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Gold/Mining/Energy : APA: Apache Corporation

APA 22.65

+1.1%

Oct 31 9:30 AM EDT

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From: Dennis Roth	10/26/2007 7:50:07 AM
	of 23

Apache Corp. (APA): Use any dip on 3Q noise, Australia well results as buy opportunity - Goldman Sachs - 10/25/07 News Apache reported EPS of $1.83 versus our $1.87 and First Call consensus of $1.97. Operating cash flow was higher than expected at $1.62 billion versus our $1.51 billion. Production of 561 MBOE/d was less than our 578 MBOE/d, though we were above the top end of the full year 9%-12% growth guidance range, and the company indicated it expects to be at the top end of that range. Analysis We had already been assuming a higher effective tax rate due to Canadian dollar appreciation, which likely represented the difference between us and consensus. Even so, deferred taxes were a much bigger portion than expected, which drove better operating cash flow. On the conference call, we expect management to discuss sand issues at the Maitland gas well in Australia that will necessitate an additional well to be drilled (though results prior to the sand issue seemed positive). The absence of a press release on the Rosella gas well in Australia could mean more neutral to cautious comments on the call. Implications We continue to rate Apache Conviction Buy and see 24% upside to a $115 12-month discounted cash flow based target price (commodity price volatility, drilling results, cost pressures and government pronouncements are key risks). We believe international assets are undervalued, with a step change in production growth visibility and rising gas prices in "stranded" areas not being fully recognized. We expect that Apache in the near term will look to sign additional gas contracts in Australia for more than 3X current realizations which would be a positive for the stock. We would use any dip related to 3Q 2007 quarterly noise or a more neutral/cautious Australia exploration update as a buying opportunity.

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