Apache Oil’s Discovery in the Permian Basin — Will It Spark Exploration and Drilling?

Apache Corp., a Houston-based oil and gas exploration company, recently announced a discovery that some in the oil and gas industry are dubbing a potential find of historic magnitudes. Last week, Apache’s chief executive officer announced that the company had made an “immense” oil and natural gas discovery in the Alpine High field in the Permian Basin.

Many players, including private equity funds and energy companies with healthier balance sheets, have capitalized on the current downturn in the oil and gas sector. They accomplished this by acquiring entire companies, choice assets, equipment, prime real estate, or some combination of them all, in a ripe, distressed market. They also did it by acquiring the equity in existing companies through rescue or debtor-in-possession financing, creating value and investment opportunities through mergers and acquisitions and distressed financing. Or, to the extent companies have chosen to explore or drill, they have focused on known commodities — i.e., proven oil fields and regions.

Meanwhile, Apache has been quietly acquiring more than 300,000 contiguous acres in the Alpine High field of the Permian Basin at record low prices — approximately $1,300 an acre, compared to the $25,000 to $60,000 an acre paid earlier this year for more attractive areas of the Permian. After extensive exploration and the drilling of 19 wells, Apache now estimates that this vast expanse of land holds approximately 75 trillion cubic feet of natural gas and 3 billion barrels of oil. If this estimate holds true, Apache’s discovery will be, by all accounts, a “game-changer” for this area of the Permian.

The Permian Basin is a sedimentary basin that stretches from the western part of Texas to the southeastern part of New Mexico, and extends beneath an area approximately 250 miles wide by 300 miles long. The Permian’s major hubs include the cities of Midland and Odessa, Texas. In addition to containing large oil and natural gas stores, the Permian is also a major source of potassium salts (potash), which are mostly used in fertilizers.

While the Permian currently produces 25 percent of all oil in the United States, the Alpine High field sits in an area of the Permian Basin that has, to date, produced lackluster results. Indeed, other exploration companies had largely written off the area as containing insufficient oil reserves, instead skewed toward less-profitable natural gas and clay, which complicates drilling. As a result of Apache’s discovery, thorough seismic mapping of the region and exploratory drilling indicate that this area of the Permian might become as prolific as the Sprayberry and Wolfcamp formations, which have been the most productive areas of the Permian in recent years. With typical yields of around 6 to 12 percent of the oil and natural gas located in a field, Apache’s projected 13 percent return on the Alpine High field beats industry standards. Unsurprisingly, Apache’s stock climbed following the announcement, closing at $59.90 on September 12 — up roughly eight points from its closing on September 6.

What impact will this historic discovery have on the oil and gas industry? Experts and analysts are not yet convinced that Apache will be able to deliver on its expectations. The long-term impacts of this discovery, therefore, remain to be seen as Apache peels back the layers of the geologic onion and invests heavily in the development of infrastructure and wells in the region. In the short term, Apache’s discovery has solidified the importance of the Permian Basin as a top U.S. oilfield. It has further shown the industry that there are still abundant resources to be discovered — particularly in areas once deemed unprofitable or too difficult to drill and especially in light of the advancement of fracking, drilling and other technologies.

Time will tell whether Apache’s contrarian play in this most recent downturn pays dividends and spurs other investors and cash-rich exploration companies to flock to undeveloped areas in the Permian or elsewhere in the United States. Or whether the mainstream models of acquisition of, or investment in, assets at steep discounts prevails as competitors fail to “drill their way out of” the downturn. Stay tuned for further analysis as this exciting development unfolds.

To read the previous installment in this series, please see “R&I Update: Hot Topics in Oil and Gas Restructurings, Volume 1” and "R&I Update: Hot Topics in Oil and Gas Restructurings, Volume 2, and R&I Update: Hot Topics in Oil and Gas Restructurings, Volume 3."