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Shares of Apache (NYSE: APA) skyrocketed nearly 30% last month after the company announced the massive Alpine High oil discovery in Texas while analysts and OPEC added more fuel to the fire.
In early September, Apache announced the discovery of a significant new oil discovery in the Permian Basin. The 3 billion barrel discovery sits in a location that the industry did not think contained that much recoverable oil. However, Apache found that it not only contained billions of barrels of oil but that it was easily recoverable and highly economic at current prices.
Alpine High is being called a "game changer" for the company. Initial conservative estimates peg the value of the discovery at $8 billion, while the company says it could be worth 10 times that amount. Either way, that is a lot of value creation potential for a $33 billion company.
While several analysts are skeptical of Alpine High, analysts at Atlantic Equities and Wolfe Research upgraded Apache's stock as a direct result of the discovery. Atlantic Equities called it a "world-class resource play" that the company picked up for a very modest price of $1,300 an acre while rivals are paying more than 10 times that amount for similar acreage in Texas' Permian Basin.
For comparison's sake, Pioneer Natural Resources (NYSE: PXD) paid Devon Energy (NYSE: DVN) $15,500 an acre for some of its acreage on the other side of the Permian. Overall, Pioneer Natural Resources recently spent $435 million to acquire an estimated 150 future drilling locations in the Wolfcamp B formation, which is where it drills its most productive wells. Meanwhile, late last year Devon Energy paid more than $600 million, or $2,300 an acre, for 500 development-ready well locations in the Rockies even though it has no intention of drilling on this acreage until oil prices improve. Contrast this with Apache, which only paid about $400 million for land that it believes holds 2,000 to 3,000 drilling locations across at least three intervals of shale that can earn returns as good as those of Pioneer can earn on its newly acquired acreage.
As if the high from the Alpine discovery were not enough, OPEC agreed to cut and cap its output in September, which pushed oil prices and oil stocks higher. That agreement, which it has yet toformalize, could result in the glut of oil on the market coming to an end, which should push prices higher. That would be great news for Apache because it would not only boost its cash flow from legacy wells but increase returns for new wells.
Apache believes that it is sitting on an incredible amount of recoverable hydrocarbons, which could fuel significant production growth in the coming years. That growth could be increasingly profitable if OPEC follows through on its output cut. It is a combination that could fuel compelling returns for investors over the next few years.
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Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of Devon Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.