Apache's Oil Discovery Brings Major Interest and Much More Upside Potential
Not all that long ago, shares of oil companies were trading as if almost the entire industry was facing bankruptcy. Throw in a major recovery in oil prices, and the interest in oil companies has selectively returned. However, there are still major oil discoveries being found, and investors are still willing to reward oil companies on good news.
Apache Corp. (NYSE: APA) announced after the close on Wednesday, along with earnings, a third consecutive Suriname oil discovery. What stands out here is that this was its largest to date. The well is Kwaskwasi-1, and the company encountered at least 912 feet of net liquids pay in two intervals. There were more specific details on the findings, but Apache said that it will have a higher net pay and also will have better quality reservoirs than its first two discoveries in the block (Maka Central-1 and Sapakara West-1).
Apache has a 50% working interest in the well, and the other half belongs to French oil giant Total S.A. (NYSE: TOT). While Apache’s stock has surged, it was not just not the same reaction at all for Total’s American depositary shares.
Apache’s press release indicated that it has identified at least seven distinct play types and more than 50 prospective plays within the thermally mature play fairway.
The earnings report shows how dire things were in the second quarter of 2020. Apache had adjusted earnings per share of −$0.74, and the company noted that it was tracking toward the lower end of its $1 billion to $2 billion capital spending range for 2020.
Credit Suisse has only a Neutral rating on Apache, but the firm raised its Suriname net asset value by roughly $3 per share to a new level of $10 per share, based on approximately 2 billion barrels of oil (equivalent) at its locations in Suriname. Credit Suisse raised its price target to $15 from $12 in that call.
Stifel was even more aggressive, upgrading its formal rating to Buy from Hold and raising its price target to $18 from $13. JPMorgan has an Overweight rating and an $18 price target. Susquehanna has a Neutral rating, but the firm raised its target to $15 from $12.
The most aggressive post-earnings call came from BofA Securities. The firm has a Buy rating on Apache, and its price objective is all the way up at $26. The post-earnings report noted a solid second quarter, with costs and capital spending trending lower to an implied breakeven of less than $30 per barrel of oil in the second half of 2020.
With the new discovery, BofA’s view is that the new resource scale is a story that is just getting started and a situation in which the Suriname assets are still poorly reflected in Apache’s stock price. BofA sees Suriname adding $10 per share to Apache’s stock price, rather than what it said was closer to $5 per share as the street’s consensus value.
Apache shares were up over 17% at $16.05 in midday trading on Thursday, in a 52-week range of $3.80 to $33.77. This was a $25 stock at the end of February and was above $30 in late January.
Total was last seen trading down about 0.8% to $38.01, and it has a 52-week range of $22.13 to $56.91.