Is Cordillera Apache's Latest Prescient Acquisition?
If Apache (NYSE: APA), one of the largest U.S. independent oil and natural gas producers, has developed a reputation for anything, it is for two things. First, the company is a smart shopper, meaing its acquisitions usually wind up creating value for shareholders. Second, the Texas-based company isn't shy about drilling fields that much larger oil companies have either given up on or wanted nothing to do with in the first place.
The $2.85 billion purchse of Cordillera Energy Partners III LLC announced today may just fit the bill as another of the company's astute purchases AND as an example of Apache finding value where other oil companies do not.
Apache's purchase of privately held Cordillera buys the former 14,000 potential drilling locations in the Anadarko Basin and proved reserves of 71.5 million barrels of oil equivalent and current net production of 18,000 barrels of oil equivalent per day. And not that it's a big deal in an environment of plunging natural gas prices, but the Anadarko Basin is one of the most gas-rich reserves in the U.S. with potential reserves of 100 trillion cubic feet.
Looking at the roster of companies that operate in Anadarko, sure Exxon is there through its acquisition of XTO and ConocoPhillips (NYSE: COP) is there as well. The rest of the companies with Anadarko footprints are of the independent and mid-major variety. However, Apache has been operating in the region for over five decades and the company said it was producing 40,000 barrels of oil equivalent per day in the area at the end of last year.
Hmm, 40,000 barrels per day at $100 per barrel is $4 million and since this is an onshore play, Apache production costs are far lower than a deepwater exploration. That means higher profits, but wait. Apache said the Cordillera acquisition will allow to triple its central region production and that's probably why the company said the deal will be accretive to EPS and cash flow this year.
To be sure, Apache is a major offshore driller as well. The company has a significant Gulf of Mexico presence. It recently bought North Sea fields from BP (NYSE: BP) and Exxon Mobil. That said, Apache does belong the list of companies that are great onshore oil plays.
The utility in the Cordillera doesn't end there for Apache shareholders. Investors might still be smarting from the drubbing Apache took early last year due to the political upheaval in Egypt. While it would not be fair to say Apache is throwing in the towel on Egypt (it is not), it might be fair to say the company is looking for safer confines to boost production and reserves. It doesn't get much safer than onshore exploration in Oklahoma and Texas – two states that are quite friendly to the energy industry.
And for those looking for more upside in Apache shares, Bank of America slapped a $160 price target on the stock today. That's almost $65 above where the stock closed on Friday. And that upside potential comes with a lower forward P/E and book value than what Exxon Mobil currently sports.
Traders who believe that Apache has more upside might want to consider the following trades:
- Apache outright. It could take a while to hit $160, but even $125 from here is great upside.
- Long Anadarko (NYSE: APC). Similar to Apache in many ways, but with more risk. Also a possible takeover target.
- Long Devon Energy (NYSE: DVN). Also similar to Apache, but more conservative.
Traders who believe that Apache could be in for a fall may consider alternative positions:
- Short the iShares Dow Jones US Oil & Gas Index Fund (NYSE: IEO).
- Long the ProShares UltraShort Oil & Gas (NYSE: DUG)
- Write covered calls on existing Apache positions for income. Remember, Apache's dividend is paltry.
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