APA Apache Corporation

By Bradley Olson and Erin Ailworth 

Apache Corp. said it has discovered the equivalent of at least two billion barrels of oil in a new west Texas field that has the promise to become one of the biggest energy finds of the past decade.

The discovery, which Apache is calling "Alpine High," is in an area near the Davis Mountains that had been overlooked by geologists and engineers, who believed it would be a poor fit for hydraulic fracturing. It could be worth $8 billion by conservative estimates, or even 10 times more, according to the company. Shares rose by as much as 13% after U.S. markets opened Wednesday.

Apache started acquiring mineral rights in the area two years ago and subsequently discovered its potential. The company then quietly went about locking up more land in the field, believed to be up to 450,000 acres overall. Its position now exceeds 300,000 acres, or roughly two-thirds of the field, and is about 20 times the size of Manhattan.

The company has begun drilling in the area and says the early wells, which produce more natural gas than oil, are capable of providing at least a 30% profit margin at today's prices, including all costs associated with drilling.

Some are so prolific that they can break even at a price of 10 cents per million British thermal units, according to the company. Natural gas futures closed Tuesday at $2.72.

"This is a giant onion that is going to take us years to unveil and peel back," Apache Chief Executive John Christmann IV said in an interview. "The industry dogma about this area, all the fundamental premises that most people had about it, were just wrong."

It remains to be seen whether Alpine High delivers on its potential; some oil and gas discoveries touted as game-changers have historically produced less than advertised. Some analysts said they were concerned about the need for infrastructure in West Texas to process and ship gas, oil and other products from the discovery.

"They are close to the Gulf Coast and to Mexico, where there will be significant demand growth, but this could be big enough that they could see price realization problems," said R.T. Dukes, an analyst at energy consultancy Wood Mackenzie.

Still, the field, which Apache estimates could hold the oil-and-gas equivalent of as much as 8.1 billion barrels of oil, underscores the potential of new drilling methods to unlock vast new resources in North America.

The discovery is likely to transform Apache, currently the nation's sixth-largest independent energy company with a market capitalization of $20.1 billion. Alpine High may now be the biggest asset for Apache, known in the industry for its frugality and record of buying assets from other companies rather than finding its own.

The company is planning to direct one-fourth of its capital budget this year toward the field, but will require several years to ramp up production because of the need for pipelines and processing equipment. Apache has so far drilled 19 wells in the area.

The discovery of Alpine High in a previously sleepy corner of Permian Basin comes as the industry has struggled globally to find new resources, particularly oil. Other major discoveries in the past decade include Exxon Mobil Corp.'s Liza field in Guyana, which could hold as much as 1.4 billion barrels.

The new play is a short distance from extensive drilling operations and is likely to stoke the speculative fever that has recently engulfed the Permian, a vast swath of geology in West Texas and New Mexico that has been gushing oil and gas for almost 100 years. The Permian has become popular again because producers have found ways to use newer technologies to extract oil from the area at a profit, even at current below-$50-a-barrel prices.

On Tuesday, EOG Resources Inc. announced plans to buy Yates Petroleum Corp. for $2.5 billion including debt to extend its holdings in the area. Private-equity firms and companies have been scooping up land in the region at a price of $20,000 to $30,000 an acre, even as the industry is mired in the worst price crash in generations.

Apache by contrast says it bought into the new field it discovered for about $1,300 an acre.

It may be years before the full value of the discovery shows up on Apache's balance sheet, if it does at all. In 2009, Occidental Petroleum Corp. trumpeted a new discovery in California that an analyst later said could hold as many as 10 billion barrels. The company never fully developed the resource and later spun off its California operations.

But if it holds true, Apache's discovery would be the latest oil and gas find to turn conventional geological wisdom on its head.

Although the area in question, Texas' Reeves County, is heavily drilled, most producers are focused farther north. For years, it was assumed that the layers in Alpine High would be too full of clay, which impedes hydraulic fracturing, the process of blasting sand and water into brittle rock layers to make oil and gas flow out.

Prior explorers drilled more than 110 dry holes in the area. However, a team of explorers led by Steven Keenan, whom Apache hired from EOG in 2014, studied the geology and hydrocarbons in the region of the Alpine High acreage and concluded that it might have undiscovered potential.

"Every 10 years or so, there's a so-called new discovery, and generally they confound the prevailing wisdom," said Mr. Keenan, in an interview.

Mr. Keenan was previously part of the team that helped EOG understand the potential of another new field: the Eagle Ford in South Texas. It now produces more than 1 million barrels a day.

Write to Bradley Olson at Bradley.Olson@wsj.com and Erin Ailworth at Erin.Ailworth@wsj.com-

(END) Dow Jones Newswires

September 07, 2016 10:58 ET (14:58 GMT)

Apache (NYSE:APA)
Historical Stock Chart
From Mar 2024 to Apr 2024

Apache (NYSE:APA)
Historical Stock Chart
From Apr 2023 to Apr 2024