and 76% liquids. However, Apache is not following the same strategy across the US; realizing the importance of domestically produced oil to its balance sheet, Apache is beginning to drill in the Williston Basin, where it estimates it has 1 billion barrels equivalent of recoverable resources, and the Mississippian Lime, where it estimates it has 2 billion barrels equivalent of recoverable resources.
Although on both of these plays Apache is starting with just three wells, I expect it will ramp up its program on the Mississippian quickly. With a low cost to entry and multiple formations targeted, beginning with the Mississippian Lime and edging down to the Upper Pennsylvania, Apache estimates it has 7,200 drilling locations across its 580,000 net acres on the play. Here as elsewhere Apache is following a contrarian path; as SandRidge Energy (SD) and other play leaders focus on the southern and eastern reaches of the Mississippian, Apache is building its position in the central and northern reaches.
One of its areas of concentration is Rawlins County, where the Cahoj Field is located; on the edge of the Central Kansas uplift, this area was well explored with conventional drilling and is only beginning to be explored by unconventional producers like Apache. Apache is equipped for production from the two shale layers known to occur throughout the Cahoj field, one overlaying the upper carbonate and one between the upper carbonate and lower carbonate zones. While the risks of punching a dry hole in this area is greater than in the southern reaches of the state where other operators are focusing, the lower costs of land acquisition and relatively known deposition of the formation will help Apache overcome such risks, and could lead to higher margins for the firm.
Apache is currently trading around $87 per share, giving it a price to book of 1.2 and a forward price to earnings of 8.0. These are attractive metrics for Apache, and indicate a discount to its peers. Anadarko is trading around $71 per share with a price to book of 1.8 and a forward price to earnings of 17.8, while EOG is trading around $114 per share at a price to book of 2.3 and a forward price to earnings of 18.1. ENI is trading around $17 per share with a price to book of 1.4 and a forward price to earnings of 13.4. Finally, SandRidge is trading around $7 per share, with a price to book of 1.2 and a forward price to earnings of 16.2.
I think Apache's discount reflects investor concerns over its aggressive growth plan, but these concerns are misplaced. Apache's focus on maintaining one of the lowest debt levels in the industry means that it finances most of its operations from cash flow, and maintains one of the lowest debt to equity levels in its peer group. Apache is also well balanced enough that any shift in a regional market can be countered with activities in another area. At the foot of a stellar growth curve, Apache is very attractive at current prices.