Apache Looks Ready To Climb On Increased Production

| About: Apache Corporation (APA)

Apache (NYSE:APA) recently announced that higher rig counts and new infrastructure helped the company to achieve record production from its Permian and Anadarko Basin operations. For the three-month period ending September 30th, 2012, Apache reported production of 771,000 barrels of oil equivalent per day, up approximately 18,300 boepd, or 2.4%, from the same period in 2011. Deferred production impacted third quarter volume by an estimated 25,000 boepd.

Earnings for the third quarter were $161 million, or $0.41 per diluted common share, after taking into account a non-cash, after tax write-down of $539 million in the carrying value of its properties in Canada due to lower natural gas prices. For the same period in 2011, Apache reported earnings of $983 million, or $2.50 per diluted share. Adjusted earnings excluding the write-down of the Canadian properties and other one-off items were $861 million, or $2.16 per diluted common share as the benefits of higher production was offset in part by lower prices for natural gas and natural gas liquids. In the same quarter of the previous year, Apache had reported adjusted earnings of $1.16 billion, or $2.95 per share. Cash generated by operations before changes in operating assets and liabilities came to $2.42 billion in the third quarter, down from $2.69 billion in the same quarter of the previous year.

G. Steven Farris, chairman and chief executive officer, said that the company continues to add drilling rigs and step up activity in the Permian and Anadarko basins. The company is currently running 56 rigs in these regions with plans to expand throughout next year. All the targets being drilled are oil and liquids-rich, and more than half are horizontal wells. Production in these two regions grew by 30% from the previous year, accounting for nearly 25% of Apache's overall production, compared to less than 20% in the third quarter of 2011. This growth trajectory is expected to continue in the future.

Apache's production from the Permian Basin and Central regions totaled 183,961 boepd in the third quarter, which included a full three month's contribution from the Cordillera assets acquired earlier in the year. For the same period in the previous year, the two regions produced 141,020 boepd. The joint-venture gas plant at the Deadwood Field in West Texas was made fully operational during this quarter and processed more than 50 million cubic feet per day. Apache also installed a 9 mile pipeline in the Bivins Ranch area in the Texas Panhandle. This line is currently transporting 3.3 MMcf of associated gas per day. This will enable development of the area beyond the current rate of 5,000 barrels of oil per day. Both these projects can be expanded to accommodate production growth.

The balanced portfolio divided between North American and international assets, as well as oil and gas-producing properties, helped to offset the effects of price volatility in the energy markets. Globally, Apache achieved an average price realization of $102.62 per barrel of oil, which is a small increase from $101.71 per barrel in the same period of 2011. The company benefited from higher price realizations on dated Brent crude produced in the Australia, North Sea, and Egypt regions, and on sweet crude from the Gulf of Mexico. Premium prices to the WTI index were realized on approximately 70% of crude oil production. The international regions saw natural gas price realizations increase on average 13% from the prior-year period to $4.21 per thousand cubic feet (NYSEMKT:MCF). North American natural gas price realizations declined 27% from the same period in the previous year to $3.51 per Mcf. International gas production accounted for 36% of the company's total gas volumes.

Apache's Kitimat project, which the company is developing in partnership with EOG Resources (NYSE:EOG) and Encana (NYSE:ECA), seems to be looking a little questionable as increased competition affects estimates of demand and potential profits from the venture. Royal Dutch Shell (NYSE:RDS.A), with backing from some of the largest consumers of LNG (liquefied natural gas) in Asia, such as Korean Gas and PetroChina, is providing direct competition for the company in Kitimat. Cheniere Energy (NYSEMKT:LNG) is also expediting plans for LNG export from the Gulf Coast. Meanwhile, Pieridae Energy Canada has recently announced plans for an LNG liquefaction and export center to be located in Goldboro on the eastern coast of Canada. Other energy majors, like Exxon Mobil (NYSE:XOM), are examining the possibility of exporting LNG from the North American continent. Apache is going to find it difficult to line up long-term supply contracts when potential customers feel that they can shop around for the best possible terms.

Apache has grown with a strategy of acquiring developed assets, starting with Mariner Energy for $2.7 billion. At the same time, it acquired Devon Energy's oil and gas assets in the Gulf of Mexico for $1.05 billion and purchased Exxon Mobil's assets in the North Sea, including the Beryl field for $1.75 billion. This year, Apache acquired privately held Cordillera Energy Partners for $2.8 billion. The purchase gave Apache access to 254,000 acres of potential energy reserves in the Granite Wash, a region along the Texas-Oklahoma border. International operations are in Egypt, Australia, and the U.K. region of the North Sea, but Egypt still remains its largest overseas operational area. Apache's commitment to Egypt began in 1994, and the firm now controls almost 10 million gross acres. Apache's proved reserves in Egypt totaled 292 million BOE at the end of 2011, or about 10% of the company's total. Apache is currently the largest producer of natural gas in the Western Desert and the third largest in Egypt.

Looking ahead into 2013, Apache forecasts production growth of 6% to 9% and continued progress towards focusing more on liquids. The mix currently stands at about 50/50. Moreover, much of the production from the Canadian assets is gas, and the company could recoup some of its write-downs if the gas market in North America recovers. If you are bullish about the energy market and gas prices, you should consider investing in Apache today.

Disclosure: I am long APA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.