By Paul Puri
Managing Partner and Chief Development Officer
Apache Corp.’s discovery of Alpine High — a new oil and gas field in West Texas — has raised interest in a region once written off as undevelopable and could boost merger and acquisition opportunities for U.S. oilfield service companies.
In its third-quarter earnings conference call in early November, Houston-based Apache was bullish on the find, hinting that it may drill more than the 2,000 to 3,000 wells it originally anticipated in Alpine High — a field it discovered in the southern portion of the Delaware Basin. The company, which has started drilling, says its early wells can generate a 30% profit margin at today’s prices.
Apache quietly amassed 352,000 gross acres in Alpine High, located near the Davis Mountains, over the past two years at an attractive $1,300 per net acre leasehold cost. It estimates its acreage position contains 75 trillion cubic feet of rich gas (1,300 BTUs) and 3 billion barrels of oil in the Barnett and Woodford formations with significant oil potential in four other formations. The company told investors that it expects to be drilling in Alpine High for more than 20 years.
The Wall Street Journal estimates that Apache has locked up about two-thirds of the field, but a land grab is underway for what remains. Private equity firms and companies are scooping up land in the region at a price of $20,000 to $30,000 an acre, the Journal reports.
To accelerate development, Apache increased its 2016 capital spending by approximately $200 million, with Alpine High representing more than 25 percent of Apache’s total capital spending program, according to the company. During the remainder of 2016, Apache, which has nine producing wells in the field, will install temporary processing capacity and evaluate midstream development and market access options.
The effect of the Alpine High discovery on the oil industry
To be sure, there’s some skepticism about the field and whether it is a fit for hydraulic fracturing. Previous well results from other operators in the immediate area have been poor, according to analysis from IHS Markit. Several specialty companies left the area more than 10 years ago after drilling a handful of unsuccessful wells. Still, it notes that unconventional drilling and completion technology have improved since then. IHS Markit estimates that break-evens for the play will be between $55 and $65 per barrel of oil and $2.50 to $3 per MCF for gas. West Texas Crude was trading at about $45 a barrel in early November.
Still, there’s a lot of optimism for Alpine High to deliver on its potential. There may be opportunities for asset acquisitions down the road, and there will be a need to add infrastructure to process and ship oil and gas from the field — a new source of jobs.
Oilfield service and manufacturing companies in the middle market could become beneficiaries of Apache’s activity in the new field. Activity in Alpine High potentially opens up new revenue streams and a return to profitability for companies that have been underutilized for the past two years since the price of oil declined.
The M&A market in the oilfield service and manufacturing sector could see an uptick as companies figure out how to redeploy resources into this new field.
If Apache is successful on a big scale in Alpine High, many others likely will be successful as well. The field could bring new momentum and new energy to the U.S. oil industry.
Capital Alliance Corporation is a Dallas-based investment banking firm with an extensive international reach and a 40-year history of providing trustworthy advice to private company shareholders who want to sell their businesses. Our team has deep operational and M&A experience across many sectors, including energy.