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Apache's (APA) Compelling Permian Basin Plans

|About:Apache Corporation (APA)

The growth of oil production from the Permian Basin has been a stealth contributor to the overall growth of US oil production. Permian producers benefit from existing infrastructure and long experience. Moreover, the Permian has what is music to any producer's ears: stacked pay. This means that underground, there are typically several oil-productive zones, rather than just one. Combined with horizontal drilling, this opens thousands of prospects.

With the usual caveats about oil price-dependent stocks-that high oil prices are subject to continued quantitative financial easing, and oil that is produced must ultimately have transport to a refinery buyer-Apache is a company with strong operations in the Permian.

Apache's (NYSE:APA) 9/12/2012 closing price of $90.51/share puts it at 81% of its one-year high of $112.09/share. Its one-year low has been $73.04/share. Its dividend of $0.68/share represents 0.8% of its share price. Per Yahoo! Finance Apache's estimated earnings per share (NYSEARCA:EPS) is $10.05/share; its most recent EPS was $8.30/share, giving it a price-earnings ratio of 11. Its liability-to-asset ratio is 46%.

One place Apache shines is its Permian (West Texas) oil operations. It owns 1.8 million net acres in the Permian, second only to Occidental (NYSE:OXY). Steve Farris, Apache's Chairman and CEO, spoke at Barclay's CEO Energy Power Conference. According to Farris, Apache has a total of 67,000 locations to drill. Its Permian operation has grown by 200%, its rig position from 6 rigs at the beginning of 2010 to 36 rigs now, and its Permian production is about 105,000 barrels of oil equivalent per day (BOE/D). Apache has identified 35,000 potential drilling locations in the Permian.

Its Permian operations, said Farris, has three parts: a vertical program in the Midland Basin, a Cline Shale program, and a Wolfcamp Shale program. Sample results from seven horizontal Wolfcamp wells are positive: with laterals ranging from 6400-9300 feet, 19-32 frac stages, initial production was 588-1260 BOE/D. Farris also identified Apache potential in MidContinent liquids plays, Mississippian Lime, Williston Basin, Cook Inlet in Alaska, offshore UK, and Vaca Muerta oil.

Majors active in the Permian Basin include Shell (RDS), which just bought 618,000 acres from Chesapeake (NYSE:CHK), Chevron (NYSE:CVX), which bought 246,000 acres from Chesapeake , as well as Occidental , ExxonMobil (NYSE:XOM), and ConocoPhillips (NYSE:COP). Some of the independents active in the Permian Basin include Approach Resources (NASDAQ:AREX), Concho (NYSE:CXO), Devon (NYSE:DVN), EOG Resources, Pioneer (NYSE:PXD), and SandRidge (NYSE:SD).

Per Bloomberg, today's prices for oil were about $98/barrel for West Texas Intermediate (NYSE:WTI) spot at Cushing and over $116/barrel for dated Brent spot. The current price for natural gas is about $3.00/MMBTU for Henry Hub spot.

Starks is long COP and SD. She has not transacted in any of the stocks mentioned here in the last three trading days and has no plans to transact in them during the next three trading days.

Disclosure: I am long COP, SD. 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.

Stocks: APA