Analysts at Bank of America Merrill Lynch raised their price target and rating on independent oil and gas producer Apache Corp. (NYSE: APA) following Thursday’s fourth-quarter and full-year 2014 earnings release. It may seem a little odd that a GAAP quarterly earnings per share loss of $12.78 would generate an upgrade, but that is what happened.

The impetus for the Merrill Lynch upgrade was Apache’s decision to reverse the planned sale of its North Sea and Egyptian assets. Internationally and offshore, Apache expects capital expenditure (capex) spending of $1.5 billion to $1.7 billion, and production is forecast to rise “slightly” from 207,000 barrels a day in 2014, again adjusted for 2014 sales and including projected asset sales in 2015. In its report, Merrill Lynch said:

… Apache’s decision to reverse its strategy to dispose of its North Sea and Egyptian businesses, is in our view, the single biggest change to the outlook for the stock and a game changer for the investment case. With substantial free cash flow from predominantly oil levered international production, [Apache] secures the means to accelerate development in the lower 48, should oil prices recover …

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So, the $64 question becomes, will oil prices recover? Apache’s approach to onshore production appears to be a combination of “wait and see” and “having our cake and eating it too.” The company’s onshore North American rig count is dropping from an average of 85 in 2014 to a range of 13 to 17 in 2015. The current year’s production, however, is forecast to be roughly equal to the 302,000 barrels of oil equivalent per day produced in 2014, excluding the effect of recent asset sales.

The company’s strategy seems to be to keep production at 2014 levels while reducing costs until the price of crude rises. When that rise happens, Apache will be well-situated to reap a significant benefit because its well costs have been sharply cut by operating fewer rigs. Multiple wells drilled from a single pad drive well costs down substantially, making it possible for Apache — and other drillers — to maintain production levels by picking well locations that offer the most promising targets for this type of drilling.

Like most things, though, this cannot last forever, so it won’t. But Merrill Lynch believes that, right now, Apache’s is a “moderately undervalued stock” compared with peers and that its portfolio, which is heavily tilted toward higher-priced liquids (67%) “is a solid option on [Merrill Lynch’s] expectation of an oil price recovery.” The analysts raised the price target from $57 to $78 and raised its rating on the stock from Underperform to Neutral.

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Apache’s shares traded up about 1.5% Friday morning, at around $65.57 in a 52-week range of $54.34 to $104.57. The consensus price target is around $71.00.

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