Apache’s Egyptian Wells Go Online

Independent energy company Apache Corporation (APA) announced the discovery of oil in two locations of the Phiops Field through the Pepi-1X and Buchis South-1X exploration wells.

The company also released a report on the appraisal of the Faghur Basin in the oil and gas province of the Western Desert, southwest Egypt.

Apache drilled the Pepi-1X well to a depth of approximately 6 miles, resulting in a test-flow of 4,216 barrels of oil and 4.9 million cubic feet (MMcf) of gas per day. The Buchis South-1X also drilled to about 6 miles and logged 131 feet of pay in several Cretaceous zones of Kharita and Alam El Buieb (AEB) sands. A test in one AEB zone encountered 1,647 barrels of oil per day.

The appraisal well, the Faghur-8X, expanded the Faghur Field by 1.6 miles toward the east. The well logged 79 feet of stacked Cretaceous pay in multiple AEB sands, with a well test flowed at an average rate of 2,992 barrels per day in one AEB sand.

The Faghur Basin is currently producing approximately 24,000 barrels of oil per day. With the help of upgraded infrastructure, the projects will increase the processing and transportation capacity of the basin to 40,000 barrels of oil per day by year-end 2010. In the second quarter 2010, Apache generated a net production of approximately 98,500 barrels of oil and 388 MMcf of gas per day in Egypt.

To date, Apache drilled five out of the eight exploration wells in the Faghur Basin. Drilling is in progress in the two wells – WKAL I-3X and Nebra-1X. The company also plans to drill five additional exploration wells. The company is busy evaluating the 3-D seismic surveys, capable of identifying additional exploration prospects in the basin.

Management remains highly upbeat about these developments as the finds are expected to boost the company’s exploration outlook. The Faghur Basin along with the AEB and Safa reservoirs will be Apache’s center of attraction in the coming months, considering their support to the multi-pay potential of this oil-prone area in the Western Desert.

We appreciate Apache’s large geographically-diversified reserve base, strong balance sheet and growth momentum of acquired assets. Moreover, the company’s exposure to international projects in Egypt, Australia and Argentina gives us confidence in its ability to generate attractive growth and returns for the next several years.

However, the unfavorable macro backdrop, international business risk and the company’s dependence on long lead-time type projects somewhat overshadow our positive sentiment, compelling us to maintain a long-term Neutral recommendation on the stock.

Apache currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.

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