Thursday, 5 November 2015

Apache - thoughts on the third quarter

In terms of position size my most important oil and gas sector holding at the moment is Apache.  Three months ago I wrote up my review of the quarterly numbers (link here) and noted:

'My view: to complement the mega cap exposure in the space with their dividend focus (link here) Apache is a good choice.  For me the conference call reiterated they have the experience and acumen to see through the current conditions and ultimately prosper and move materially above the current decade plus share price low is clear.  As with probably any other energy sector call over the last year I have been wrong to buy/build in Apache shares but you can only invest going forward - and this is no time to be selling their shares in my view'

Over the last three months the shares are slightly up but clearly it has been a tough last year given the backdrop of sharply falling oil prices.

These difficult conditions were reflected in Apache's headline results (even before consideration of a multi-billion write down) which showed a small net loss and a year-on-year revenue reduction of around 55%. Despite this there was some good news...including a production guidance increase and impressive comments about onshore North American production, Egypt and the UK...

...during the conference call the company noted:

'Egypt, Permian Basin and North Sea were the most successful exploration areas'

Egypt (where the company is now the largest oil/gas producer) and the North Sea saw particularly good production increases year-on-year...

...but the clear production revenue bias of the company is shifting towards US onshore production

What else is of note?  The balance sheet of course...

The view on future cash flow priorities was pretty clear even if they are not willing to provide some thoughts on 2016 until the February full year results point: 

‘not in a position to provide guidance ranges for 2016…want to be cash flow neutral over the year…and not use asset sales to fund investing cash flows’.  2016 guidance coming in February with full year numbers.  Such matching includes the dividend.

‘we are not contemplating any material asset sales in 2016’ 

Perhaps slightly overstating the point, the Apache management noted:

‘Apache’s balance sheet is a leader amongst peers without raising new equity’

Fundamentally it is not easy to value oil companies today - especially the non-heavy dividend yielding ones like Apache (2% yield) - but I like the company's skill in raising production and (in previous quarters) selling assets - which is why I stay long the stock anticipating further recovery in its share price (undoubtedly influenced by the direction of the oil price - which I feel is bottoming). 

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