On May 30, Apache (APA) declared a quarterly dividend of $0.17 per share, a yield of approximately 0.8%. This is equal to the company's April dividend, and two cents above its January 2012 dividend rate of $0.15. Though Apache's first quarter earnings fell 30% compared to the first quarter of 2011, the company remains financially sound and more than able to support its dividend with its current long-term picture.
This picture is positive overall for Apache, which after an acquisitions streak is looking forward to exploration and production on its holdings. Over the past two years, Apache spent $14 billion on acquisitions and joint ventures in eight of its ten regions worldwide. Despite competitors' moves to focus almost exclusively on oil and liquids, Apache is maintaining a roughly 50% split between oil production and natural gas production, which in part contributed to its lower quarterly earnings, as it was more heavily exposed to low U.S. natural gas prices, which made up 15% of its revenue as of the close of 2011.
Surging on Prospects from the Permian
In unconventional plays, Apache is focusing on the Permian Basin, where it holds the second-largest acreage position (just over 1.5 million net acres) with a drilling inventory of 10,000 locations. With 30 rigs operating on the play Apache is setting the stage for production at scale. Competitor Occidental Petroleum (OXY) is the largest player on the Permian by acreage, with 3 million net acres, 2,000 drilling locations identified, and 26 rigs operating.
Oxy is ahead of Apache in terms of production plans. While Apache reports (pdf) it is in "the early stages" of horizontal drilling applications here, Oxy is actively using CO2 flooding as a recovery technique on the play, with strong results so far. In the first quarter, Oxy extracted 139 mbbl of oil, 39 mbbl of liquid natural gas, and 155 mmcf of natural gas from its Permian operations. Sixty-four percent of its oil production on the play is derived from CO2 related extraction techniques, and it estimates that it has 2.5 bboe of further recoverable reserves. Oxy increased its capital expenditures allocation to the Permian in 2012, from 15% in 2011 to 20% in 2012, based in part on these results. By comparison, Apache is operating just six CO2 floods on the play, but is using 45 water floods, a step that can be preparatory to CO2 extraction, to extract its estimated 751 mmboe of reserves on the play.
Chesapeake Energy (CHK) is the third largest leaseholder on the Permian, with 1.5 million net acres. This represents 5% of Chesapeake's proved reserves as well as 5% of its total annual production, which Chesapeake is hoping to monetize through sale by the third quarter of this year. Though its annual report indicated Chesapeake thought that the sale of the Permian assets could help it repay most of its crippling debt load, more recent estimates indicate that the asset asking price of $5 billion will only cover about half of the $9 billion Chesapeake needs this year. There is also doubt as to whether Chesapeake can raise $5 billion from the sale, as despite holding a top-three acreage position the acreage is underdeveloped, placing Chesapeake at 20th place as far as production.
Early reports suggest that Oxy put in a bid for Chesapeake's Permian assets, at $3.5 million, and was rejected. Anadarko (APC) CEO Al Walker recently indicated that his company plans to look at the assets. Apache leadership is staying quiet about the potential to acquire the assets, but I think that it's likely the company has an interest in acquiring at least portions of the acreage held for sale. Apache's interest is contingent on many factors, not the least of which is how serious the company is about expanding into CO2 injection like Oxy. Recent research indicates that to maximize recovery using CO2 flooding methods larger well spacing is a requirement. Given that many of Apache's acres were previously producing for larger firms using conventional methods, particularly BP (BP), from which Apache purchased substantial acreage, such enhanced recovery methods will be necessary for Apache to maximize its production.
Positive Corporate Image
Apache recently earned an Investor Excellence Award from Oil and Gas Investor magazine for its community and sustainability programs, mainly on the strength of the Apache Foundation's Tree Grant Campaign. The campaign has given over two million trees to various organizations since 2005, helping to offset carbon dioxide emissions.
Apache is an ideal corporate citizen, and appears to take environmental responsibilities seriously. It releases an annual sustainability report detailing its contributions to non-profit and community organizations and its future goals for sustainable energy. In its most recent report, Apache highlighted its massive improvements in employee safety, reporting an 88% decline in recordable employee injuries. This is not only important to the company's sustainability, but to its profitability, as a poor injury record impacts revenue through lost work, associated costs, and public image - as competitor BP can no doubt attest. I think that BP's stock is pushed down as much by public perception as by doubts over the ultimate cost to the firm. A positive corporate image can only help Apache rise higher.
Apache is trading 15% off its high at the beginning of June, which I believe is a result of its lower than anticipated first quarter earnings. However, as noted above, its earnings were primarily impacted by low natural gas prices. Its asset base is among the strongest in the industry, and based on its position in the Permian Basin, I have an extremely positive outlook for the firm. Currently trading around $81, Apache has a price to book of 1.1 and a forward price to earnings of 6.0, which is a steal for a stock in its position. I anticipate the stock will break $90 once the reaction to first quarter earnings winds down.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.