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Analysts hang hope on further Suriname drilling after Apache price spike

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Analysts hang hope on further Suriname drilling after Apache price spike

After a tough second half of 2019, Apache Corp. is off to a better start in 2020 with a new partnership, reborn optimism offshore Suriname and refreshed vigor in its share price.

The Houston-based producer's shares were battered and beaten by the end of 2019 following a tough year that included the resignation of a key executive, a plan to tighten the company's purse strings in 2020 and some disappointing drilling results.

However, investors are pinning their hopes on Apache's future exploration success in Suriname after it recently disclosed a "significant" oil and condensate discovery in the tiny country off the coast of South America that sent the stock price 27% higher on the day. According to analysts, Apache's stock price should see a sustained improvement going forward, assuming more exploration success in the hot new play.

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Shares of Apache on the NYSE ended the Jan. 9 session at $32.60, down 13 cents, or 0.4%, following reports that it will close its San Antonio office and cut up to 15% of its workforce, or 500 jobs, around the world. By comparison, the broader S&P 500 closed 0.67% higher Jan. 9.

In October 2019, the company's senior vice president of global exploration, Steve Keenan, stepped down, and CEO John Christmann said Apache would undergo a comprehensive corporate and operational restructuring that could save up to $150 million. Indicating it would throttle back on its pace of production growth, Apache's upstream capital budget this year will likely be between 10% and 20% lower than its 2019 budget of $2.4 billion.

Part of those cuts include scaling back operations in the gas-heavy Alpine High prospect in the U.S. Permian basin, as Apache looks instead to exploration success in Suriname.

Apache's recent disclosure was light on details, including potential resource estimates for its oil find, but based on preliminary data, it could set the stage for additional discoveries, with the company identifying at least seven distinct play types and more than 50 prospects, it said.

In a Jan. 7 research note, Bernstein analyst Bob Beckett said that while the new discovery could be "transformational" for Apache, his target price for the company's stock — $30 per share — does not account for the Suriname find due to the many unknowns surrounding the discovery at this point.

Acknowledging that any meaningful production impact from the new discovery could take several quarters to materialize, it provides "incremental confidence in the potential for oil/hydrocarbon development in the region particularly given prior investor skepticism," SunTrust Robinson Humphrey oil and gas analyst Neal Dingman said in a Jan. 7 note.

In early December 2019, Apache's shares plummeted to an 18-year low after the producer revealed it needed to conduct additional testing to determine if production would be viable at Maka Central-1, which was its first exploratory well in Block 58.

Weeks later, Apache said it had partnered with French oil major Total SA to help develop Block 58. In exchange for a 50% stake, Total will contribute up to $100 million upfront and another $75 million on first oil production, and will reimburse half of the block's costs incurred thus far.

"While still early in the exploration/appraisal stage for the massive 1.4 million acre Block 58 position, we believe that the announcement of oil-bearing pay (as well as gas-condensate) should continue to be a positive for Apache, particularly as the recently announced [joint venture] helps alleviate 50% of the risk/cost burden associated with the program net to Apache," Dingman said.

After the Jan. 7 Suriname announcement, Dingman raised his price target for Apache to $32 per share, from $25.64 per share as of Jan. 6.

The northeastern coast of South America has become a hotly watched frontier exploration region following a slew of discoveries and the first flow of oil in 2019. Analysts and international oil companies are betting that production from Suriname and the neighboring Guyana will ramp sharply higher in the next decade.

Suriname Block 58 is adjacent to the massive Stabroek Block in Guyana operated by Exxon Mobil Corp., where oil production from the Liza field recently started ahead of schedule.

The Stabroek Block has been estimated to hold about 6 billion barrels of oil equivalent recoverable resources, but that figure is now believed to be conservative as the majors continue to find oil. Exxon and partner Hess Corp. on Dec. 23, 2019, announced a 15th discovery at Stabroek.