Apache's Taken Some Gas, but Remains Strong

Who said that cyclicality has departed from the oil and gas industry? The weak, gas-price-related results turned in by the likes of ExxonMobil (NYS: XOM) , Chesapeake (NYS: CHK) , and now Apache (NYS: APA) have done an effective job of laying waste to that silly notion.

Add on a recent dip in crude prices, and the task of selecting solid energy names for your Foolish portfolio is likely to become far more difficult than usual. Nevertheless, I consider it extremely unwise to allow gas prices and recently slipping crude levies to provide an excuse for emptying your portfolio of all-important energy representation.

On that basis I suggest we take a quick look at Houston-based Apache. Indeed, I believe that's a gander well worth taking, given my virtually unshakable belief that U.S.-based independents with solid domestic holdings and also operations in relatively safe international locations -- a la Apache and Anadarko (NYS: APC) -- merit Foolish attention in today's topsy-turvy energy world.

Costly Canadian reevaluation
On a purely financial basis, moribund North American natural gas prices prevented Apache from proverbially shooting the lights out in the most recent quarter. Indeed, the company checked in with earnings of $778 million, or $2 per share, versus $1.12 billion, or $2.86 per share, for the comparable quarter a year ago.

If you back out $390 million in special items, including a write-down of its Canadian properties, the company's adjusted per-share earnings rose to $3 a share, obviously up year-over-year, but under the $3.10 that had been forecast by the analysts who follow the company. Revenue increased 15% to $4.54 billion.

From a perspective of realizations, the average worldwide price for crude hit $111.22 per barrel, versus $97.83 a year ago. A 22% dip in North American natural gas prices was responsible for a 12% slide in worldwide gas realizations to $3.82. It's worth noting, however, that 38% of the company's natural gas production occurs internationally, where prices are considerably higher than in North America.

Investing is all about looking ahead
More importantly on a going-forward basis, operations remain far more robust. Production for the most recent quarter averaged 769,000 barrels of oil equivalent per day, a 5% increase from a year ago. The 2011 figure was boosted by properties that have since been jettisoned, but produced 11,000 barrels per day in the prior quarter.

In North America, Apache's onshore areas of operation include the Permian Basin of West Texas, the central U.S., and the onshore region of the Gulf of Mexico. Offshore it is active in both the Gulf of Mexico and the deeper waters of the area.

Internationally, it is spread across much of Canada's producing areas, including British Columbia, Alberta, and Saskatchewan -- along with Egypt, offshore Western Australia, the U.K. portion of the North Sea, and in several newly intriguing areas of Argentina. A significant portion of its Permian Basin, Canadian, and Egyptian assets were acquired years ago from BP (NYS: BP) for a total outlay of $7 billion.

Its wallet's out again
But Apache clearly hasn't hit its buying brakes with the hefty amount it forked over to BP. As April turned to May, the company announced that, for a price tag of $2.5 billion and 6.3 million of its common shares, it had completed the acquisition of Cordillera Energy Partners III. Privately held Cordillera has operated in the prolific Granite Wash, Tonkawa, Cleveland, and Marmaton plays, which together straddle western Oklahoma and the Texas Panhandle.

The newly acquired assets produced about 21,900 barrels of oil equivalent in April, a 22% improvement from the beginning of the year. At the conclusion of 2011 the estimated proved reserves totaled 71.5 million barrels of oil equivalent.

As you no doubt have concluded from my qualifying adjective in front of Granite Wash two paragraphs above, that particular play is likely the crown jewel of the recent acquisition. The term relates to several layers of sandstone and conglomerates, in which horizontal drilling and multi-stage fracturing completions are typically successful.

Harkening back to its existing properties, the company has been especially successful of late in the Permian and mid-continent liquids play, which are the sites of steady increases in the company's rigs. Internationally, production was up 67% year-over-year in the Beryl and other fields in the North Sea. In Argentina, Apache has increased its capital allocation following the delineation of 650,000 acres in the Vaca Muerta Shale. Conversely, Canada has been affected by 83% of the company's production in the region consisting of gas.

The Foolish bottom line
All in all, Apache continues to represent a significant growth opportunity within the compelling independent producers' group. And while I'm somewhat more favorably inclined to Anadarko at this juncture, I suggest that Fools observe Apache's progress closely, first by adding the company to your Foolish Watchlist.

At the time thisarticle was published Fool contributorDavid Lee Smithdoesn't own shares in any of the companies mentioned in this article.Motley Fool newsletter serviceshave recommended buying shares of ExxonMobil and Chesapeake. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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