It is entirely possible that the shares of many energy companies will test year low trading prices in the near future. The usual culprits of slow recovery domestically and the continuing Euro-zone crises are working to see demand for crude diminishing while costs of exploration, development and production of oil, natural gas and natural gas liquids increase. Companies in the energy business will have to weather bad news through the summer months. Today, oil is trading below $83 per barrel and natural gas at decade lows is trading below $2.30 per thousand cubic feet.
Apache (APA) is an oil and gas exploration and production company with operations in North America, Africa, the North Sea, Australia and Argentina. The company experienced record earnings in 2011 of $4.5 billion or $11.47 per common share, up 50% from the year ended 2010. In 2010 oil and natural gas liquids production demonstrated 50% of total volume and contributed approximately 80% of revenues. In 2011 Apache benefited from the price differentials between West Texas Intermediate and higher prices for oil produced in the Gulf of Mexico, Egypt, Australia and the North Sea which accounted for 78% of all of Apache's crude production.
Apache's first quarter 2012 saw record worldwide production. Worldwide production was 769,000 boe per day compared with 732,000 per day in the same period of 2011. U.S. liquids production was 148,000 boe per day in the quarter, an 11% increase from first quarter 2011. Global liquids production rose 6% in the quarter. Earnings were $778 million or $2 per share compared with $1.1 billion and $2.86 per share from the same period in 2011. Revenues were $4.5 billion in the first quarter, an increase of 11% over the same period in the previous year. Daily production growth was 7% adjusted by asset sales in 2011. Earnings in the quarter were down almost 30% from the same period in the previous year as a result of the company's $390 million write-down of its oil and natural gas properties in Canada. The company expects overall production to continue to grow as it has a strong drilling program worldwide including 312,000 new acres in the Anadarko Basin.
Despite low North American natural gas prices, the company has been able to achieve good financial results because of its worldwide assets. The company received higher prices from the Brent crude produced in Australia, the North Sea and in Egypt. Apache had projected production growth of 7% to 13% and met those projections in the quarter.
Apache has increased its onshore drilling activities to allow for 56 rigs up from 36. Its production in the Permian Basin rose to 99,000 boe per day from increased drilling programs and is operating 31 rigs in the Basin. It has doubled its position in the Anadarko Basin with acquiring almost 550,000 acres.
Apache acquired Cordillera Energy Partners in January, 2012. Cordillera was a private corporation that held 245,000 acres of potential energy reserves in the Ganite Wash area on the border of Texas and Oklahoma. The acquisition cost was $2.85 billion. Apache expended in excess of $15 million since 2010 to acquire a series of properties in Egypt, the North Sea, West Texas and the Gulf of Mexico.
Many U.S. based producers are stepping up their drilling and production programs in natural gas and natural gas liquids to diminish the U.S. dependency on foreign fuel. While oil production has increased for the first time in 20 years, the recession and higher gasoline prices have domestic consumers using less gasoline and are also replacing older cars with more fuel efficient vehicles. In 2011 the U.S. imported 45% of the liquid fuels it used. It imported 60% in 2005. Increased domestic production is a result of industry friendly policies and technological advances that make oil extraction easier and more cost effective.
While domestic production is diminishing the dependence on imports, it is not having a positive effect on the cost of the commodity. Oil is affected by macro-economic factors around the world, from supply disruptions in Africa to political factors in the Middle East and a rising demand from a recovering world economy contribute to price increases. Slow recovery domestically, fiscal crises in Europe and less than expected demand from emerging economies all contribute to price decreases in oil.
The glut in domestic natural gas has made the U.S. a potential net exporter with many import facilities applying for licenses to export gas abroad. The Energy Department predicts that daily per barrel oil and boe output could reach seven million barrels by 2020. If the U.S. could reach 10 million barrels per day, it would come close to matching the output of Saudi Arabia. More production means more negative environmental impact for air, groundwater and wastewater. Working with the environmental issues are the most challenging obstacles for the oil industry. There are now more than 475 operating rigs in the U.S. The Permian Basin in West Texas and southeastern New Mexico has approximately 25% of all rigs operating the U.S. Almost one million barrels per day are produced in this region by Apache and its peers, Chesapeake (CHK), Devon Energy (DVN) and Occidental Petroleum (OXY). With increased international geo-political risks, concentration on drilling in the U.S. is a good move that is dependent on a company's ability to properly address and manage environmental issues.
Some are of the opinion that Apache is oversold at these prices. It would be pretty easy to come to that conclusion of many oil stocks after the week of May 28, 2012. Apache's shareholders recently voted that Apache's board has directors that are elected every year as opposed to on a staggered basis. This method of board declassification is seen as being a better measure of transparency and governance for shareholders. In this environment, while the transparency is a nice touch, the company will have to provide shareholders with increasing disclosure to highlight what measures the company is taking to work through the rough times ahead. It is now more about how Apache will manage assets to gear supply to meet decreased demand and how it will deal with the oversupply of natural gas and the exporting of that energy source. Apache will have to reign in its capital expenditures, study the consumption patterns of its product in the different regions in which it operates and track production so that it is delivering what is necessary in this volatile pricing environment. Management will have to continue to employ hedging programs for its products which is a difficult task while Europe is not finished delivering bad news to the world capital markets.
Apache is another great company that has assets in regions that continue to deliver oil and natural gas in a cost effective manner. The challenge for Apache is how it will manage those assets to deliver solid returns to shareholders. Values of energy companies are in jeopardy at the moment, until we see some good news about global macroeconomic factors, the values will remain in a state of flux. As with many energy companies, Apache will test its lower trading limit before anything gets better. At the moment, unless some stability enters the world markets, it will make little difference where Apache is producing energy, it will make all the difference if it can continue produce energy in a cost effective, safe and timely manner.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.