The Area Where Apache Found Oil Is New Exploration Hot Spot - Barron's

Natural gas burns at an Apache plant in the Permian Basin in Garden City, Texas. Photograph by Spencer Platt/Getty Images

The hottest area for new oil and gas production isn’t in the Middle East or the U.S. Permian Basin. It’s off the northeast coast of South America, and four companies in particular are in strong shape to benefit should the fields pan out.

Exxon Mobil (ticker: XOM) said late last year that it had begun producing crude about 120 miles off of the coast of Guyana, which neighbors the oil-rich nation of Venezuela, in a series of fields that are expected to produce 750,000 barrels per day by 2025. The Starbroek block where Exxon is drilling could contain the equivalent of more than 5 billion barrels of oil, including natural gas, the company has said.

That would represent a hefty addition to Exxon’s 24 billion barrels of so-called proven reserves, an industry term for oil a company is confident it can profitably pump at prevailing prices.

Exxon stock trades at 19 times the per-share earnings expected for the coming year, a richer valuation than its peers. Its Guyana stake has arguably contributed to that premium because Exxon now has better projected production growth than its rivals.

And Exxon isn’t the only company benefiting. A subsidiary of Hess (HES) also has a 30% interest in the block, which is the main reason Hess was the top-performing large-capitalization oil stock of 2019, with a 65% gain.

This week, another oil company announced a find in the region. Apache (APA), which has mostly drilled on land in the U.S., announced a “significant oil discovery” off the coast of Suriname, which is next to Guyana to the southeast. Apache’s stock jumped by double digits on Tuesday and is now up 26% this year. The French oil giant Total (TOT), which has bought a 50% stake in the block from Apache, barely moved on the news, in part because it is a much larger company.

Analysts have had mixed reactions. Morgan Stanley’s Devin McDermott wrote that the find “could be the start of a multiyear portfolio transformation” for Apache, but he believes the impact is already reflected in the stock price, particularly given Apache’s decision to sell a stake to Total. He rates shares at Underweight with a price target of $18, well below the current level of around $32.

The stock has moved wildly in response to news about Suriname. The shares plunged in December when management issued an update that disappointed investors.

Suntrust Robinson Humphreys’ Neal Dingmann thinks the latest news should boost the stock. He raised his price target to $40 from $32, on expectations that the newly found oil will also help Apache deal with its debts, allowing it to refinance.

Bernstein analyst Bob Brackett, meanwhile, has written about the difficulty of coming up with a value for Apache’s Suriname stake. He isn’t factoring the holding into his target of $30 for the stock’s price.

The discoveries come as oil in other parts of the world is looking riskier. The potential for major disruption in the Middle East has been made clear over the past week. The U.S. strike killing a key Iranian general has led to reprisals and volatility in oil prices. Multiple U.S. oil companies pulled their American employees out of the region.

In the U.S., shale oil remains a growing industry, but the rate at which shale wells deplete has begun to raise concerns that the boom is about to crest.

Of course, the South American oil plays aren’t without risk. The companies are working closely with the governments of Guyana and Suriname, which expect the discoveries to boost the standard of living of the local population. If that doesn’t pan out, or local politics change, the companies could face new dangers.

Write to Avi Salzman at avi.salzman@barrons.com

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