Large-cap energy exploration and production company Apache (NYSE:APA) has proactively managed its energy production to grow reserves and production and to focus that production on high value crude oil and negate the negative impact of low natural gas prices. As oil prices have risen out of the 2008 lows of the commodity bubble blow-out, this path has resulted in growing operating margins and profits. However, the cycle of the energy markets in relation to global economic forces has turned against energy production companies like Apache. The company's share price has been in a decline for almost a year and that downward trend will not turn around soon.
Apache is one of the largest pure energy exploration and production companies with a market cap of $31.5 billion. The company produces oil and gas around the globe, from the continental U.S. to the North Sea to Australia to Argentina. The company has been very successful finding and developing new energy plays. Slides from a recent investor presentation show 12 new plays by the company in progress in 2012. Apache will find and produce more oil and gas. The company's current problems are factors outside of its control:
The price of the U.S. benchmark crude - West Texas Intermediate - peaked back in February 2012 at about $110 per barrel. Now, in late May 2012, the WTI quote has dropped below $90. Price declines for crude oil come right off the top of net profits.
In the first quarter of 2012, Apache had two-thirds of its production pegged to the Brent crude oil benchmark price. The Brent price has not declined by the same amount as the WTI, resulting in an imbalance between Brent and WTI. This is good news for Apache so far but market factors may soon affect the Brent price equally.
The reversal of the Seaway Pipeline between Cushing, Oklahoma, and the U.S. Gulf Coast, which is jointly owned by Enbridge (NYSE:ENB) and Enterprise Product Partners (NYSE:EPD) will bring lower cost WTI based crude to the U.S. Gulf Coast to compete with Brent price based oil.
The economic problems of Europe hit energy prices with the one-two combination of lower demand and a stronger dollar in relation to the euro. A rising dollar generally results in lower market prices for crude oil.
Apache has forecast its energy production will increase by 7% to 13% in 2012. If oil prices decline by a percentage greater than the production increase, net income will decline. Also, if production growth is close to the low end of the forecast range, the growth factor will be well below the Apache historical average. In 2011, Apache reported net earnings of $11.83 per share. Currently, the Wall Street consensus earnings estimate for 2012 is $12.13 per share, which would be a 2.5% increase. The low end of the range of estimates is earnings of $9.68 per share - an 18% decline if the outlier estimate proves to be correct. 2012 is shaping up to be a very difficult year for the energy exploration and production companies.
The stock market has been pricing the energy price declines into the Apache share vale since last summer. The share value is down 37% from most recent high in late July 201. Apache has under-performed its major competitors. Devon Energy (NYSE:DVN) is down 29% over the same time period. Anadarko Petroleum (NYSE:APC) and EOG Resources (NYSE:EOG) have experienced share price declines of 25% and 7%, respectively. The global approach to energy production taken by Apache Corp. has not provided a benefit to shareholders over the last year or so, while U.S. focused EOG Resources has been able to increase production at a much higher rate.
Earnings from Apache for the next several quarters stand a very good chance of disappointing Wall Street, the markets and shareholders. For investors who have confidence in the long term viability of higher oil prices, 2012 will not be the year to test those beliefs. Lower oil prices over the last couple of months will start to show in the second quarter earnings results. The Brent crude oil benchmark price could see significant weakness over the summer based on the factors discussed above - a weak Europe and a strong dollar. If this price weakness does happen, the effects will start to show in the 2012 third quarter results for Apache. Investors may need to wait for the fourth quarter of 2012 to see a price bottom in the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.