Apache Corp.: Permian Production Keeps Growing

About: Apache Corporation (APA), Includes: ALTM, APC, CVX, XOM
by: Fun Trading

Apache Corp. posted a quarterly loss of $47 million or $0.12 per share on May 2, 2019.  Revenues were $1,635 million, down 6.4% for the same quarter a year ago.

The first quarter total production rose 14.2% to 502,877 barrels of oil equivalent per day compared to a year ago and up 4.3% sequentially.

I recommend APA as a HOLD with a possible accumulation banking on an eventual acquisition by one of the oil supermajors.

Image Courtesy: Reuters - Permian Basin.

Investment Thesis

The Houston-based Apache Corp. (APA) owns oil and gas assets in three different regions and has earned $598 million in consolidated operating cash flow from operations during the first quarter of 2019.

Source: APA Presentation

The US Shale and particularly the Permian Basin continues to drive the company's growth with good results. Alpine High has reached 70K Boep/d during the first quarter, and Permian production reached 247.9K Boep/d in 1Q'19.

The issue we are confronted with Apache is that the company invested heavily in its Alpine High prospect which is a Permian gas play and is not as attractive as a pure oil Permian play due to pricing issues. Apache temporarily halted production at Alpine High late in March, curtailing the output by about 250 MCF/d, reacting to meager NG prices.

The stock is trading in tight correlation with oil and gas prices, and I do not see much improvement at this level.

Thus, I recommend APA as a HOLD with a possible accumulation banking on an eventual acquisition by one of the oil supermajors (e.g., Exxon Mobil (XOM) or eventually Chevron (CVX) if its attempt to acquire Anadarko Petroleum (APC) is not successful).

Chart Data by YCharts

John J. Christmann said in the conference call:

Apache had an excellent first quarter in terms execution, well performance and delivery against our production and capital guidance. We exceeded our U.S. production target, my 5,000 BOEs per day and our international target by 7,000 BOEs per day, on a capital budget of less than $600 million. In the Permian basin, we maintained oil production near fourth quarter levels despite placing one of our two completion crews on a frac holiday for the entire first quarter. At Alpine High, where we also had a relatively low number of completions, production was up significantly from the fourth quarter and was in line with our guidance of 70,000 BOEs per day.

Note: On August 9, 2018, we learned that Apache and KAAC (Kayne Anderson Acquisition Corp) formed a $3.5 billion pure-play Permian midstream called Altus Midstream (ALTM).

John Christmann said in the conference call:

Construction of Altus Midstream's first two cryogenic plants is proceeding ahead of schedule with the first plant currently commissioning and expected to flow gas this month. The second plant is expected to be fully in service during July and the third plant remains on schedule for the fourth quarter. By year-end, Altus will have a total 600 million cubic feet of nameplate rich gas processing capacity, capable of producing more than 60,000 barrels of NGLs per day. Kinder Morgan's GCX pipeline is also expected to be in service beginning in October, which will give Apache access to Gulf Coast pricing on 550 million cubic feet per day of gas from the Permian. These processing and transportation catalysts will drive a significant uplift and Alpine High liquids production revenue and cash flow

Note: Altus Midstream released its first quarter on May 1, 2019.

At Alpine High, the company is about to reach a significant milestone this month with the start-up of Altus Midstream first cryogenic plant in the next two to three weeks. Clay Bretches, Altus CEO, said in the conference call:

[T]o maintain our focus on building out infrastructure that adds value to production from Alpine High, delivers gathering and processing services timely and efficiently, and provides a midstream system that will serve for the full development life of the field. This is progressing well. Our first cryogenic processing plant is mechanically complete and on budget with Trains 2 and 3 following closely behind

Apache Corp. - Balance sheet and production history for 1Q'19: The raw numbers

Apache 2Q'17 3Q'17 4Q'17 1Q'18 2Q'18 3Q'18 4Q'18 1Q'19
Total Revenues and others in $ Billion 1.384 1.575 1.586 1.742 1.929 1.983 1.765 1.635
Net Income in $ Billion 0.57 0.06 0.46 0.15 0.20 0.08 -0.38 -0.05
EBITDA $ Billion 0.68 0.75 0.95 1.05 1.21 1.12 0.39 0.91
Profit margin % (0 if loss) 41.3% 4.0% 28.8% 8.3% 10.1% 40.8% 0 0
EPS diluted in $/share 1.50 0.16 1.19 0.38 0.51 0.21 -1.00 -0.12
Cash from Operating activities in $ Million 751 554 668 615 1,113 1,006 1,043 598
CapEx in $ Million 711 773 763 877 1,017 942 1068 863
Free Cash Flow in $ Million 40 -219 -95 -262 96 64 -25 -265
Total Cash $ Billion 1.67 1.85 1.67 1.08 0.97 0.59 0.71 0.33
Total LT Debt in $ Billion 8.48 8.48 8.48 8.34 8.34 8.20 8.20 8.43
Dividend per share in $ 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25
Shares outstanding (diluted) in Million 383 383 383 384 385 385 381 376
Oil Production K boep/d 2Q'17 3Q'17 4Q'17 1Q'18 2Q'18 3Q'18 4Q'18 1Q'19
Total Oil Equivalent in K Boep/d 460 448 440 440 464 476 482 503
International 216 217 218 208 209 204 199 211
USA 244 231 222 232 255 272 283 292
Permian 146 161 177 183 202 222 236 248
Global liquid price ($/Boe) 46.89 49.34 58.36 64.34 69.35 69.12 58.37 57.70
Global Natural gas price ($/Mbtu) 2.60 2.75 2.90 2.82 2.50 2.56 2.57 2.34

Source: Company filings and Morningstar/Ycharts

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

1 - Revenues and other

Apache Corp. posted a quarterly loss of $47 million or $0.12 per share on May 2, 2019. Revenues were $1,635 million, down 6.4% for the same quarter a year ago due to weaker oil and gas price. Please see the graph below:

2 - Free cash flow was a loss of $265 million in 1Q'19

APA is not passing the FCF test.

3 - Net debt is now $8.1 billion

Net debt is $8.1 billion, with a net debt-to-EBITDAX ratio of 1.9x in 1Q'19.

4 - Oil-equivalent production was 502.9k Boep/d in Q1'19 (63% liquids).

Production details per segment.

The first quarter total production rose 14.2% to 502,877 barrels of oil equivalent per day compared to a year ago and up 4.3% sequentially.

Source: APA 1Q'19

In 1Q 2019, the Permian Basin recorded output of 247.9K Boep/d representing 49.3% of the overall oil and gas production, improving from 182.972K Boep/d in first-quarter 2018.

The North Sea established another record with 65,833 Boep/d.

Note: I indicated the Permian production in green in the first graph, which was 247,939 Boep/d in 1Q'2019 (Midland Basin and Delaware Basin, outside of Alpine High).

Source: APA Q1 Presentation

Internationally, Apache's Egypt and North Sea regions continued to generate free cash flow. The CEO, John J. Christmann said in the conference call:

Looking ahead, second quarter Permian oil production is projected to be down slightly due to completions timing with growth anticipated in the back half of the year is the number of completions increases significantly. At Alpine High production volumes will be impacted in the second quarter by the voluntary gas deferrals we discussed in our press release last week. I would note however, that temporary deferral of this production is expected to improve our short-term net cash flow.

Second Quarter Guidance

Source: APA

For 2019, Apache Corp. continues to foresee 6% to 10% growth on a total company adjusted basis consisting of 12% to 16% growth in the U.S. and a 2% to 4% decline internationally. Permian oil production is still anticipated to expand by 5%. Apache reiterated its guidance for 2019 CapEx at $2.4 billion.

Despite some inflationary headwinds related to the rise in oil prices. We remain on track to deliver our 2019 planned activities set for $2.4 billion. We were experiencing cost increases in labor, trucking, fuel and chemicals, but have thus far been able to offset these through efficiency gains. The CEO said in the conference call.

Conclusion And Technical Analysis

The takeaway for the first quarter of 2019 is that Apache's Alpine High and the Permian plays are getting brighter and brighter (upstream and downstream). However, the price of natural gas is limiting revenues substantially.

Stephen Riney said in the conference call:

Beginning in late March, for a variety of reasons, Permian Basin natural gas dipped to extremely low, and at times negative pricing. In response, Apache chose to defer a portion of our guest production at Alpine High. In the month of April, these deferrals averaged approximately 230 million cubic feet per day of gross wellhead gas.

The deferred volumes are comprised of both lean and rich gas. And now we anticipate a continuation of week gas prices, until more transport capacity comes online later in the year. We currently plan to restore all of our rich gas production as we commissioned our first two cryo facilities over the next eight to 10 weeks.

As I explained above, with CapEx expected to go down significantly in 2019, Apache will improve its free cash flow slowly. Upstream CapEx was below $600 million in 1Q'19.

Technical analysis (short term)

APA had a decisive negative breakout late in April and reached its secondary line support at around $30 (I recommend adding at this level depending on the oil prices strength).

The old pattern was called symmetrical wedge with line support at $35 which is now the new line resistance (I recommend selling about 20% of your position at this level).

However, Apache is a potential acquisition comparable to Anadarko Petroleum (APC), and it is a good idea to accumulate the stock on any weakness.

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Disclosure: I am/we are long APA. 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.

Additional disclosure: I own a small position at $31 as a gamble for a possible acquisition