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Apache stock jumps as JV with Total brings cash to Suriname projects

Investors are once again welcoming Apache Corp.'s activities off the coast of Suriname after the company announced a joint venture with Total SA that will help Apache develop Block 58.

Earlier in the month, the Houston-based producer saw its stock price crash to an 18-year low after the company's first exploratory wells offshore Suriname failed to indicate whether production would be viable.

However, news that the French integrated oil and gas major would help Apache develop Block 58 helped lift Apache's stock price to $26.53 by the close of trading Dec. 23, up 17.3% on the day and at its highest point since September. By comparison, the broader S&P 500 was up less than 0.1% on Dec. 23.

"For [Apache] shareholders, X-mas should arrive a few days early thanks to [the Dec. 22] JV announcement which brings cash in the door and secures financing from an entity with an upstream-focus on exploration," analysts with Tudor Pickering Holt & Co. wrote in a Dec. 23 note to clients.

In exchange for a 50% interest in Block 58, Total has agreed to provide Apache with $100 million upfront and another $75 million on first oil production and to reimburse half of the Block 58 costs incurred thus far, which Tudor Pickering Holt analysts estimated at up to $65 million through the third quarter.

Total also agreed to fund 87.5% of the project's capital expenditures through the first $10 billion of gross capex and will pay Apache royalties on the first 1.5 billion barrels of gross production, the analysts said.

Apache will operate the first three exploration wells, which include the Maka Central-1 well, before transferring the operatorship of the block to Total. The two companies also agreed to bear their share of costs on all other exploration wells.

Apache did not provide any further clarity on the first three tests being conducted, but the Dec. 22 news release "shows no change to oil-focused language in the company's messaging," the Tudor Pickering Holt analysts said.

Apache's stock was battered earlier in the month after the company issued a very short report on its Maka Central-1 well. Apache has spoken favorably about the potential for oil production offshore Suriname and has made that project, along with its operations in the U.S. Permian Basin, the centerpiece of its operational plan moving into 2020.

Drilling on Maka Central-1 began in late September with an expected drill time of 30 to 60 days. Despite that time frame, the company gave no update on production potential when it reported the well results in early December. Instead, Apache said it would drill deeper.

"Deepening and testing operations continue at Maka Central-1," Apache CEO and President John Christmann said in the Dec. 22 news release. "When the companies are prepared to fully characterize results of Maka Central-1, additional information will be provided."

The joint venture "is a net positive for Apache in de-risking potential future development, especially after the sell-off following the low-impact update on Maka a few weeks ago," Mizuho analyst Paul Sankey wrote to clients Dec. 23. "Total clearly sees potential at Block 58, but the company is not paying up significantly to gain access to the block."

Despite the knee-jerk upswing in Apache's stock price Dec. 23, Sankey said the stock "remains relatively challenged into 2020 barring major exploration success."

"And the moonshot valuations we put on a big discovery at Maka have been effectively cut in half for $100 million up front," Sankey said.

The joint venture is expected to close within three days.

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