Apache Corp.: Key Takeaways From The Third Quarter 2018 Results

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About: Apache Corporation (APA)
by: Fun Trading

Summary

Revenues and other were $1.983 billion this quarter, up 25.9% from a year ago and up 2.8% sequentially.

Third quarter 2018 results were strong, but not enough to boost the stock price much higher, showing some fatigue in correlation with the oil prices which have weakened recently.

We have many reasons to bet on the long-term potential for Apache, substantially supported by oil and gas prices that create an environment of solid cash flow.

Image Courtesy: Reuters - Permian Basin.

Investment Thesis

Apache Corp. (NYSE: APA) is an American petroleum and natural gas exploration and production company with its headquarters located in Houston, Texas. The company owns assets in three different geographical areas and has earned $1 billion in consolidated Operating Cash Flow from Operations during the third quarter of 2018.

As I will show in this article later, we have many reasons to bet on the long-term potential for Apache, substantially supported by oil and gas prices that create an environment of solid cash flow. Thus, I recommend APA as a long-term investment and advise using this retracement to accumulate for the long-term horizon.

The main project for the company called Alpine High is slowly but surely coming to completion, the path to profitability appears clear now.

Chart APA data by YCharts

The company indicated in the third quarter that Alpine High had reached 55K Boep/d on a net basis, and stated that 2019 production is expected to trend to the upper end of 85 to 100K boep/d guidance range.

However, production for 2018 has been revised slightly down to 44k Boep/d from 45k Boep/d due to a processing upset that sent moisture down the pipeline, requiring a two-day field shutdown to dig the lines.

The company placed 27 wells on production during the third quarter and said it is on track to put more than 90 wells on production this year.

Alpine High and the Permian are two engines for a new era of strong results and stock appreciation in 2019. Notably, the Permian Basin continues to drive the company's growth. Compared with the third quarter a year ago, oil production in the basin increased 16%, and total output grew 38%.

Apache averaged 18 rigs and five frac crews in the Permian Basin during the third quarter, and at Alpine High, the company placed 27 wells on production during the third quarter.

John J. Christmann said in the conference call:

After significant upfront investment at Alpine High and the pending completion of our Altus Midstream transaction, Apache has turned the corner and is well positioned to deliver on this philosophy for many years to come. We continue to generate steady production growth on a flat activity set and are poised to deliver positive free cash flow in 2019.

For the Alpine High, the strategic objectives in 2018 included finalizing a joint venture, or partial monetization of the midstream enterprise, and reaching agreements for future oil, gas, and NGL takeaway capacity.

As indicated last quarter, on August 9, 2018, We learned that Apache and KAAC (Kayne Anderson Acquisition Corp.) are forming a $3.5 billion pure-play Permian midstream called Altus Midstream.

Apache Corp. - Balance sheet and production history for 3Q'18: The raw numbers

Apache 1Q'15 2Q'15 3Q'15 4Q'15 1Q'16 2Q'16 3Q'16 4Q'16 1Q'17 2Q'17 3Q'17 4Q'17 1Q'18 2Q'18 3Q'18
Total Revenues and other in $ Billion 1.630 2.246 1.526 1.482 1.083 1.382 1.438 1.451 1.878 1.384 1.575 1.586 1.742 1.929 1.983
Net Income in $ Billion -4.65 -0.86 -4.14 -4.02 -0.37 -0.24 -0.61 -0.18 0.21 0.57 0.06 0.46 0.15 0.20 0.08
EBITDA $ Billion 0.85 0.73 -3.38 -4.42 0.40 -0.49 -0.15 0.61 1.22 0.68 0.75 0.95 1.05 1.21 1.12
Profit margin % (0 if loss) 0 0 0 0 0 0 0 0 11.3% 41.3% 4.0% 28.8% 8.3% 10.1% 40.8%
EPS diluted in $/share -12.34 -2.28 -10.95 -10.62 -0.98 -0.65 -1.60 -0.49 0.56 1.50 0.16 1.19 0.38 0.51 0.21
Operating cash flow in $ Million 650 1,132 711 174 239 744 651 796 455 751 554 668 615 1,113 1,006
CapEx in $ Million 1781 1224 924 879 565 478 440 466 513 711 773 763 877 1,017 942
Free Cash Flow (Ychart) in $ Million -1131 -92 -213 -705 -326 266 211 330 -58 40 -219 -95 -262 96 64
Total Cash $ Billion 0.23 2.95 1.66 1.47 1.00 1.20 1.23 1.38 1.52 1.67 1.85 1.67 1.08 0.97 0.59
Total LT Debt in $ Billion 12.27 9.68 8.78 8.72 8.72 8.72 8.72 8.54 8.48 8.48 8.48 8.48 8.34 8.34 8.20
Dividend per share in $ 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25
Shares outstanding (diluted) in Million 378 378 378 378 379 379 380 379 383 383 383 383 384 385 385
Oil Production K boep/d 1Q'15 2Q'15 3Q'15 4Q'15 1Q'16 2Q'16 3Q'16 4Q'16 1Q'17 2Q'17 3Q'17 4Q'17 1Q'18 2Q'18 3Q'18
Total Oil Equivalent in Kboep/d 601 564 542 493 531 536 520 490 481 460 448 440 440 464 476
International 294 247 236 185 233 235 242 238 229 216 217 218 208 209 204
USA 307 317 306 308 298 282 278 252 252 244 231 222 232 255 272
Permian 159 172 170 174 171 165 158 149 148 146 161 177 183 202 222
Global liquid price ($/Boe) 47.87 58.09 46.34 39.79 31.52 43.14 44.35 47.39 51.20 46.89 49.34 58.36 64.34 69.35 69.12
Global Natural gas price ($/Mbtu) 2.93 2.73 2.89 2.65 2.15 2.04 2.59 2.85 2.74 2.60 2.75 2.90 2.82 2.50 2.56

Source: Company filings and Morningstar

Trends And Charts: Revenues, Earnings Details, Free Cash Flow And Oil Production

1 - Revenues and other

Revenues and other were $1.983 billion this quarter, up 25.9% from a year ago and up 2.8% sequentially. Net earnings - the company incurred a $75 million after-tax loss during the quarter as a result of a tender bond exercise. Excluding this one-time item and other special items, net earnings would have been $244 million instead.

Oil production represented 48.3% (196.567K Bop/d) of the total adjusted oil production and contributed to 78.7% of oil equivalent revenues this quarter. Thanks to the oil prices this quarter which reached a high of $69.12 per barrel while indicating a record production in the Permian, reaching 222.259K Boep/d.

Apache beat on EPS by $0.16 per share and revenues by $70 million.

2 - Free cash flow

Free cash flow for Apache is still negative on a yearly basis and represents a loss of $197 million.

Free cash flow is an essential topic for a long-term investment. Of course, FCF should be adequate and positive if the business model is to be considered viable. However, CapEx is an essential engine of growth and over-spending in CapEx makes sense for the long term (Alpine High). It is what APA has experienced until 1Q'18.

APA is not passing the FCF test, but positive free cash flow is expected to be reached by next year.

3 - Net debt

Net debt is $7.61 billion, with a net debt-to-EBITDA ratio of 1.76x in 3Q '18. It shows that the company is holding a reasonable level of debt relative to its EBITDA. Mainly, it will take 1.76 years to pay off the net debt, which is satisfactory. Operating cash flow on a yearly basis is $3.4 billion, or 44.7% of APA's net debt is quite a good number.

4 - Oil-equivalent production

The third quarter total production was 476K Boep/d (Adjusted production 400.677k Boep/d), or up 6.3% compared to a year ago and up 2.6% sequentially. In 3Q 2018, the Permian record output of 222.259 K Boep/d represented 46.7% of the overall adjusted production mix.

Note: I indicated the Permian production in green in the first graph, which was 222.259K Boep/d in 3Q'2018 (Midland Basin and Delaware Basin, outside of Alpine High). Production was 153.2K Boep/d excluding Egypt tax barrels and non-controlling interest.

Internationally, Apache's Egypt and North Sea regions continued to generate excellent free cash flow, benefiting from the recent price increase for Brent Index crude oil. The CEO, John J. Christmann said in the conference call:

Capital efficiency has improved significantly in the North Sea and we anticipate delivering higher production in the fourth quarter and in 2019 with a flat capital profile. Production growth will be driven by the tie-in of three significant wells in the barrel area: a development well at Caliber, a discovery well at Store (11:46) and our discovery well at Garten, which we have now accelerated into 2018. Longer-term, the Garten discovery has lowered the risk profile of several analogous exploration prospects, some of which we will likely test in 2019.

5 - Company 2018 Guidance

Courtesy: APA 3Q'18 Presentation.

Apache expects adjusted production of 394K Boep/d in 3Q'18 or an increase of 2.9% from the second quarter of 2018. The growth is primarily due to the Permian which reached 54k Boep/d at the end of July. The company is raising 2018 U.S. production guidance to 260K BOE per day, from previous guidance of 250K to 258K BOE per day.

In the press release, the company indicated:

Reported Alpine High net production of 32,000 BOE per day during the quarter, which increased approximately 70 percent to 54,000 BOE per day by the end of July.

The Permian production is expected to increase significantly with a 26-28% CAGR while the international output will slightly decline by about 8% in 2020.

Source: Company Presentation

Conclusion And Technical Analysis

The takeaway for the third quarter of 2018 is that Apache's Alpine High and the Permian plays are showing some bright green color (upstream and downstream). CapEx is expected to go down significantly in 2019, and Apache is showing its second quarter in a row with positive free cash flow. Alpine High and the Permian basin are now delivering some impressive well results from critical tests.

Timothy J. Sullivan said in the conference call:

These are impressive growth rates on a large production base, which reflect the success of our ongoing development in the Midland and Delaware Basins and the continued ramp up at Alpine High. We averaged 18 rigs and five frac crews in the Permian Basin during the quarter. Compared with the preceding period, we held our oil production steady, up 1%, and with the completion schedule skewed toward the back half of the year, there will be a larger contribution to oil growth in the fourth quarter and even more so in 2019.

Third quarter 2018 results were strong, but not enough to boost the stock price much higher, showing some fatigue in correlation with the oil prices which have weakened recently.

Technical analysis (short term)

APA is showing a descending broadening triangle pattern. I do not agree with Finwiz about the long-term trend which should be at $42 now (I recommend selling about 20% of your position at this level unless the price of oil turns very bullish again). Line support is around $36 (I recommend buying and accumulating at this price on any weakness depending on the future price of oil). A descending broadening triangle pattern is indicated a period of high volatility, but leads to a positive decisive breakout generally.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in APA over 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.