Apache’s Alpine High Starts To Deliver

Last September Houston-based Apache Corp. (NYSE: APA) reported a massive new find in a largely overlooked area of the Permian Basin. The find, dubbed “Alpine High,” may contain 15 billion barrels of oil equivalent (BOE), according to company estimates.  

But in what has to be one of the larger disconnects in the oil and gas sector today, this week you could buy a share of Apache for less than you could before the discovery’s announcement. On September 6, 2016 – the day before the new find was announced – you could buy a share of Apache for $51. The share price ran up to $67 in the months following the news, but the pullback in the energy sector this year has dropped Apache back to $50. 

Contributing to Apache’s weakness were initial well results that were deemed disappointing by some analysts. But Apache CEO John Christmann IV attributed the preliminary results to a lack of equipment and pipelines in the remote area. Christmann said this limited hydraulic fracturing operations. If you read my previous article in which I interviewed a friend in the Bakken who is involved in hydraulic fracturing, it’s quite easy to imagine that these limitations would exist in a remote area that hadn’t experienced significant drilling. 

Now Apache has released Q1 2017 earnings, and they seem to bear out Christmann’s claim. The company announced the delivery of first gas at Alpine High midstream, two months ahead of schedule. But Apache also reported new test well results that were far better than the initial results that disappointed analysts. The company reported production of 600 barrels per day from the Chinook 101AH, which has a relatively short horizontal well length of 4,500 feet. This production rate is nearly triple the previously released rates at Alpine High and the highest flow to date there.  

Source: Apache Investor Relations

For the quarter, Apache reported a return to profitability after making significant improvements in 2016. The company reported Q1 2017 revenues that jumped by almost $800 million to $1.9 billion over the same period last year and adjusted earnings of $31 million. Expenses fell by $125 million (9%) to $1.3 billion. The company also reported that net cash provided by operating activities rose to $455 million, compared to $239 million in the first quarter of 2016. The company’s net debt at the end of the quarter was just under $7 billion, a decline of $200 million from the previous quarter.

The company’s net debt at the end of the quarter was just under $7 billion, a decline of $200 million from the previous quarter. Oil and gas capital investment was $646 million during the quarter, with 68% focused on developing its Permian Basin assets. 

The company also announced the completion of the first section of a 30-inch gas pipeline that allows the company to send gas to market for the first time from the field. The new pipeline frees up a constraint that allows Apache to accelerate the expansion of the company’s oil and natural gas liquids production in the new field. This, along with the excellent results of the recent test wells, caused the company to increase North American production guidance to a midpoint of 260,000 BOE/day, up from 252,000 BOE/day in 2016. 

Source: Apache Investor Relations

Apache is only one of the energy companies experiencing a disconnect between its share price and its prospects. I don’t believe these disconnects can last, and that will inevitably prove to be a profitable opportunity for investors. Consider subscribing to The Energy Strategist for the latest advice on which companies stand to benefit the most from a recovery in the energy sector.

Follow Robert Rapier on Twitter, LinkedIn, or Facebook.