Apache Offers Thrills to Investors Prizing Boredom

(Bloomberg Opinion) -- In a week when oil stocks seem stuck in the familiar (if somewhat erratic) steps of a Viennese waltz, Apache Corp. is dancing to a different tune. And falling over.

With OPEC+ meeting this week, Saudi-ology, along with Kremlinology, Iraqi-ology and all the other -ologies, dominate. Rumors the group would agree to deeper production cuts proved more soothing to oil markets than a slice of sachertorte on Monday morning. Except for Apache.

The exploration and production company issued an update on an exploratory well it has been drilling off the coast of Suriname. Needless to say, it wasn’t a barnstormer. Apache essentially said the well had reached its target depth and the company was evaluating two distinct plays and planned on drilling a bit further to assess a third. No mention of hitting a significant deposit of hydrocarbons. On the other hand, no mention of it being a dry hole either. Ambiguity reigns — and, as monarchs go, ambiguity faces some decidedly restless subjects.

This is the kind of thing for which people used to own oil stocks. The binary outcome of a well that could make or break an E&P company was what really got the punters going, not debates about whether OPEC could manage to get Brent toward $65 rather than $60 a barrel.

Indeed, this is Apache’s problem. Block 58 in Suriname’s waters sits very close to Exxon Mobil Corp.’s wildly successful Stabroek discoveries offshore Guyana. A little geographic extrapolation has offered support to Apache’s stock in recent months; a stock which otherwise isn’t exactly brimming with reasons to own it. The company lost its head of exploration in October, sparking a big sell-off. Its latest big bet, the Alpine High play in Texas, ran into a one-two punch of consistently moribund natural gas prices and the collapse in natural gas liquids pricing over the past year. Beyond this, its portfolio of onshore U.S., Egyptian and North Sea assets is something of an acquired taste in investor circles. Just as its peer Hess Corp. has been given a new lease on life by its non-operated stake in Exxon’s Guyanese success, so Suriname has offered a potential catalyst for Apache.

Clearly, Monday’s announcement doesn’t close the door on success there. With the stock hitting its lowest level in more than 17 years — when Brent was trading at $25 — those willing to bet Apache is simply being overly cautious in a sector that usually errs the other way could find the wildcatter bet ultimately pays off. However, even after this latest sell-off, there may yet be a long way further down. Apache’s characteristic discount to the sector had closed as a result of anticipation over Suriname. And while that’s widened out again to about 10% as of Monday morning, the average for the past decade has been 21%.

Assuming all else equal, putting Apache on a 21% discount would mean a stock price of about $17 and, thereby, a dividend yield of about 6%. It would need that, though, given the lack of growth embedded in consensus forecasts. Apache is a relatively small yet diversified E&P stock with a history of bold moves and which is exposed to a binary exploration outcome in world where investors now tend to prize either focus or scale and dependable free cash flow rather than big bets. Dancing to a different tune, prized when the crowd is enthusiastic, can be a liability when the mood music has changed this much.

To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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