Apache's Alpine High Play Is The 'Backbone' For Operating Strategy

 | Dec 16, 2016 | 3:51 PM EST
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As U.S. oil and gas producers are racing to ramp up production while oil prices rise higher, Action Alerts PLUS holding Apache (APA) is drilling into a new discovery that has some analysts waiting on the sidelines.

Wells Fargo downgraded Apache to Market Perform from Outperform on Friday. APA shares were slightly lower, down 0.8%, during the trading session.

The Wells Fargo analyst team reduced the rating because, to them, the story around the company's Alpine High project in the Delaware Basin needs "more clarity."

"While the Alpine High discovery has huge resource potential which could provide some long-term upside and could alleviate potential inventory constraints, we believe there is still significant risk with this project, not least of which is the capital and time required to build out needed infrastructure," wrote the analysts in a research note on Friday. "In addition, even if the project proves successful, there is still a number of quarters before it's fully up and running and thus investors are assuming that risk during the wait-and-see period."

Separately, analysts at Goldman Sachs note that the Alpine High play "has the potential to move into Hopes and Dreams mode as APA continues testing and ramping-up activity in the play, though we believe this is reasonably valued in APA shares."

However, Jim Cramer and Jack Mohr, portfolio managers for AAP, are bullish on Apache because of this project and its ability to navigate through the recent downturn.

"Alpine High is now set to produce high-quality oil and gas for perhaps the next two decades for Apache, and it will be the backbone for the company's operating strategy going forward," Cramer and Mohr wrote in a note to subscribers on Friday.

Meanwhile, Goldman Sachs sees a structural "Alpha" buying opportunity in fellow AAP holding Schlumberger (SLB) .

"With the acquisition of CAM, and its expansion of SPM (Schlumberger Production Management), it has substantially expanded its exposure to customer wallet versus the last cycle, while the company's transformation initiative is structurally lowering its cost structure," the analysts wrote.

SLB shares were relatively flat on Friday. 

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