Apollo Investment Posts a Loss From Credit Losses

Apollo Investment (AINV 2.00%) reported yet another quarter of depressed earnings stemming from losses in its oil and gas investments. Given low expectations for the company due to its portfolio construction, Apollo shareholders can take small comfort in the fact that the results could have been much worse.

Apollo's quarter by the numbers
Compared to the prior year, Apollo's net investment income (a figure which excludes capital gains and losses in its portfolio) and net increase in net assets (a figure inclusive of all income, including gains and losses) fell. Book value also took a hefty hit year over year, led by losses from commodity-related investments.

What happened this quarter?
Apollo is slowly reducing its exposure to poorly performing industries and allocating its capital to non-commodity investments and share repurchases.

• The company monetized investments in two oil companies this quarter, and happily reported on the conference call that its mining exposure is "de minimis" as of this quarter.
• Higher dividend income from its portfolio companies helped its net investment income this quarter. Apollo reported $14.4 million in dividend income, clarifying on the conference call that it expects $10 million to $11 million in dividend income from its portfolio companies on a quarterly basis in future quarters.
• Oil investments now make up 15% of the portfolio at fair value. Two of its largest investments, Caza Petroleum (NASDAQOTH: CAZFF) and Walter Energy (NASDAQOTH: WLTGQ), should soon have positive events to report for Apollo. Caza is attempting to raise new capital to repay Apollo. Walter Energy filed for bankruptcy, and Apollo executives pointed out that it is currently marked at Apollo's expected recovery. These two account for 22% of its oil and gas investments at fair value.
• Non-accrual investments -- investments on which Apollo is no longer recognizing income -- grew to 4.7% of investments at cost, and 2.2% at fair value. Miller Energy makes up substantially all of its non-accrual assets at fair value, and should come off non-accrual when the company exits bankruptcy.

What management had to say
On the conference call, management indicated that refinancing some of Apollo's debt could add about $0.06 per share in net investment income on an annual basis, helping earnings in future quarters.

Additionally, the company is making use of its repurchase program at current share prices. In the press release, James Zelter, Apollo's CEO, said, the company "repurchased over $21 million of common stock during the quarter. Given where our stock is currently trading, we intend to continue repurchasing shares."

Repurchases are highly accretive to book value and earnings on a per-share basis. As it sits today, shares trade at a 30% discount to book value. Buying shares back, and in quantity, is like buying dollar bills for just $0.70 each.

Looking forward
Easy losses in the company's oil and gas portfolio are likely to have been realized by now. Its largest individual credits in the industry will soon be worked out. And the company is making smart capital allocation decisions by buying back stock at significant discounts to book value.

Apollo simply needs to execute on its plans set forth in prior conference calls by reducing energy exposure, shifting to investments that generate current cash income to support its dividend, and boost book value per share by buying back stock when it trades at a significant discount.