Shares of Apache Corporation APA have been on the red territory for a while now, with its shares declining around 14% over the past year.
In the past month itself, the stock has declined more than 6%. In fact, the share price, which closed at $35.04 yesterday, is quite close to the stock’s 52-week low of $33.60. While the recent pullback in crude prices along with pipeline crisis in the Permian play are weighing on the stock, we believe that the Houston-based energy explorer still holds much promise, as is validated by its Growth Score and VGM Score of A.
What’s Going Against Apache?
Notably, the three-year oil industry downturn due to the global supply glut had hit Apache hard. The company slashed its capital expenditure budget in wake of commodities slump to realign itself with the changed dynamics, which adversely affected production volumes. In 2017, Apache’s production averaged 349,717 barrels of oil equivalent per day (BOE/d), down 10% from 2016. Contracting output volumes are especially bad for independent production firms unlike integrated majors who have refining and marketing segments to fall back on. Despite the crude uptick for most part of this year, Apache is yet to recover from its long string of negative free cash flows.
While Apache acquired Alpine High acreage for a good price, the region lacks energy infrastructure, which translates into a capital intensive and time consuming process for the company. Further, the ongoing pipeline takeaway constraints in the Permian Basin might not allow Apache to fully benefit from high oil prices for its production. In fact, the resulting Permian discounts may affect the capital expenditure plans of Apache, which is already burdened with elevated leverage of more than 51%.
Hopes of a Turnaround
Notwithstanding the high capex associated with Alpine High assets, which may put pressure on the company’s financials, we consider the Alpine High discovery in West Texas as a vital game changer. Estimated to hold massive oil and natural gas reserves, the wells are expected to drive strong economics and top-tier returns going forward. The company has made some solid output projections for its Alpine High assets and forecasts its overall Permian production at 315,000 BOE/d by 2020, which is almost double its 2017 figure of 158,000 BOE/d. In fact, Apache forecasts its Alpine high output to witness a compounded annual growth rate (CAGR) of more than 150% through 2020. Moreover, total production is expected in the band of 475,000-510,000 BOE/d by 2020, reflecting a double-digit CAGR from the 2017 output level.
While the pipeline pinch may be dampening investors’ sentiments, it is to be noted that Apache has advanced the infrastructural development in the Alpine High by entering into a partnership with Kayne Anderson Acquisition Corporation for the creation of a pure-play Permian Basin midstream firm—Altus Midstream— in Texas. This midstream infrastructural development project holds much significance for Apache, providing it a competitive edge. As it is, various new pipelines will be coming online next year, providing respite to a considerable extent.
Importantly, as part of streamlining its portfolio, Apache has divested its high-cost Canadian assets, thereby freeing up capital to concentrate on its longer-term high-grade prospects, especially in the Permian basin, that now constitute more than half of its total output. The company has been focused on ramping up its portfolio and strategically redeploying capital to highest value opportunities.
While Permian and Alpine High are the more significant assets of the company, Apache has certainly not put all its eggs in one basket. The company also has considerable acreage in Egypt and North Sea and expects robust cash flow from these assets in the coming years.
Very recently, the company commenced production from Garten development in the North Sea and is currently producing at a rate of 13,700 barrels of oil and 15,700 cubic feet of gas per day. Notably, the recoverable resource in the field is expected to exceed 10 millions of oil and natural gas.With the company bringing the field online ahead of its target of early 2019, the Garten project is expected to contribute significantly to its cash flow next year.
With the company having lost 60% of its value since the past five years and currently trading at much lower prices, we think it’s quite a bargain. Considering Apache’s Permian focus along with midstream efforts,we believe that the company will be able to counter the odds and turnaround in the coming years. Apache is expected to generate free cash flows from the next year, which will strengthen the overall financial picture of the company. Its earnings are estimated to witness long-term growth of 7% and we think that it’s prudent enough to hang on to this Zacks Rank #3 (Hold) stock as of now.
However, some better-ranked players in the same industry include Antero Resources Corporation AR, QEP Resources, Inc. QEP and Cabot Oil & Gas Corporation COG, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Antero Resources’ long-term earnings growth is expected at 20%.
Long-term earnings growth of QEP Resources is pegged at 12%.
Cabot Oil & Gas has an expected long-term earnings growth of 30%.
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