Apache Corp.’s natural gas drilling results in British Columbia’s Horn River Basin show more promise than initially estimated, with the potential recovery for individual horizontal wells estimated at 10 Bcf, executives said Thursday.

Three wells recently completed at Two Island Lake, all operated by joint venture partner EnCana Corp., were brought online at gross initial production rates of more than 16 MMcf/d and continue to produce 8-10 MMcf/d after two to three weeks. Apache and EnCana each hold a half interest in 425,000 net acres at Horn River.

The Apache executive team, led by CEO G. Steven Farris, offered some color on the Horn River prospects, as well as other North American plays, during a conference call to discuss 2Q2009 earnings.

“We’re really feeling pretty good about what the two teams have been able to do with our drilling efforts” in Horn River, said Co-COO John Crum, who helms Apache’s North American exploration efforts.

Because the region still lacks some midstream and pipeline infrastructure, Apache and EnCana are focused on reducing drilling costs, he said. Each Horn River well now takes 16 days on average to complete — down from 30 days a year ago — and they cost about $9-10 million each to complete. “Obviously, getting less days out there will pull your cost down pretty quickly,” Crum said.

Apache and EnCana, which were the shale play’s pioneers, to date have drilled 28 wells and brought 10 horizontal wells on production. By early next year, Crum said 32 wells are expected to be on production. Fracture stimulations, he said, have been increased to as many as 14 stages per horizontal section.

Because of low gas prices, and to ensure work in the Horn River continues, Apache has hedged a net 50-100 MMcf/d over the next three years at $6-7/Mcf.

“Given continued soft gas prices the partners will need to continue to look for ways to reduce costs to make this play very competitive,” Crum told analysts.

Asked if Apache was now breaking even in the Horn River Basin, Crum said, “we think so, but it depends what you need as a gas price, so if I just had to characterize a number we think we need Henry Hub to be somewhere in the $3.50 to $4.00 range for us to kind of come out even. Anything less than that we’re going to have to get our cost down.”

In addition to the Horn River success in 2Q2009, Apache also scored in the Gulf of Mexico (GOM), where the deepwater natural gas Geauxpher Field at Garden Banks Block 462 came online in May. The field, in water 2,700 feet deep about 150 miles off the Louisiana coast, produced 4.3 Bcf by June 30. The field, in which Apache holds a 40% interest, is currently producing 105 MMcf/d from two wells.

“Initial production from development projects in the Gulf of Mexico and in Egypt, combined with rebounding oil prices, more than offset the continuing deterioration of North American natural gas prices during the quarter,” Farris said.

“Importantly, our natural gas resource plays are either held by production or through long leases,” said Farris. “So we’re not under any pressure to drill hundreds of wells at current depressed prices. We have the choice instead of maximizing value for our shareholders by focusing our near-term development capital on other growth opportunities while making sure, of course, that we capture the highest quality gas opportunities for the longer term.”

Apache, like other North American gas producers, deliberately slowed its rig activity in the first half of the year “to wait until drilling and well service costs dropped to a level more consistent with lower oil and gas prices,” Crum told analysts.

However, the company hasn’t slowed its efforts to find more domestic gas and oil.

“We are particularly enthusiastic about our position in the emerging horizontal Granite Wash gas play in the Anadarko Basin,” Crum said. “This has been a core area for Apache for decades. We own interests in almost 2,000 acres in the play area.”

Apache has drilled “more than 100 successful vertical Granite Wash wells over the past five years and knows these rocks well,” said Crum. “Dozens of horizontal wells have now been drilled with initial rates above 10 MMcf/d, significantly reducing our risk as we begin rigorous evaluation of the horizontal potential on our acreage.”

The company now is drilling its first operated Granite Wash well, and it has identified other horizontal gas and oil plays that are to be tested “over the remainder of 2009 and into 2010,” he said.

In the United States, Apache “can drill and complete a well today for roughly two-thirds of last year’s costs,” noted Crum. “Workover rig hourly rates are down 35% in the Anadarko and 30% in the Permian basins. We entered the second half of the year with 70% of the region’s budget unspent.

“We are now accelerating our drilling and workover programs and will concentrate on relatively shallow Permian Basin oil prospects, especially in our prolific units of southeast New Mexico.”

Gulf Coast hurricane restoration efforts, primarily associated with third-party infrastructure repairs needed following last year’s storms, said Crum. Apache expects to recover an additional 8,800 boe/d by the end of September.

Oil production comprised 48% of Apache’s worldwide output in 2Q2009, but it accounted for 72% of total oil and gas revenue. Apache received an average of $58.15/bbl of oil, up 37% sequentially from 1Q2009, and $3.48/Mcf of gas, down 9% from the first three months of the year. Prices for both commodities were “substantially” below year-ago levels, the producer said.

Apache reported record worldwide oil and natural gas production of 587,400 boe/d in 2Q2009, up 7% sequentially from the first three months of 2009 and 6.5% higher than in the year-ago period.

Net income was $443 million ($1.31/share) in 2Q2009, compared with $1.4 billion ($4.28) in 2Q2008. Cash from operations totaled $1.26 billion, about half of the $2.3 billion reported a year earlier.

CFO Roger B. Plank said the “primary thing that differentiates Apache’s results this quarter is our strategy of diversified production and revenue sources. We’re all painfully aware that North American gas prices fell significantly during the quarter; in our case realizations dropped some 73 cents/Mcf, or 16% from the first quarter.

“Given the market’s myopic focus on North American natural gas, it may come as somewhat of a surprise that Apache’s equivalent realizations for oil and gas rose 19% during the quarter,” Plank said. “Obviously being half oil helped…”

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