Apache Corp. (APA, Financial), an independent energy company, announced the discovery of 2 billion to 3 billion barrels of oil in a West Texas field on Wednesday.
The area, being referred to as “Alpine High,” is located near the Davis Mountains in Reeves County and has been previously overlooked due to the belief it would not be fit for hydraulic fracturing. According to Apache, the find could be worth at least $8 billion and has the potential to become one of the biggest energy finds of the past decade.
The company began acquiring mineral rights in the area two years ago, discovering the potential drilling prospects in the process. Apache has operations in the nearby Permian Basin, the Gulf of Mexico, Oklahoma, Canada, Egypt and the U.K.
Apache has a market cap of $21.9 billion and an enterprise value of $30.4 billion. It has a forward price-earnings (P/E) ratio of 48.5, a price-book (P/B) ratio of 2.9 and a price-sales (P/S) ratio of 3.9.
GuruFocus ranked Apache’s financial strength 3 of 10. Its Piotroski F-Score is 2, indicating a poor financial condition. Its Altman Z-Score is -1.32, placing it in the distress zone which indicates the possibility of bankruptcy in the near future. Its Beneish M-Score of -5.9 indicates the company does not manipulate its earnings. Its cash-debt ratio of 0.14 is below the industry median of 0.44. The oil industry has been hurting lately due to the decline in the price of oil and natural gas.
GuruFocus ranked the company’s profitability and growth 4 of 10. Its operating margin is -305.3%, and its net margin is -261.9%. It has a return on equity (ROE) of -183.4% and a return on assets (ROA) of -54.8%, which rank lower than 89% and 81% of other companies in the industry.
Gurus involved in Apache include Dodge & Cox, Chris Davis (Trades, Portfolio), Bill Nygren (Trades, Portfolio), Charles Brandes (Trades, Portfolio), Richard Pzena (Trades, Portfolio), Arnold Van Den Berg (Trades, Portfolio) and Steven Cohen (Trades, Portfolio), among others.
Locals have had mixed reactions to the news, as this announcement follows the initiation of construction of the controversial Trans-Pecos Pipeline in May. The pipeline, a 143-mile project of Energy Transfer Partners (ETP, Financial), has caused contention among locals in Brewster, Pecos and Presidio counties who do not want it to interfere with the natural beauty of the area. The pipeline also runs across private property, mostly ranches, in the area.
Some locals voiced concern over the environmental impact drilling will have on the surrounding area, namely Balmorhea State Park, part of San Solomon Springs that is a popular attraction.
Source: Apache Corp.
Apache released a statement Thursday promising not to drill in areas that will affect Balmorhea.
Apache said, “[We have] voluntarily decided to implement an exclusion zone and will not drill in or under Balmorhea State Park or in or under the city limits of Balmorhea.”
Apache also addressed concerns over water usage as water resources are limited in the area.
“We are also committed to reducing our overall water needs and using nonpotable water sources whenever possible,” Castlen Kennedy of Apache Corporation wrote. “We are looking into water recycling programs to address our water needs and minimize local impacts.”
Balmorhea State Park, Source: Texas Parks and Wildlife
Kennedy went on to explain the company has been purchasing water from landowners and recently entered an agreement with the Reeves County Water District.
Reeves County Commissioner Paul Hinojos said he sees the discovery as a potential positive investment for the county but wants residents to know he is looking out for their best interests. He has been in close communication with Apache to ensure the area’s natural resources are preserved.
Despite these actions, petitions have already begun circulating among the local population.
The program is still in its early stages and Apache plans to meet with city leaders and county officials to discuss the project, which would set up 3,000 drilling locations in West Texas. Apache said it plans to increase its 2016 capital spending by $200 million for the year and are allocating more than 25% to the Alpine High program alone.
Shares in Apache rose 13% after the market opened Wednesday. Apache was trading at $58.52 Friday. The DCF Calculator gives it a fair value of $-387.61.
Disclosure: I do not own stock in any companies mentioned in the article.
Start a free 7-day trial of Premium Membership to GuruFocus.
