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Low prices, Alpine High concerns leave Apache with murky outlook

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Essential Energy Insights - September 17, 2020

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Low prices, Alpine High concerns leave Apache with murky outlook

Showing that with fluctuating oil prices can come fluctuating opinions on producers, a pair of analyst commentaries went in different directions on Apache Corp., with one saying the Houston-based producer is undervalued, while another speculated that 2019 will be a difficult year, requiring spending cuts.

During Apache's third-quarter 2018 earnings call, CEO John Christmann said the company expects a capital budget of $3 billion for 2019 but said the total could change as commodity prices dictate.

"We have frequently stated in our philosophy that an [exploration and production] company should be capable of living within cash flow from operations, generating sustainable long-term reserve and production growth while also returning capital to shareholders," he said. "Apache has turned the corner and is well-positioned to deliver on this philosophy for many years to come."

According to analysts at energy investment bank Tudor Pickering Holt & Co., staying on that positive track may require proving that Apache will, indeed, alter its capital budget for 2019. The firm said it expects the Apache's leadership to remain "steadfast" in aligning its capital expenditures to cash flow, which would mean a budget closer to $2.6 billion for the year. Even though Apache has focused much of its budget on the Alpine High and other holdings in the Permian Basin, the analysts said that is where the cuts will have to be made.

"Given the long-cycle nature of the North Sea we'd expect the lion's share of cuts from the Permian and Egypt (though US remains 70-75% of capex)," the firm said. Tudor Pickering Holt said another possibility could be to raise capital through asset sales, speculating that Apache's holdings in the Anadarko Basin and the East Texas portion of the Eagle Ford Shale could be "dark horse catalysts."

In its review of Apache, Sanford C. Bernstein & Co. LLC gave a somewhat dour outlook, saying the company's reliance on the Alpine High play for production growth makes it too dependent on gas and NGL prices. Analyst Bob Brackett said the firm's "bearish gas price deck" of $2.50/Mcf through 2020 gives the Alpine High a net asset value of about $2 billion, or $6,000 per acre. Outside of the new Permian play, Brackett said, Apache's production appears to be flat or slightly down year over year.

Despite the firm's concerns, Brackett said, Apache is undervalued. He pointed out that Apache's proved reserves are worth approximately $10 billion at $50-per-barrel pricing for West Texas Intermediate crude, while its market cap was about $11 billion.

"If you believe on average that oil price will be at least ~$50/bbl or higher and if you believe on average that Apache won't destroy value with the capital it deploys, you're getting Suriname, Alpine High, [Permian-based subsidiary Altus Midstream Co.] … for free — entirely different assets altogether," Brackett said.