U.S. Energy firm Apache Corp. (APA) reported strong second-quarter results, mainly due to increased volumes and higher realized oil prices.
Earnings per share, excluding one-time items, reached $3.22, comfortably surpassing the Zacks Consensus Estimate of $3.09 and way above the year-ago adjusted profit of $2.46.
Revenues of $4,338.0 million were up 46.0% from the second quarter 2010 and just about managed to beat our projection of $4,316.0 million.
Operational Performance
The production of oil and natural gas averaged a record 748,519 oil-equivalent barrels per day (BOE/d) (49% liquids), up approximately 15.7% year over year. Production for oil and natural gas liquids (NGLs) was up roughly 6.2% to 369,683 barrels per day (Bbl/d), while natural gas production of 2,273.0 million cubic feet per day (MMcf/d) was 26.9% above that achieved in the second quarter of 2010.
Apache’s upstream growth momentum is retained organically as well as through acquisition. The reported quarter's production increase was on the back of contribution from two Australian fields (Van Gogh and Pyrenees), as well as higher output from the recently-acquired Permian Basin, Gulf of Mexico and Canadian fields.
Additionally, during the June quarter, the Houston, Texas-based company started production from its most prolific development well in the Forties field (North Sea), that came online in excess of 12,500 Bbl/d of oil.
The average realized crude oil price during the second quarter was $106.31 per barrel, representing an increase of 42.0% from the corresponding period of the previous year. The average realized natural gas price during the June quarter of 2011 was $4.54 per thousand cubic feet (Mcf), up 13.2% from the year-ago period.
Lease operating expenses totaled $662 million, up 48.4% from $446 million in the year-ago quarter.
Balance Sheet
As of June 30, 2011, Apache had approximately $1,107.0 million in cash. The company had a long-term debt of $7,404.0 million, representing a debt-to-capitalization ratio of 21.7%.
Exploration Success
In a separate development, Apache announced two new oil discoveries in Egypt’s Western Desert, building on the integrated energy company’s leading position in this hydrocarbon-rich area.
The latest finds in the Faghur basin play – Deep-1X and Neilos-1X – will boost Apache’s growth prospects in Egypt by adding to its already significant interests in the country. In 2010, Egypt accounted for over 20% of Apache's oil and gas output. Year-to-date, the firm has drilled and/or completed eleven exploration wells, leading to nine new discoveries in the Faghur Basin region.
Our Recommendation
Apache – which has recently made combined asset purchases worth around $8 billion from BP plc (BP) and Devon Energy Corp. (DVN) – currently retains a Zacks #3 Rank (short-term Hold rating). We are also maintaining our long-term Neutral recommendation on the stock.
We like Apache’s large geographically-diversified reserve base, balanced exposure to natural gas and crude oil, and multi-year trends in reserve replacement and production growth. A pristine balance sheet helps the company to capitalize on investment opportunities and strategic acquisitions, thereby further improving growth visibility.
However, taking into consideration Apache’s sensitivity to gas/oil price volatility, as well as drilling results, costs, geo-political risks, and project timing delays, we see limited upside potential for the shares.
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