Two stocks. One price. Any buys?
Currently, shares of Apache Corporation (NYSE:APA) and Anadarko Petroleum (NYSE:APC) are both sitting just below $47/share. Earlier this year, though, Apache's per-share price was above $60, and Anadarko's was above $70! Let's look at which one of these beaten-down energy industry stocks is likely to have better performance for investors.
Apache and Anadarko each released their first-quarter 2017 earnings report in early May. Both companies performed better than the prior year, which is hardly surprising considering how much oil prices have increased since then. The companies' biggest rival ConocoPhillips (NYSE:COP), for example, saw a billion-dollar year-over-year improvement in earnings in Q1. Despite these improvements, all three companies' stock prices have suffered since.
Anadarko saw impressive sales volume growth during the quarter -- up a divestiture-adjusted 20% year over year. It was also able to enhance its product mix to 61% liquids versus 53% in the year-ago quarter. Because liquids command higher prices, this improved the company's overall margins. In spite of that, though, the company still didn't manage to turn a profit during the quarter, posting an adjusted $330 million loss.
Apache, on the other hand, posted a small profit, but on lower volumes than in the year-ago quarter. (although that wasn't unexpected). Revenue and cash flow were both up, and the company is seeing better-than-expected results from its Alpine High play (more on that later). Nevertheless, the market had hoped for more, sending shares downward after the announcement.
Both companies are clearly benefiting from an improved oil market, although there's still a long way to go. However, a profit beats a loss, so this one goes to Apache.
Especially in the current environment, when stocks across the industry are down and with no clear recovery on the horizon, a dividend can be a godsend for investors. The regular payout a dividend provides can reward investors for their patience as they wait for share prices to recover. Both Anadarko and Apache pay a dividend, although Apache's is much more robust.
In early 2014, both companies increased their dividend payouts. Anadarko upped its dividend to $0.27/share, while Apache raised its to an even $0.25/share. Of course, shortly thereafter, the bottom fell out of the oil market, and the entire industry started to suffer.
Anadarko held its dividend at that level for nearly two years, but eventually, Anadarko's management -- wisely, in my opinion -- bit the bullet and slashed its dividend to just $0.05/share, where it remains today. Apache, on the other hand, has been able to keep its dividend steady at $0.25/share and doesn't seem likely to cut it -- or, for that matter, raise it -- anytime soon.
That gives Apache an attractive current yield of about 2.1%. Which is close to best-in-class ConocoPhillips' 2.4% yield. Of course, some of the integrated majors, like ExxonMobil or Royal Dutch Shell yield far more or have a longer history of increases, but 2.1% is not bad, especially compared to Anadarko's tiny 0.4% yield.
The importance of past earnings and current dividend yield, though, pale in importance to a company's future prospects and performance. And both Apache and Anadarko are undergoing some changes that could have a big impact on their upcoming operations.
For Anadarko, the changes stem from an April explosion at a home in Colorado, which killed two people. Investigators discovered that an abandoned return flowline connected to a nearby Anadarko-owned well hadn't been properly capped. Gas from a cut in the pipeline seeped into the home, causing the blast.
As a result, Anadarko -- Colorado's largest gas producer -- was ordered to inspect all of its wells located within 1,000 feet of buildings. Anadarko wrapped up those inspections in early June and submitted a report to the state, but it's still unclear what further actions -- if any -- Anadarko might have to take. And of course, there are almost certain to be legal ramifications.
Apache, on the other hand, is busily developing the infrastructure at its monster Alpine High find in the Delaware Basin of Texas. The area around the find had been ignored by the industry until recently, so Apache is basically starting from scratch, but it's currently ahead of schedule and under budget. The company estimates production won't be able to start in earnest until the second half of 2017, and it won't really take off until 2018. In the meantime, the infrastructure development coupled with some scheduled maintenance downtime in the company's North Sea operations is going to make for lackluster performance.
The near-term outlook is uncertain for both companies -- particularly with oil prices dropping again. However, there's still a lot we don't know about Anadarko's Colorado operations and how the company will be affected overall. Apache's position -- sitting on a huge oil and gas find and just needing to build out some infrastructure -- seems much more secure.
And the winner is
Apache may not have had the best performance so far this year, but it pays a nice dividend and has excellent prospects for growth once its Alpine High find comes online. In fact, these factors convinced me to put my own money into the stock in May.
However, if things in Colorado can be resolved quickly for Anadarko, and if it can start turning a profit from its record production, it could still be worth a look. Today, though, Apache is the clear winner.