Apache Corp. this year will pull back on its drilling program in Alberta because of anticipated royalty regime changes, but don’t expect the Houston-based explorer to slow down much anywhere else. With record profits and record production in 2007, Apache said it is set to take on just about anything that comes its way.

Apache’s net income in the final quarter of 2007 nearly doubled to $1.07 billion ($3.19/share) from $519 million ($1.56) in 4Q2006. Adjusted earnings were $2.92/share, up from $1.40. The independent also reported record annual earnings last year of $2.8 billion ($8.39/share), compared with $2.5 billion ($7.64) in 2006. Revenue jumped 50% to $1.9 billion from 4Q2006, and for the year, cash from operations rose 22% from 2006.

“By virtually all financial and operational yardsticks, it was a great year,” said CEO G. Steven Farris. He told energy analysts and investors during a conference call Thursday that with its exploration successes in Australia and Egypt “and encouraging results at the Ootla gas shale play in northern British Columbia, we built tremendous momentum that set the stage for 2008.”

Beyond the record financial results, “we have extended our visibility into the next decade” with a “development pipeline that will add 100,000 boe/d of production by 2011,” he said. Apache has “significant exploration drilling programs planned in our ‘ACE’ core growth areas of Australia, Canada and Egypt.”

Apache’s output averaged 561,239 boe/d during 2007, which was 12% higher than in 2006. Production in 4Q2007 averaged 574,646 boe/d, up 8% from the prior-year period. Proved reserves grew 6% last year, and Apache replaced 167% of its 2007 production, including 140% through the drillbit.

Quarterly natural gas volumes in the United States grew to 773 MMcf/d from 707 MMcf/d in 4Q2006; they rose for the year to 770 MMcf/d from 667 MMcf/d in 2006. In Canada, gas volumes rose to 394 MMcf/d in the final quarter from 391 MMcf/d in 4Q2006. Canadian gas volumes for the year fell to 388 MMcf/d from 404 MMcf/d a year earlier.

Apache management is encouraged by the changes taking place in international gas markets, which Farris said are expected to favorably contribute to future results. He told analysts that gas prices for new contracts in Australia climbed from less than $2/Mcf to $7 or more in the past year on demand from the country’s mining industry and the liquefied natural gas export market. In Argentina, Apache’s 4Q2007 gas price of $1.60/Mcf was the highest quarterly realization since the company began operations in the country and a 72% sequential increase from 3Q2007.

Apache last year received on average $68.84/bbl of oil, up from $59.92 in 2006, and $5.34/Mcf for gas, compared with $5.17 a year earlier. In 4Q2007, Apache received $83/bbl and $5.65/Mcf. Apache received $7.29/Mcf for its U.S. gas in 4Q2007, compared with $6.32 a year earlier. For the year, U.S. gas averaged $7.04/Mcf, up from $6.54 in 2006.

“Apache generates top-tier returns overseas at low prices historically,” said Farris. “International supplies are not available at $2 gas. The upside will be apparent in the future as gas moves to $7.”

With the royalty regime changes anticipated in Alberta, Apache plans to pull back on its spending the province — but it still has high hopes for a gas shale play in British Columbia, and the country’s capital spending program will be flat overall. Activity in Alberta “will be limited and refocused on shallow gas opportunities” that were not affected by the royalty changes, and activity is set to increase at the Ootla shale play in British Columbia. Medium-depth gas and oil drilling activities in Alberta will be reduced, Farris said.

“The current structure of Alberta royalties is on both a rate and a price curve,” Farris explained. “At lower rates, you actually paid a lower rate than under the old regime, and as you go higher you pay a disproportionate higher price, which is why we have curtailed our deeper drilling activities. If you have a 5 MMcf/d well under the new regime, it would be a 50% royalty rate, which seems exorbitant to us.” The royalty regime changes were announced last October, and they are expected to be finalized — and perhaps revised — early this year (see NGI, Oct. 29, 2007).

Apache has partnered with EnCana Corp. on the Ootla shale play and they are drilling three wells now that will have multiple-stage fracs, Farris said. “A horizontal well that we drilled there last year, we put three fracs on it and it tested at 3 MMcf/d. Ten months later it’s still at 1 MMcf/d. We’ve had good results with good pressure.” Farris was hesitant to discuss the Ootla well costs, but he said Apache has to drill wells for about $5 million.

The producer has reduced its portfolio in North America, but only slightly. By the end of 2007 Apache had sold properties for about $250 million, and it has about $120 million more pending. “They were basically either nonoperated or marginal production sold,” Farris said. “We had a little bit in the Permian Basin, a little bit in a nonfocused area in northern Louisiana, a nonoperated field in the Gulf of Mexico. We also sold some nonfocused area production in Canada.”

All together the North American assets sold accounted for about 5,000 boe/d in production.

“Our goal is to develop core areas that have long-term potential,” said the CEO. “The areas where we’re in, all of them are sizable, and all of them have the potential to continue to grow.”

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