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Apache Corporation (APA - Analyst Report) announced that, along with co-partners, it will go ahead with the development of the deepwater Lucius project in the Gulf of Mexico.

The project is located in the Keathley Canyon area – including portions of the blocks 874, 875, 918 and 919 – and about 200 miles southeast of Houston at a water depth of 7,000 feet.

Apache holds 11.7% working interest in the Lucius venture through its subsidiary Apache Deepwater LLC. Anadarko Petroleum Corporation (APC - Analyst Report) acts as the operator of the project with 35% interest. Other partners are Plains Exploration & Production Company (23.3%), Exxon Mobil Corporation (XOM - Analyst Report) (15%), Petrobras (PBR - Analyst Report) (9.6%) and Eni Petroleum (5.4%), an affiliate of E SpA (E - Analyst Report).

The companies will develop Lucius with a truss spar floating production facility that has a production capacity of 80,000 barrels of oil and 450 million cubic feet of natural gas per day. Currently, the spar is being manufactured at Technip's facility in Pori, Finland. The field is expected to generate its first production in 2014, from six initial wells.

Lucius stands as an important venture for the companies as this is expected to open doors for further drilling activities in the Gulf region.

Houston, Texas-based Apache is one of the world's leading independent energy companies engaged in the exploration, development and production of natural gas, crude oil and natural gas liquids.

We remain optimistic about Apache’s production growth over the next few quarters based on its vast domestic and overseas operations. Next year, the company will likely start producing from three deepwater projects — the Bushwood (Garden Banks 463) and Wide Berth (Green Canyon 490) and Mandy (Mississippi Canyon 199).

We also like Apache’s geographically diversified reserve base, its balanced exposure to natural gas and crude oil and multi-year trends in reserve replacement, enabling management to allocate capital and resources to high-return projects.

However, we see limited upside potential for Apache, considering its sensitivity to gas/oil price volatility, drilling disturbances, geo-political risks and project timing delays. As such, we expect Apache to perform in line with the broader market and, therefore, maintain our Neutral recommendation, for long term. 

Apache currently retains a Zacks #3 Rank, (short-term Hold rating).

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