Apache Corp.: Suriname Is A Game Changer

Summary

• Apache reported net income attributable to common stock of $10 million for the fourth quarter of 2020.
• Net debt as of Dec. 31, 2020 was $8.51 billion. The debt includes Altus debt. Apache's standalone long-term debt is $8.146 billion.
• APA is a good long-term investment. However, the stock may have reached an overbought situation.
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Image: Apache website

Investment Thesis

Houston-based Apache Corp. (NASDAQ:APA) released its fourth quarter and full-year 2020 results on Feb. 25, 2021.

The fourth quarter was better than expected, with an average daily U.S. output of 232,975 Boe/p, which fell 22% year over year. It was not something to brag about.

The investment thesis has changed with the recent rally in oil and gas prices. It would be best to slowly accumulate APA with a time horizon of about 12 to 18 months.

The first quarter of 2021 will not be stellar due to weak oil production, even if oil and gas prices will be much higher. This situation leaves us plenty of time to accumulate at a good discount.

If we compare APA to SPDR S&P Oil & Gas Exploration ETF (NYSEARCA: XOP), it has partially recovered and seems to improve with solid oil and gas prices.

Data by YCharts

The success story in Q4 was Altus Midstream (OTC: ALTM), Apache's subsidiary linked with the Permian midstream. On Dec. 10, 2020, the stock jumped sharply after Altus Midstream announced its first quarterly dividend of $1.50 per share with a dividend yield of 11.33%.

Note: Altus Midstream released its Fourth-quarter results on Feb. 25, 2021.

Apache Corp. - Balance sheet and production history for 4Q'20: The raw numbers

Apache	4Q'19	1Q'20	2Q'20	3Q'20	4Q'20
Total Revenues and others in $ Billion	1.625	1.344	0.752	1.120	1.058
Net Income in $ Billion	-2.98	-4.48	-0.367	-0.004	0.010
EBITDA $ Billion	-2.22	-3.90	0.11	0.58	0.56
EPS diluted in $/share	-7.89	-11.86	-1.02	-0.02	0.03
Cash from Operating activities in $ Million	778	502	84	304	498
CapEx in $ Million	613	531	335	239	197
Free Cash Flow in $ Million	165	-29	-251	65	301
Total cash $ Billion	0.25	0.43	0.14	0.16	0.26
Total LT Debt in $ Billion	8.56	8.91	8.82	8.93	8.77
Dividend per share in $	0.25	0.025	0.025	0.025	0.025
Shares outstanding (diluted) in Million	377	378	378	378	378
Oil Production	4Q'19	1Q'20	2Q'20	3Q'20	4Q'20
Total Oil Equivalent in K Boepd	487.2	467.8	435.4	445.2	410.8
International	188.6	185.1	184.9	187.2	177.8
USA	298.6	282.6	250.6	258.0	233.0
Permian	288.0	273.1	240.5	254.0	226.0~
Global liquid price ($/Boe)	60.19	48.31	25.77	40.88	43.21
Global Natural gas price ($/Mbtu)	2.05	1.47	1.68	1.90	2.27

Click to enlarge

Source: Company filing

Note: historical data since 2015 are only available to the Gold and oil corner subscribers.

Analysis: Revenues, Earnings Details, Free Cash Flow, And Oil Production

1 - Revenues and others were $1,058 million in 4Q'20

Apache reported net income attributable to common stock of $10 million, and on a fully diluted basis, a loss of $16 million or $0.04 per share during the fourth quarter 2020.

Q4 Revenues were $1.058 billion, down 34.9% from the same quarter a year ago. Revenues and others (including derivative) were $1.289 billion.

One positive is that the global liquid price is still recovering from the steep fall in Q2, as shown in the chart below.

Steve Riney talked about the lower production in the conference call:

This was driven by declines in the Permian Basin and Egypt, where we felt the impacts of reduced activity levels after the first quarter cut in capital spending. These declines were partially offset by increased North Sea production primarily associated with the timing of work-over activity.

2 - Free cash flow was a gain of $301 million in 4Q'20

Note: The generic free cash flow is the cash from operating activities minus Capex.

2020 free cash flow is now $86 million, and a free cash flow of $301 million is estimated for the fourth quarter.

The company kept its quarterly dividend at $0.025 per share or a yield of 0.51%. However, we should expect an increase in dividends, probably in Q3'21.

3 - Net debt is now $8.51 billion in 4Q'20 (Including Altus)

Net debt as of Dec. 31, 2020, was $8.51 billion. The debt includes Altus debt. Apache's standalone long-term debt is $8.146 billion.

From: Presentation

4 - Oil-equivalent production was 410.8k Boep/d in Q4'20 which comprises 65% liquids.

Production details per segment are indicated in the chart below. Again, I have estimated the Permian production that I could not find in the filings. The company is not consistent in its reporting about its Permian production, and it's quite frustrating.

In the fourth quarter, total production decreased by 15.7% to 410.8k Boep/d than a year ago and down 7.7% sequentially.

In 4Q 2020, the Permian Basin recorded an estimated 226k Boep/d, representing 55% of the overall oil and gas production. Also, Permian production estimated represented about 97% of the total US output.

5 - Guidance for the first quarter and full-year of 2021

Source: Presentation (montage)

Total adjusted production is expected to be around 324K Boep/d in Q1, lower than the fourth quarter's adjusted production due to weather downtime and completion schedule cadence. However, capex is up to $300 million.

Commentary and Technical Analysis

Apache Corp. Q4 results did not really dazzle me, and the first quarter of 2021 is expected to deliver a weaker domestic production due to the recent cold spell in Texas.

It could affect revenues significantly again, even if oil and gas prices have rallied recently and are trading well above $60 per barrel.

However, Apache's important element is the prolific Suriname prospect in collaboration with Total SE (NYSE:TOT), a game changer for the company, with the first oil by 2025.

Source: Presentation

On Jan. 14, 2020, Apache announced the fourth consecutive oil discovery in Block 58 Offshore Suriname at Keskesi East-1 Well. As we all know, Total assumed operatorship of Block 58 from Apache on Jan. 1, 2021, with a 50% working interest. Apache holds the remaining 50% stake.

CEO John Christmann said in the conference call:

Finally, as we look back on 2020, one of the key highlights was our exploration program in Suriname, where we commenced activity under our joint venture with Total. We have now made four significant oil discoveries in our first four exploration tests and recently began the appraisal drilling program.

Technical analysis (short term)

APA forms an ascending wedge pattern with resistance at around $22.15 and support range around $19. Ascending wedge patterns are generally bearish when entered from the support side, as is the case here. Hence I'm expecting a crossing of the support at $19 to potentially $16.

The short-term trading strategy is to sell partially between $21.50 and $22.15 and wait for a breakdown to accumulate between $19 and $16.

Of course, this TA interpretation is valid for only a few days and will have to be updated based on news and oil prices.

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Analyst’s 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.

I trade short-term APA frequently.