Apache Corporation - Continuing On Its Path To Grow In Less Risky But High Yielding Projects

May.11.14 | About: Apache Corporation (APA)

Summary

Continues to make progress with its strategy - announced divestment in the Gulf of Mexico.

Future growth comes from North America and Australia, both politically stable areas.

Once investors realize this, Apache's growth profile warrants a premium valuation.

Apache Corporation (NYSE:APA) continues to make progress with its strategy to focus on less risky and higher yielding production areas, targeting North America in particular.

I believe that investors will applaud these moves in the long run as a less risky but growing domestic oil company warrants a premium valuation.

First Quarter Headlines

Apache reported first quarter revenues of $3.67 billion which is down by 6.9% compared to the year before. Despite the drop in topline revenues, Apache managed to grow operating income by 3.6% to $1.43 billion as the company cut back on operating lease expenses.

Apache reported GAAP earnings of $236 million versus $698 million in the period last year after the company recorded a $517 million loss on discontinued operations.

Non-GAAP diluted earnings came in at $1.90 per share, a penny less compared to last year.

Operational Developments

Apache reported oil-equivalent production of 640,000 barrels per day in the first quarter, or 672,000 barrels including discontinued operations in Argentina.

North American liquids production rose by 21% to 198,500 barrels which was actually up by 6% compared to last quarter. While realized global oil prices fell about a buck to roughly $101 per share, natural gas prices and NGL prices were up strongly. Besides the US operations, Apache has of course large operations in Egypt, the North Sea and Australia.

Apache continues to invest vast amounts of money in the business. Capital expenditures totaled $2.9 billion during the quarter versus $2.7 billion last year.

Gulf Of Mexico Divestments

On top of releasing its earnings, Apache announced that it will sell its non-operated interest in the Lucius and Heidelberg development projects as well as 11 deepwater exploration blocks to Freeport-McMoRan Copper & Gold (FCX).

Apache will receive $1.4 billion for the activities in a deal which is expected to close as soon as June of this year.

The move supports Apache's strategy to avoid deepwater projects and focusing on projects with less than a 1,000 feet deep, which require less capital and are quicker to develop. Apache's ownership in the Lucius business was 11.7% while that in Heidelberg was 12.5%. The interest in 11 other blocks ranged from 16.7 to 60%.

Valuation

Apache ended the quarter with $1.64 billion in cash and equivalents, and roughly $9.67 billion in total debt which results in a net debt position of roughly $8 billion. Given the announced divestitures in the Gulf, Apache is able to reduce its debt position without losing current production. For 2013 the company managed to reduce its debt position by $2.6 billion.

As a matter of fact, Apache used roughly $485 million to repurchase 5.9 million shares over the past quarter. Apache's current quarterly dividend yield of $0.25 per share provides investors with a yield of 1.2% per annum after hiking the payout earlier this year.

At $88 per share equity in the firm is valued at approximately $35 billion. Given the developments outlined above, revenues could come in around $15 billion while even adjusted earnings tend to be very volatile. I foresee them anywhere between $2 and $3 billion, valuing the company at roughly 14 times earnings.

On Track With Its Strategy

Apache continues to move along with its strategy as updated at the Howard Weil presentation in March of this year.

Apache continues to focus on production growth, despite reporting a 18% year-on-year drop in the first quarter which of course was the result of previous divestments. The focus will be on liquids production and North America. Steps which have already been taken include sales or partial sales in the Gulf of Mexico, the joint venture with Sinopec in Egypt and the exiting of the operations in Argentina. In total this has yielded the company about $8 billion since the start of 2013.

While divestitures result in pressure on current production, the company remains very optimistic about its future growth trajectory. North American onshore liquids growth is seen at 15-18% this year, while the Australian Wheatstone LNG project is expected to be operational by 2016. Apache owns a 13% stake in the project operated by Chevron (CVX). Production growth is something which investors are looking for with the company aiming to invest $8.5 billion in the business this year.

Takeaway

All of these developments will take more time to materialize but what is key is that Apache will be a more focused company down the road focusing on oil production in North America while holding potentially lucrative assets in Australia. On top of this comes the steadily declining North Sea operations as well as the politically sensitive assets in Egypt.

In general the company is making moves to reduce risks both politically and technically, while steering capital to high return projects. With capital expenditures are expected to come down in the medium term, organic production growth and a deleveraging of the balance sheet could result in a premium valuation for this relatively fast growing oil company.

I remain cautiously optimistic.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.