Apache's (APA) net earnings of $2.07 per diluted common share for the second quarter of this year were far below its adjusted earnings for the comparable quarter last year, which came in at $3.22 per share. Apache attributed the drop to lower oil and gas prices, even despite its record production during the most recent quarter ended. But, this downward trend is only temporary; for the long term, Apache has strong growth prospects, including those overlooked by larger and better financed competitors.
North Sea Brings Apache's Expertise to Fore
One bright spot for Apache's global operations is its North Sea production. Strong results in the Bacchus and Beryl fields are expected to result in increased production during the third and fourth quarters. Despite fears that the North Sea is close to exhaustion, it appears that newer operators like Apache and Statoil (STO) are able to coax better results out of the play than stalwarts like BP (BP) and Exxon Mobil (XOM). In fact, even on older fields that are well explored and declining, Apache is achieving results.
It recently began work on an extension to its main Forties field platform, acquired from BP in 2003 after production for BP from the field dropped to 40,000 boe per day on estimated remaining reserves of 144 mmboe. Between 2003 and today, Apache managed to produce 180 mmboe from the field, nearly a quarter above the reserves estimated. The investment in extension work shows that there is still much left to be recovered from the mature field, as Apache's proved reserves here are estimated at 130 mmboe, nearly as much as when the field was originally acquired.
Apache is emerging as an active dealmaker in the North Sea, further acquiring the Beryl field and other assets from Exxon Mobil last year. According to James House, Apache North Sea Ltd. Regional Vice President and Managing Director, the reason Apache is able to make these mature fields profitable is because Apache is willing to work on production from reserves that are "harder to get at, tucked away in more difficult spots…getting at all the remaining oil." Competitor Statoil is similarly willing to release expenditures and widen its approach to recovery to achieve results, announcing earlier this year a commitment to invest $18.6 billion in heavy oil North Sea fields in coming years. The sense of these investments was recently made clear, when Statoil announced a previously unknown major oil field in the North Sea off the shores of Norway.
Given the successes of Apache and Statoil, one might think that the major players are regretting the decision to exit the fields, but the opposite is happening as the process of decommissioning North Sea infrastructure is accelerating, so much so that a North Sea decommissioning conference where decom managers from BP, Exxon Mobil, Royal Dutch Shell (NYSE: RDS.A), and others are scheduled to speak is selling out weeks in advance. These decommissionings could benefit Apache and other independents willing to work harder for production, since acreage and infrastructure acquired at bottom-market prices make recovery all the more profitable.
Apache Vice President, Planning and Strategy Alfonso Leon was recently promoted to Senior Vice President and Chief of Staff. In this role, he will continue to report to G. Steven Farris, and will be responsible for furthering Apache's growth strategy, performance, and new business opportunities. This will be a growth role for Leon and for Apache, since the firm's success in coming years hinges on continuing to make and exploit world class oil and natural gas discoveries while onboarding projects accumulated over the past several years.
Leon has a very strong and deep background in the energy sector. Since 2009 he served Apache in various planning and strategy roles. Previous to this, he directed energy investment banking at Perella Weinberg Partners, after successfully serving in several strategy and planning roles at Shell. While Strategy Advisor for Shell International, in a 2004 interview, Leon indicated that in order to prepare for markets where oil is at a premium to historical prices, investments in conventional oil alternatives like heavy crude, gas to liquids, and oil sands would be necessary; these are all areas where Apache can claim a leadership position. Combined with his experience and education, I think this match between Leon's forecast and Apache's activities is an indication of the likelihood of success in his new role, which will be a major support for Apache.
Apache is currently trading around $84 per share, with a price to book of 1.1 and a forward price to earnings of 7.3. BP, preparing to go to trial over claims that the Macando blowout was due to its own gross negligence, is trading around $42, with a price to book of 1.2 and a forward price to earnings of 15.9. Exxon Mobil is trading around $87 with a price to book of 2.5 and a forward price to earnings of 9.9. Shell is trading around $70 with a price to book of 1.2 and a forward price to earnings of 10.9. Statoil is trading around $25 per share, with a price to book of 1.5 and a forward price to earnings of 3.1.
Apache believes it has an inventory of 67,000 drillable locations in its onshore U.S. liquids rich leasehold. According to its Chairman and CEO G. Steven Farris, "Now is the time to drill wells," and Apache is doing so with an accelerated drilling schedule designed to maximize its production even further. Apache's accelerated drilling schedule on onshore U.S. plays should help blunt the impact of lower price realizations in the third quarter, but based on the current price picture it is likely that Apache's third quarter earnings will again be lower than in the same period last year.
I think this could introduce a buy opportunity, since the trend in the last few quarters generally shows a drop in Apache's earnings after an earnings release before entering a run up ahead of the next quarterly report. Since earnings are expected to be low for E&P independents almost across the board for the third quarter, I think the price on Apache stands a good chance of becoming even more attractive in the near future, before recovering for what will hopefully be long term gains for a price closer to its actual value.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.