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Gold/Mining/Energy : APA: Apache Corporation

APA 22.65

+1.1%

Oct 31 3:59 PM EDT

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From: Dennis Roth	7/27/2007 9:32:08 AM
	of 23

Further production strength could justify premium valuation - Goldman Sachs - July 27, 2007 What's changed Apache reported much better than expected 2Q2007 production and operating cash flow. EPS of $1.89 was less than our $1.97 estimate but in line with consensus of $1.90. Operating cash flow was $1.47 billion versus our $1.37 billion estimate. Production of 572 MBOE/d was better than expected and 36 MBOE/d higher than 1Q2007 (of which 12 MBOE/d was due to the acquisition of Permian Basin assets from Anadarko Petroleum). Management indicated it expects production to be at the top of the 9%-12% range for 2007. Implications We believe Apache's production guidance is now conservative and we are assuming production growth of 13% for 2007. The Gulf of Mexico was a particular highlight for the quarter, and we believe further strength in production in the coming quarters could justify Apache trading at a premium to E&Ps. Apache's diversified international exposure and expertise relative to its increasingly domestic-focused E&P peer group could also differentiate the company in the near term if North American natural gas prices remain challenged and WTI crude continues to trade at a discount to international blends. Valuation We are raising our 12-month, cash flow-based target price to $80 from $76, because we believe Apache should trade at parity with other large-cap peers. Our target implies 2% downside versus 5% downside for other large-cap E&Ps. Apache trades at 5.0X 2008E EV/debt-adjusted cash flow versus 5.0X for peers. We rate Apache Neutral. Key risks Commodity price volatility, drilling results, cost pressures and government pronouncements are key risks.

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