Apache Corp.’s decision to pivot from North American natural gas basins to liquids targets paid off handsomely in 2011, and there are no plans to turn back, CEO G. Steven Farris told financial analysts on Thursday.

The producer’s net income jumped 75% in 4Q2011 from a year earlier, lifted by higher output and strong crude prices. The “continued downward pressure on North American natural gas prices” led the producer to transition its North American drilling program to more oily targets in the Permian and Anadarko basins, the Gulf of Mexico (GOM) and Canada. Expect that to continue, said the CEO.

“We are planning to drill up to 20-30% more wells in 2012 than in 2011, when we drilled approximately 1,100 gross wells,” Farris said. “More than half of the wells planned in 2012 will be drilled in the Permian and Anadarko basins to exploit stacked oil and liquids-rich pay opportunities in these prolific basins.” Last month Apache paid $2.85 billion to acquire Cordillera Energy Partners III LLC, and with it, a substantial add-on for its Anadarko position (see Daily GPI, Jan. 24).

The company also unveiled to investors its newest drilling target, the Whittenburg Basin in West Texas, where five of six initial vertical tests were completed as “oil producers” in the Canyon Wash interval. Apache operates a 96,000 net-acre leasehold in the Bivins Ranch area, a 200-square-mile block in Hartley, Oldham, Potter and Moore counties where it has estimated working interests of 73.5%. The block is immediately south of the prolific Panhandle Dolomite field and north of two 25-well Canyon Wash fields.

Robert Johnston, who runs the central region operations, said horizontal drilling is to begin by the middle of this year.

Apache also plans “active” exploratory drilling programs in the deepwater GOM, as well as Alaska and overseas, said Farris. Several long-lead-time projects have been sanctioned including in Australia, as well as the Anadarko Petroleum Corp.-operated Lucius unit in the Keathley Canyon area of the deepwater GOM (see Daily GPI, Dec. 16, 2011).

To match the expanded drilling, Apache has upped its capital spending. Last year close to $8 billion was directed to exploration and development. Look for the company to spend close to $9.5 billion this year. “We will live within our cash flow, and we will review capital allocations quarterly,” said Farris. “We are in a good position to deliver profitable growth in 2012 and future years. Based on our current capital program, we anticipate production will increase in the range of 7-13% in 2012.”

Apache has yet to sanction Kitimat LNG, a liquefied natural gas export terminal that would be built along British Columbia’s west coast with partners EOG Resources Inc. and Encana Corp. However, negotiations with overseas buyers are advancing, Farris said.

“Frankly, we’re somewhat past the polite introductions and that kind of stuff with respect to buyers,” he said. “We’re now in the throes of actual negotiations.” If the export terminal is sanctioned, it would be a “step change” for North American gas markets.

The company may have moved to more liquids-rich pastures, but gas production just keeps increasing. In the final three months of 2011 total gas output rose 3.2%; oil output climbed 4.3%.

North American gas volumes increased to 1.494 Bcf/d in 4Q2011 from 1.432 Bcf/d in 4Q2010, and from 1.478 Bcf/d in 3Q2011. Output was higher quarter/quarter in the Permian Basin, the GOM deepwater and onshore along the Gulf Coast. Canada gas volumes also were higher.

Apache earned $1.17 billion ($2.98/share) in 4Q2011, compared with $670 million ($1.77) in 4Q2010. Revenue rose 25% to $4.3 billion. Wall Street had forecast quarterly earnings of $2.85/share. Apache earned $4.5 billion ($11.47/share) in 2011 versus $3 billion ($8.46) in 2010. Proven reserves at the end of 2011 totaled 3 billion boe, 1% more than in 2010, and production was 273 million boe. The company added 422 million boe, or 155% of output, through extensions, discoveries and acquisitions. Divestitures and revisions totaled 113 million boe.

Oil and natural gas liquids production last year comprised half of the year’s total volumes, but it contributed almost 80% of revenues “because of the wide gap between global crude oil and North American natural gas prices,” said Farris. Results also benefited “from the price differentials between oil prices in basins linked to the West Texas Intermediate benchmark and higher prices for oil produced in the Gulf of Mexico, Egypt, Australia and the North Sea, which represents three-quarters of the company’s crude production.”

During the last three months of 2011 Apache sold its gas for an average of $4.18/Mcf, which was 3% higher than a year earlier. Oil sold on average for $102.71/bbl, or 24% more than in 4Q2010.

The regular quarterly cash dividend on common shares recently was increased by 13% to 17 cents/share. “With our balanced portfolio and deep inventory of drilling locations and development projects, we have confidence in Apache’s future,” Farris said.

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