1 Oil Company Betting Big on U.S. Shale

With the end of the "easy" oil era at hand, energy companies around the world are venturing into some of the most remote regions of the world – where costs and risks are both often high – in the never-ending quest for oil.

Others, however, are focusing their efforts on onshore U.S. shale plays, where resource potential is often more certain and risks are considerably lower than they are in, say, the Arctic. One such company is Houston-based Apache Energy (NYSE: APA  ) , an independent oil and gas company with assets that span the U.S. and Canada, as well as Egypt, Australia, Argentina, and the U.K. North Sea.

Apache's growth core
Though Apache's asset base is spread across the globe, the company sees future growth coming mainly from its onshore North American oil plays. The company maintains that's its "growth core" assets are in Texas and Oklahoma, while its operations in the U.K. North Sea and Egypt are mainly for cash flow generation.

Indeed, of its $10.5 billion capital budget for the year, about $4 billion will go toward onshore U.S. operations, where the company projects output growth in excess of 20%. "We used to ask our US assets to stay even, and we'd grow internationally. And all we're doing is flipping that," Steve Farris, Apache's CEO, told the Financial Times. "We're talking about having our international [operations] provide cash for our North American growth."

Apache's approach
As Apache attempts to reduce its debt, it doesn't plan on acquiring additional properties any time soon – a departure from its previous strategy, which sought growth through international expansion. Instead, it plans to continue with its successful strategy of coaxing more oil out of its existing asset base. A shining example of its prowess in this respect is the Forties field in the North Sea, where Apache managed to boost production from 40,000 barrels a day to a peak of 70,000 barrels a day after acquiring the field from BP (NYSE: BP  ) back in 2003.

Similarly, in the Permian Basin of West Texas, where Apache is currently the second-largest producer, it has managed to sharply boost estimated ultimate recoveries by drilling deeper laterals and employing a greater number of frac stages. Other companies, such as Pioneer Natural Resources (NYSE: PXD  ) and LINN Energy (NASDAQ: LINE  ) , have seen similar success in the Permian by employing secondary oil recovery techniques.

For instance, Pioneer's use of waterflood injection technology has significantly  boosted its recovery rates in the Spraberry formation, while LINN, which tends to use more conventional recovery methods in its core Wolfberry acreage, has seen great success by utilizing waterflooding in its Permian operations outside the Wolfberry.

One big risk to consider
Despite Apache's enthusiasm over its onshore U.S. oil and gas assets, where it hopes to continue slashing costs and boosting production, the company's substantial exposure to Egypt – where it is the largest acreage holder in the nation's Western Desert, controlling some 9.7 million gross acres – is a cause for concern.

In the aftermath of the 2011 Egyptian revolution, which led to the ouster of Hosni Mubarak's regime, Egypt remains highly unstable. The country is plagued by a dysfunctional government, an anemic economy, and a highly unequal society – factors that substantially raise the risk of social unrest that could threaten Apache's operations.

While CEO Steve Farris has pointed to Egypt as a "a tremendous cash generator" for the company, the risks from a continued presence in the country may simply be too great to justify in my opinion. Perhaps Apache would be better off exiting Egypt altogether and using the asset sale proceeds to reduce its debt and buy back shares.

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