Apache: What A Drag

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About: Apache Corporation (APA), Includes: ALTM
by: Fun Trading
Summary

Apache Corp. posted a quarterly loss of $360 million, or $0.96 per share, on July 31, 2019. Revenues were $1,603 million, down 16.9% for the same quarter a year ago.

The second-quarter total production dropped 1.4% to 455,023 Boep/d compared to a year ago and down 9.5% sequentially.

Despite the recent bout of optimism that seems to get some momentum this week, it doesn't change much my long-term outlook.

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 $856 million in consolidated operating cash flow from operations during the second quarter of 2019. Oil and Gas revenues come from three central areas:

Source: APA Presentation

The US Shale, and particularly the Permian Basin, continues to drive the company's growth with noticeable results. However, a continued setback in natural gas prices forced the company to revise outlook. Alpine High produced 49K Boep/d during the second quarter, and Permian production reached 226.3K Boep/d in 2Q'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. The natural market is bearish with multi-year low prices. However, while the natural gas price outlook is supported with strong demand, the supply is more than enough to cover it, with record production in the USA. One recent positive is that October natural gas futures increased to $2.585 per MMBtu.

In short, the stock is trading in tight correlation with oil and gas prices, and I do not see much improvement at this level even if the recent days brought some relief.

Thus, I recommend APA as a HOLD with a possible accumulation banking on an eventual acquisition by one of the oil supermajors that could be tempted to acquire the company on the cheap.

John J. Christmann said in the conference call:

"The second quarter Apache's total adjusted production exceeded guidance with upstream capital spending of just under $600 million. Through mid year, we have invested less than 50% of our four-year budget of $2.4 billion. We are focused on strict capital discipline which is achievable given our level loaded activity set and relatively stable operational pace over the last couple of years."

Note: Just a little over a year ago, we learned that Apache and KAAC (Kayne Anderson Acquisition Corp.) formed a $3.5 billion pure-play Permian midstream called Altus Midstream (ALTM).

Note: Altus Midstream released its second-quarter on August 1, 2019.

At Alpine High, the company has reached a significant milestone with the start-up of Altus Midstream first cryogenic plant. On May 30, the first of its three new cryogenic processing trains at the Diamond Cryo Complex in Alpine High started to process abundant natural gas and delivering natural gas liquids and residue gas to sales.

Apache Corp. - Balance sheet and production history for 2Q'19: The raw numbers

Apache 4Q'17 1Q'18 2Q'18 3Q'18 4Q'18 1Q'19 2Q'19
Total Revenues and others in $ Billion 1.586 1.742 1.929 1.983 1.765 1.635 1.603
Net Income in $ Billion 0.46 0.15 0.20 0.08 -0.38 -0.05 -0.36
EBITDA $ Billion 0.95 1.05 1.21 1.12 0.39 0.91 0.55
EPS diluted in $/share 1.19 0.38 0.51 0.21 -1.00 -0.12 -0.96
Cash from Operating activities in $ Million 668 615 1,113 1,006 1,043 598 856
CapEx in $ Million 763 877 1,017 942 1068 863 803
Free Cash Flow in $ Million -95 -262 96 64 -25 -265 53
Total Cash $ Billion 1.67 1.08 0.97 0.59 0.71 0.33 0.55
Total LT Debt in $ Billion 8.48 8.34 8.34 8.20 8.20 8.43 8.33
Dividend per share in $ 0.25 0.25 0.25 0.25 0.25 0.25 0.25
Shares outstanding (diluted) in Million 383 384 385 385 381 376 377
Oil Production K boep/d 4Q'17 1Q'18 2Q'18 3Q'18 4Q'18 1Q'19 2Q'19
Total Oil Equivalent in K Boep/d 440 440 464 476 482 503 455
International 218 208 209 204 199 211 191
USA 222 232 255 272 283 292 264
Permian 177 183 202 222 236 248 226
Global liquid price ($/Boe) 58.36 64.34 69.35 69.12 58.37 57.70 63.71
Global Natural gas price ($/Mbtu) 2.90 2.82 2.50 2.56 2.57 2.34 1.41

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 $360 million, or $0.96 per share, on July 31, 2019. Revenues were $1,603 million, down 16.9% for the same quarter a year ago due to weaker oil and gas price. Adjusted earnings were a gain of $0.11 per share.

Please see the graph below:

2 - Free cash flow was a gain of $53 million in 2Q'19

The company is struggling to show positive free cash flow. Free cash flow yearly is a loss of $173 million, with a gain of $53 million this quarter. The company is paying a dividend of $0.25 quarterly or $377 million yearly, which is not covered by the free cash flow.

3 - Net debt is now $7.8 billion

Net debt is $7.8 billion, with a net debt-to-EBITDAX ratio of 1.8x in 2Q'19.

The company used a portion of the proceeds from its divestitures from the company’s exit from the Western Anadarko Basin and the SCOOP/STACK play to retire $150 million of debt that matured in July.

4 - Oil-equivalent production was 455.0k Boep/d in Q2'19 (63% liquids)

Production details per segment.

The second-quarter total production dropped 1.4% to 455,023 Boep/d compared to a year ago and down 9.5% sequentially.

Source: APA 2Q'19

In 2Q 2019, the Permian Basin recorded output of 226.3k Boep/d representing 85.72% of the overall oil and gas production.

The North Sea established another record with 60.1k Boep/d.

Note: I indicated the Permian production in green in the first graph, which was 226,318 Boep/d in 2Q'2019 (Midland Basin and Delaware Basin, outside of Alpine High).

Source: APA Q2 Presentation

Internationally, Apache's Egypt and North Sea regions continued to generate free cash flow.

Third Quarter Guidance

Source: APA Presentation

For 2019, Apache Corp. is slashing production outlook for 2019 from 427.5k Boep/d in May to 408.5k Boep/d now.

Source: APA Presentation (partial)

In the press release:

Apache is revising its production guidance for the second half of 2019 in the Permian Basin to reflect the delays experienced in the Midland/Delaware Basins, as well as continuing gas production deferrals at Alpine High in response to ongoing weak Waha gas prices.

Note in the press release: For Permian Basin oil, Apache expects third-quarter production to be 94k to 98k Boep/d and fourth-quarter production to be 100k to 105k Boep/d.

Conclusion And Technical Analysis

The takeaway for the second quarter of 2019 is that oil and gas prices are facing strong headwinds due to a bearish demand outlook. Despite the recent bout of optimism that seems to get some momentum this week, it doesn't change much my long-term outlook.

The second-quarter of 2019 results were not good, with a 78.6% fall in adjusted profit from last year. The fall in natural gas prices due to surging production and lower demand is mostly to blame.

Furthermore, delays in the Midland Basin and Delaware basins will curtail production in Q3 and Q4, pushing the company to revise down production outlook.

Alpine High is not delivering what we were expecting last year when the company was investing a significant CapEx to start it.

John J. Christmann said in the conference call:

"In the short term, Alpine High economics were adversely impacted by very depressed gas pricing at Waha. In response, we are continuing to defer the majority of our lane [ph] gas and a portion of our rich gas production until the GCX pipeline enter service in late September."

And continued further:

"At current gas and NGL prices, some portions of Alpine High are less competitive than other opportunities in our portfolio. If this pricing situation does not improve, some capital will be re-allocated to areas with more leverage to oil price most likely elsewhere in the Permian Basin."

Overall, I am not impressed with what is happening, and the market is not either. The stock tumbled since April from $38 a share to now $23.65 with a low just below $20 in mid-August. I am not optimistic despite what I consider a dead cat bounce in progress, and I believe Apache will face more headwinds later this year. Invest wisely.

Technical analysis (short term)

As always, my interpretation of the chart differs a little from FinViz. I see a descending channel pattern based on the line support indicated above. Line resistance is a parallel using the top in July, which is $24.50. Descending channel patterns are a short-term bearish, which means I recommend actively taking profit at $24.50 or around 25% of your position assuming a profit. Line support is between $18.25-$19.75 at which point I will be willing to buy APA.

However, APA is highly correlated to oil and gas prices, and it is paramount to analyze the future oil and gas outlook before jumping on the train.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.

Additional disclosure: I trade APA occasionally now.