Of all the oil and gas exploration and production companies reporting earnings this week, the one I've been watching most closely is Apache (NYSE:APA). The driller reported a big find in West Texas last year, dubbed Alpine High, and the company has altered its operations to exploit it. 

But that shift in strategy has led to short-term underperformance, which was on display in the company's Q1 2017 earnings reported May 4. Here's what happened.

Oil pouring from barrel.

Apache's production declined as expected in the first quarter. Image source: Getty Images.

The raw numbers

MetricQ1 2017Q1 2016Change
Production (adjusted) 398 million BOE/D 486.0 BOE/D (13%)
Revenues from production $1.5 billion $1.1 billion 36.4%
Cash flows from continuing operations $730 million $471 million 55%
Earnings per share (diluted) $0.56 ($0.98) N/A

Data source: Apache Corporation. BOE/D = Barrel of oil equivalent per day; figure excludes tax barrels, noncontrolling interest, and divestitures. Chart by author.

Looking ahead

Apache had a much better quarter than it did last year, posting positive earnings on both a GAAP and an adjusted basis. Revenue was also way up, as was cash flow. Production declined, but this wasn't unexpected. In its Q4 earnings report, the company predicted that production would fall from the 421 million BOE/D it reported that quarter to just 372 million BOE/D in Q2 2017. This quarter's figure of 398 million BOE/D is almost right in the middle.

One of the reasons Apache's production has dropped so far is that the company has been devoting much of its resources -- including 63% of its 2017 capital expenditures -- to developing its Permian Basin plays, including the Alpine High field in West Texas. And those developments have been very encouraging this quarter.

The company drilled three new test wells at Alpine High during the quarter: one well each in the Woodford and Barnett shales, and a lateral test well. The Woodford and Barnett wells featured the highest percentage yields to date of higher-margin oil as opposed to lower-margin gas. The new Woodford well is producing oil over gas at a ratio of 73:1 while the Barnett well is producing oil over gas at an impressive 141:1. This is good news for a company that derives 78% of its revenue from oil.

What management had to say

Management clearly intends to stay the course. CEO John Christmann said:

During the first quarter, we delivered strong results and made notable progress toward our 2017 strategic objectives. Earlier this year, we outlined a plan to deliver returns-focused growth by budgeting conservatively, investing to sustain free cash flow internationally, and increasing investment in the Midland and Delaware basins. We are maintaining a razor-sharp focus on costs and well optimization and actively managing our portfolio. ... At Alpine High, testing and delineation have continued with strong results that reinforce our confidence in this world-class resource play.

Investor takeaway

The market didn't like Apache's performance for the quarter, and treated the stock accordingly. Shares took an immediate beating after the announcement, but trended higher throughout the day to close down 1.8%, just below $48 per share. That's a 52-week low. 

This is an excellent buying opportunity for those who believe -- as I do -- that Alpine High will be a game-changer for the company. Savvy investors clearly saw opportunity as they snapped up shares on the cheap in the wake of the initial drop. With real growth unlikely until the second half of 2017, though, there's still plenty of time to buy in to the company's exciting growth story.

John Bromels has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.