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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Why Apache’s Latest Oil Find Is Such A Game Changer

Apache’s recent oil find highlights what could be a new phase in fracking. To date, fracking in the U.S. had really been all about taking explored basins and drilling new wells to get at previously untapped resources. That strategy worked well when oil prices were more than $80 a barrel. At today’s prices though, drilling the old style rigs in mostly depleted fields to get at residual layers of black gold is a money losing strategy. Apache’s find shows that money can be made by taking risks and looking for major new finds in areas that had been passed over previously.

Apache Corporation has struck oil in a region that no one would have expected. The believed to be clay-ridden region of the Permian Basin surprisingly contains at least $8 billion in oil, and there could be more. For years geologists have explored and drilled down to find limited resources and an abundance of clay.

Apache Corp’s leading competitors are Chevron and Occidental Petroleum, both of which maintain a significant presence in the Permian Basin as well. Occidental opened at $78 but closed $.87 lower on Tuesday. Their shares have since retreated to $75.85 and were downgraded to a hold. This past May, rumors were circulating that Occidental was in talks to take over Apache. The acquisition would have been worth $25 billion, if it were true. Occidental quickly put the rumor to bed and Apache’s stock withdrew from its 11 percent spike. Apache’s news last Tuesday threw Occidental’s hopes of a takeover out the window. Alpine High could be Apache’s ticket to a more competitive market share in the basin.

Unbeknownst to the public, Apache hired a team of drillers from EOG Resources in 2014 to evaluate the quality of the land. The team drilled several test holes and used 3d seismic to determine where the deposits are located. Apache is now referring to the resource rich land as Alpine High.

Apache estimates there are roughly 75 trillion cubic feet of gas and 3 billion barrels of oil in the ground. They have spent the past two years gathering land, now some 307,000 acres in preparation for Tuesday’s announcement. Apache has recognized 2,000 to 3,000 potential drilling locations and claims each could be worth a net present value of $4 million to $20 million. The company is confident they will see a 30 percent rate of return on the investment. Related: Geopolitical Oil Glut: What Happens When Libya Exports 600,000 bpd in 4 Weeks?

Even more curious, they bought the land at $1,300/acre when land in this region fetches at least $20,000. The difference in price is due to the fact the more expensive land is usually developed with wells already standing. Most of the land Apache purchased is undeveloped and has little to no infrastructure nearby. Thanks to the major find though, Apache has a lock on what could be one of the most exciting finds in decades.

Apache has already constructed 19 wells, most of which are pumping natural gas, but more is likely to come once infrastructure and procedures are set. A concern for the company will be clearing land and creating necessary roads and pipelines for the oil and gas. Apache is increasing its capital investment by $200 million for the year, taking a considerable chance. It is unlikely Apache will turn to Baker Hughes or Weatherford for oil field services considering the amount of capital they will be investing.

As of Tuesday, Apache’s stock was at a regular price of $51.67 a share but has since risen 14 percent to $59.40. EOG Resources recently announced they would be acquiring Yates Petroleum, increasing their share value along with collective acreage in a nearby territory.

There have already been clear signs of Apache’s stock climbing but with more data and reassuring news potentially unfolding in the future, the company could stand to be a solid investment. Most of the land is undeveloped and only a few wells stand, meaning there’s plenty of work to be done before this project pays off. Speculators should also study WTI oil and natural gas futures and note their price will respond negatively to production increases. Apache will be one of the few oil companies this year to see such substantial growth and increase in spending.

By Michael McDonald of Oilprice.com

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Leave a comment
  • Joe on September 15 2016 said:
    Good for Apache. An interesting thing about their stock is that is never did gain traction above a price of a single bbl of oil in the last 10 years. Except for it's small dividend, you might have done just as well by buying a tank full of oil and hoarded it. Go ahead and plot APA against WTI oil and see for yourself.
  • John A on September 16 2016 said:
    "drilling the old style rigs in mostly depleted fields"

    Never base your understanding of an industry on a writer who includes this type of gibberish in an article thinking it is analysis. Based on this phrase, I can only think Michael McDonald has no understanding of the oil and gas business.

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