Images source: Apache Corporation.

Apache (NASDAQ:APA) worked hard during the oil market downturn to right size its business for the current environment. While the process has taken time, the company is making tangible progress. That was evident on the company's second-quarter conference call, with CEO John Christmann highlighting four important takeaways that demonstrated its improvement.

1. Our financial results were solid

Christmann led off the highlight reel by saying:

First, we delivered another solid quarter of adjusted earnings and operating cash flow. This underscores the significant progress we have made on costs and the resilience of our portfolio in a low price and low reinvestment environment.

While most of its rivals are reporting deep quarterly losses, Apache reported adjusted earnings of $20 million, or $0.05 per share. Even better, it generated $781 million in net cash from operating activities. That cash flow is crucial during the current environment because it enabled Apache to fund its capex and dividend with cash to spare. In fact, the company generated roughly $200 million in excess cash flow during the quarter, which bolstered its cash position, pushing its net debt lower.

2. Our costs are falling

Christmann continued:

Second, we have been working all aspects of our cost structure for more than 18 months. Last year, the majority of our cost savings came from G&A reductions and capital efficiencies. While these costs continue to improve, we are now seeing most of our significant savings coming from LOE [Lease Operating Expenses].

A critical reason the company generated excess cash flow last quarter was its ability to push costs down. In particular, LOE costs are down sharply and averaged $7.38 per barrel of oil equivalent during the quarter, which is 17% below the year-ago quarter. That's allowing the company to mute some of the impact of lower oil and gas prices on its production, which is improving its cash flow.

3. Production is holding up

Next, Christmann pointed out:

Third, production volumes continue to hold up well and track in line with the increased guidance range we provided last quarter. Our production expectations for the full year remain unchanged.

Heading into the year, Apache projected that its production would decline by 7% to 11% year over year as a result of its decision to cut its capex budget by 60% over what it spent in 2015. However, thanks to stronger-than-expected production in its North American onshore plays, the company boosted its full-year guidance in the first quarter. It maintained that steady pace in the second quarter, putting it on track to hit its updated production guidance.

Driving Apache's better-than-anticipated production was the "solid performance from our base production and very good results from maintenance projects and new drilling" in the Permian Basin. That is not all that surprising considering what its peers in that legacy oil basin have experienced this year. For example, leading Permian driller Pioneer Natural Resources (NYSE:PXD) exceeded its production guidance in both the first and second quarters as a result of robust production from recent wells drilled in the Permian. That enabled Pioneer Natural Resources to increase its production growth guidance from its initial outlook of 10% up to 13%+.

4. We have optionality

Christmann concluded by saying:

Finally, with our cost structure better synchronized with the lower oil price environment and with the potential for prices to exceed our $35 budget for the year, we can see a path to more normalized investment levels. Our conservative budgeting approach coupled with incremental cash flow in the second quarter now gives us the optionality to increase investment activity. Any incremental investment will continue to be made within the construct of our rigorous capital allocation process and within operating cash flow.

Apache initially set its budget to be cash flow break-even at $35 oil. However, with oil well above that level, the company has the potential to generate excess cash flow, which it could reinvest into new wells. That is something a growing number of its peers are doing. Pioneer Natural Resources, for example, recently boosted its capex budget by $100 million, which sets it up to accelerate production growth next year to a range of 13% to 17%.

Investor takeaway

Christmann's overarching message was that Apache made substantial progress on its plan so that it is now in the position to thrive at lower oil prices. Because of that, it's starting to think about restarting production growth as it heads into 2017.

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