Apache's Time to Shine

by Toby Shute - May 5, 2009 - 0 comments

Boy, things have sure changed in the oil patch since I covered Apache's (NYSE: APA) earnings last August. Commodity prices had already begun their descent by then, but certainly no one believed at the time that this would be, as Helmerich & Payne (NYSE: HP) has put it, "the worst cyclical downturn since 1981."

<p>Boy, things have sure changed in the oil patch since I covered <strong>Apache</strong>'s <span class=

(NYSE: APA) earnings last August. Commodity prices had already begun their descent by then, but certainly no one believed at the time that this would be, as Helmerich & Payne (NYSE: HP) has put it, "the worst cyclical downturn since 1981."

" >

A lot of oil and gas exploration company business models were built
for the boom times, and some of those companies are struggling to stay
solvent today. Some have failed to do so. As I noted in October, however, Apache stands apart for its conservatism.

That statement can be applied even more literally today. First off,
the sub-6.5% blended cost of debt that we saw Apache obtain in late
2008 stacks up most impressively compared to subsequent capital raises
by companies like Petrohawk Energy (NYSE: HK) and Chesapeake Energy (NYSE: CHK).

As for Apache's equity, the shares have performed better than those of Devon Energy (NYSE: DVN),
but they otherwise don't really stand out from the pack. If this
downturn really drags out, I think we will see that relative
outperformance emerge, however.

Now, as for the first-quarter numbers, they were none too rosy, but
operating earnings did come in well ahead of analyst expectations. The
net income figure was significantly distorted by a non-cash writedown,
which is par for the course for companies employing full-cost accounting. You won't see Anadarko Petroleum (NYSE: APC) taking such a hit, for example, but this kind of charge is non-economic, so don't sweat it.

The best news may lie on the cost front, seeing as Apache reported
21% lower cash costs per barrel of oil equivalent than the prior year.
Plunging prices outweighed these cost savings, taking cash margins down
from the 73% range to just shy of 60%, but that still represents some
substantial cash being created.

On the call, perhaps the most important point made by management was
that Apache has more economic plays than it has cash flows to deploy.
The company has no interest in spending beyond this level, especially
given the falling industry cost structure. It really pays to wait, and
Apache needs exactly this sort of luxury, given the condition of its
balance sheet.

If anything, Apache will be allocating extra capital to low-cost acquisitions, like the Permian properties just picked up from Marathon Oil (NYSE: MRO).
The company estimates that it paid less than 4.5 times cash flow, based
on hedges in place. If banks keep aggressively pulling E&P company credit lines, then Apache will probably see even more tasty targets surface in the not-too-distant future.

Companies in this news:

Chesapeake Energy

Devon Energy

Last edited by Rakhi Kaptiyal on Tue, 05/05/2009 - 09:00 | Write to author: Toby Shute |