Apache Corporation (APA, Financial) has oil wells in some key locations, providing it with numerous stack pay prospects and a major long-term competitive advantage for the company. The management at Apache has proactively minimized its drilling operations, G&A, well costs and rented operating expenditures to counter a sharp decline in the oil prices.
Optimizing the portfolio is a smart move
The significant efforts of Apache to reduce its cost structure by selling off its non-strategic operations are believed to help the company in fighting the fall of oil prices.
Apache’s key operations at the North Sea and Egypt are estimated to prove complementary to its solid cash flow and production in North America. However, both these regions are believed to generate significant free cash flows in 2015 at present low costs.
In Australia, Apache is focused on the possible monetization of its outstanding non-LNG assets which are believed to have greater value highlighted by long-lasting fixed price natural gas agreements.
The smooth operations at the Egypt and North Sea coupled with a significant hidden value in the company’s non-LNG assets are forecasted to benefit Apache in the long term and hedge it against the rapid decline in oil cost.
In the third quarter of 2014, Apache ran 91 onshore rigs in North America. By this month's conclusion, Apache is expected to have lowered its rig count to 27.
Apache is also postponing the development of some backlog wells till the time costs of pressure pumping reset to levels and closely signifies the present pricing scenario of the commodity.
The closure of a majority of rigs in North America along with the delay in building its wells in the backlog is estimated to allow Apache for controlling expenses and drive long-term profitability and sustainability.
Ramping up operations
Apache is highly confident about efficiently ramping up its drilling activities in the Permian, Eagle Ford and Canyon Lime for delivering superior production and significant cash flow development post recovery and stabilization of oil prices at improved levels.
The progressive industry slowdown and major decline in oil price has created several positive effects that are estimated to significantly improve its ability to deliver robust long-term investor returns.
The confident operations of Apache at its key rigs are believed to be supported by the current fall in oil price and the ongoing industry slowdown.
Apache estimates its pro forma onshore production to remain nearly constant for North America and its pro forma offshore and global production to grow a little in 2015. Therefore, the company’s net pro forma production in 2015 is forecast to remain comparatively unaffected from 2014.
During the fourth quarter of 2014, there was 5% sequential and 20% year-over-year growth in onshore liquids production in North America. The production at Permian was the highest and proved to be a major growth driver for the company. Apache operated 42 rigs in the fourth quarter and believes to bring this down to nearly 15 by this month closure.
The steady pro forma onshore production and improved onshore liquids production in North America is estimated to drive significant long-term profitability for the company.
In 2015, Apache targets on developing approximately 10 to 12 rigs on an average in the Permian of which nearly four are expected in the Delaware Basin, five in the Midland Basin and two rigs are forecasted to be drilling at improved rates of return from both the horizontal and vertical wells on the Central Basin platform in Northwest Shelf.
In the Central Region, total production enhanced by 3% on sequential basis for the quarter with Apache completing 72 overall wells in several inherited Anadarko Basin formations.
The new rig development at Permian signifies the robustness of the company operations, only slightly being affected by the macroeconomic slowdown and falling oil prices.
In Canada, Apache is wrapping up its three-rig drilling schedule in the Montney and Duverney and expects to introduce the operational rigs for the rest of the year. Apache targets completing a seven-well pad in the Duverney during the third quarter and continues to craft a long-term plan for processing prospective Montney gas production.
The decision of Apache to undo the planned sale of its Egyptian and North Sea assets has forced the analysts at Bank of America Merrill Lynch to raise their rating and price target for the drilling major.
The consensus of 44 polled investment analysts dealing with Apache Corporation suggests investors to hold their position in the company after the decline of analyst sentiments in February 2015. The earlier expectation was for the company to outperform the market.
Conclusion
Overall, the investors are advised to avoid investments into the Apache Corporation as of now looking at the stock overvaluation with forward P/E of 42.69. The PEG ratio of 2.94 suggests slower company growth. The profit margin of -39.83% depicts no profit but loss. Diluted EPS of -14.07 signifies decline in shareholder earnings. Apache is also burdened with huge debt having total debt of $11.24 billion and total cash of $769.00 million only.
