Shareholders be prepared: The way oil companies announce new discoveries may be about to change - but don’t panic. You’re being kept in the dark for a reason, and you’ll thank them later.
That’s what the recent theatrics surrounding the much-awaited Apache oil drill in Suriname has been all about: A strategic rethink.
Apache Oil Corporation isn’t ExxonMobil, and it’s not Tullow Oil, either.
Exxon is a supergiant with a dazzling 15 discoveries, back-to-back, in the world’s darling new offshore oil venue - Guyana.
Tullow is a mid-cap explorer with a string of hits until it recently fell on some bad luck in this same venue.
Apache is a large-cap E&P company, and it’s had to play things very differently than both the above companies as it seeks to repeat Exxon’s stunning success right across the maritime border in Suriname.
Much of the oil left to be discovered on earth is going to be offshore in geologically challenging deepwater basins.
If you’re Exxon, you can afford to drill, drill, drill at breakneck speed and prove up your discovery, even bringing a play into production months ahead of deadline. You can also afford a miss and abandon a well if necessary.
If you’re mid-cap Tullow and your flagship Ghana project is missing the beat on production, you can't afford a miss in Guyana - at all. Especially not after you've raised expectations so high.
Tight Lips Don’t Sink Ships
Short of being a fly on the corporate Apache wall, one can only assume that its silence in late November was a calculated risk – and one that paid off.
Apache’s shares started to tank in late October, shedding 5% in a single day, when it emerged that its senior vice president of global exploration, Steve Keenan, had resigned. Immediately, shareholders panicked. After all, here is Apache (which is not Exxon), trying to drill its first well in Block 58 in Suriname in a very tricky new geological play that had already resulted in failure for Kosmos Energy.
At times like these, losing a key exploration chief doesn’t sound great. Even worse when it comes with no explanation whatsoever.
Then came the drill results.
First, a lot is riding on Suriname because it could end up being another giant Exxon-style play like Guyana - or it could be a total flop. For Apache, the pressure was immense because of slowing production in the Permian.
But with Suriname, Apache had been extremely tight-lipped from the beginning, including with any information on when the contracted drillship was set to reach Block 58 and start drilling back in early November, and where, exactly, it was going to drill.
On November 29th (a Friday), Apache was set to tell shareholders of its drill results. Shareholders, already on edge from the Keenan developments, were disappointed. In the end, all the company said was that Apache would drill deeper and conduct further tests. There was zero indication that the company had struck oil, or not.
Traders assumed the worst. After all, if Apache had struck oil, why wouldn’t they have said?
That sent shares down by 15% in trading the following Monday.
Twenty days later, Apache made a surprise announcement, unveiling a deal with French oil giant Total SA to develop the offshore Suriname project in a joint venture. That meant that Total SA would be chipping in financing to finish exploration.
In the deal, Apache would get a $100-million bonus when the deal closed and would also see half of its to-date exploration costs reimbursed. It would also get $5 billion in cash carry on its first $7.5 billion of appraisal and development capital, with Total SA eventually becoming the operator of the wells.
Shareholders loved it. Finally, something that made sense of all the silence.
Shares saw a 10% bump immediately following the news.
That left Apache stock still trading down about 5% on the year.
Only two weeks later, Apache made another - much more stunning announcement that sent stocks surging 27% on January 7th. Apache and Total unveiled a major oil discovery in Suriname that is potentially game-changing for the Houston-based company.
Apache sacrificed its stock price in the immediate term for a much bigger gain shortly afterwards. It was highly strategic.
Will Others Take Cue From Apache?
Perhaps Tullow should have been a bit more cautious about its Guyana discovery announcements.
Just like Apache has been under great pressure over Suriname, Tullow has been the center of attention in Guyana.
Facing extremely high expectations, Tullow has lost half its value and its CEO resigned in early December.
Like Apache, Tullow was facing slowing production in another of its key venues - Ghana. So not only was a Guyana discovery important, it was imperative.
The discoveries were lining up, with Tullow announcing three in a row in short order in 2019 to great fanfare.
But then the other shoe dropped rather abruptly, first in the Orinduik block and then in Kanuku license.
On January 2nd, Tullow was dealt its third blow in a month, revealing a smaller-than-expected oil pay at the Carapa-1 well in the Kanuku license. Related: Oil Tanks As Trump Claims Iran Is Standing Down
Building on the December drama of more discovery disappointments and the resignation of the CEO, Tullow’s acting chief, Dorothy Thompson, went as far as to say the company was open to takeover offers, the Irish Examiner reported.
The lesson learned - or pre-empted - by Apache was this: It’s time to lower expectations. Apache did just that - successfully. Going into the discovery announcement with Total SA, shareholders were psychologically prepared for disappointment. Instead, they got a major discovery.
This is where oil exploration adds a psyops element.
And Apache may just have started a new trend for mid-cap and large-cap independent explorers who need to handle discovery announcements and drilling results in a different way, or sink under the pressure of expectations versus deliverables.
Moving further into 2020, we might just see more psyops that rather than trying to impress investors with immediate discovery news, will be trying to lower expectations in advance so that a de-risked discovery announcement doesn’t just impress - it stuns, and is sustainable.
By. Charles Kennedy for Oilprice.com
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