Apache Corporation (NYSE: APA) sold off 9.7% in October after updating investors on its future. That included the decision to outspend cash flow by as much as $1 billion this year, with another significant gap anticipated next year. That shortfall has investors concerned that Apache is a step behind rivals that intend on living within cash flow in 2018.
Apache told investors in mid-October that it was on pace to outspend cash flow by $1 billion this year, which is a significant departure for a company that believes it should live within cash flow. It also thought it would outspend cash flow by about $500 million in 2018, and that's assuming oil averages $55 a barrel. The company believes that this is the right decision because it needs to spend above what it's bringing in so it can complete the testing and begin development of its Alpine High play. In addition, it needed to invest money in building the infrastructure required to support that recent discovery.
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That said, most of Apache's rivals plan to live within cash flow in 2018. Anadarko Petroleum (NYSE: APC) is one of those more fiscally conservative peers. CEO Al Walker detailed the company's plans in September, saying:
Going forward, we will continue to demonstrate financial discipline with a focus on returns. Our 2018 upstream investment plan is anticipated to produce substantial free cash flow, assuming an average oil price of $50 per barrel, while total capital spending, including midstream investments, should be approximately break-even to discretionary cash flow from operations.
Anadarko plans to use some of its cash balance to repurchase shares as well because it believes that is a more attractive use of cash than drilling more wells in the current low oil price environment. The market seems to agree since the stock has rallied more than 15% over the past three months while Apache's has barely budged despite last month's volatility.
Apache is making a big bet that its investments to get the Alpine High play up and running will pay big dividends over the long term. That said, it's paying the price in the short term since the market punished its stock last month for deciding to continue investing above its means as it finishes up the initial buildout of the infrastructure needed to develop the field more efficiently. However, if Apache is right, Alpine High will drive growth for years to come, which could eventually make last month's slump a distant memory.
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