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Gold/Mining/Energy : APA: Apache Corporation

APA 22.65

+1.1%

Oct 31 9:30 AM EST

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From: Dennis Roth	9/17/2007 9:23:21 AM
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Adding Apache Corp to Conviction Buy List - Goldman Sachs - September 17, 2007 Source of opportunity After upgrading the stock to Buy last week, we are adding Apache to our Conviction Buy List as the stock most levered to our out-of-consensus bullish views on oil and natural gas that has not been in favor with the Street. We see: (1) greater production growth visibility vs. prior periods; (2) Australia and Egypt growth and relative stability are not being factored in; (3) exposure to our bullish view on crude oil; (4) minimal value to potential for reserve additions in the Gulf of Mexico and gas price increases in Australia; (5) long-term Energy Carbonomics benefits from Permian Basin oil assets; and (6) increased optimism on Canada shale potential. Catalyst Key catalysts include further strength versus Street expectations in crude oil prices (expected in the near and medium term), further detail on development project progress and legacy growth in Australia and Egypt (quarterly), exploration announcements (ongoing), lower-than-expected production declines in the Gulf of Mexico (quarterly) and improved access to CO2 in the Permian Basin (near, medium and long term). Valuation Apache trades at 4.5x 2008 EV/debt-adjusted cash flow versus other large-cap E&Ps at 5.5x. Our 12-month discounted cash flow based target price of $110 assumes 33% upside versus 22% upside for E&P stocks. We do not assume any unbooked resource from the Gulf of Mexico or from Argentina in our target. While we do not argue that Apache will regain its historic leading multiple, we believe the Street will increasingly see the company’s production profile as more visible which can lead to multiple expansion. Key risks Key risks include commodity price volatility, drilling results, cost pressures and regulatory pronouncements.

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