Apache (APA, Financial) is counting on several initiatives to reduce its well costs in order to yield returns that will be competitive at $50 a barrel. Although it will reduce its cash flow for now, these short term pains will give promising returns in the coming years as oil prices get back on track.
Apache's smart moves
In response to the headwinds faced by the company on account of falling oil prices, Apache has taken decisive steps to reduce its drilling activity, well costs, G&A and lease operating expenses. This will improve its operational efficiency preparing the oil producer for future growth.
On the plus side, it continues to invest heavily in its operations at Egypt and North Sea, which offers steady and high rate of return. Not only that; the portfolio diversification benefits of these regions are significant for the company as they have 50% less downside sensitivity to oil prices compared to its North American operations. And most importantly, the management expects both these regions to generate free cash flow in 2015 at current strip pricing.
The oil market is quite unfavorable at the moment, yet Apache is highly confident of its future prospects on the back of these initiatives. During its fourth quarter press release, the management stated that,
“Regardless of how long oil prices remain depressed we plan to emerge in this downturn as a top-tier resource company in terms of drilling inventory, operational efficiency, cost structure and balance sheet strength.”
Conclusion
This is a bold statement especially in this environment. However, it is backed by strong fundamentals of the company along with its relentless efforts to make it in an industry leader. Its initiatives are good but then again its challenges in the near term cannot be neglected. Moreover, the crude price recovery is yet to kindle, which in fact, was the main reason bringing the stock to its 52-week low range. In the light of these factors it seems prudent for investors to watch the stock from side lines and look for a better entry point in the coming months.
