Brace yourselves: Oil and gas exploration and production company Apache Corporation (NASDAQ:APA) is predicting lower results for the second quarter of 2017. We'll see just how much lower when it reports earnings on Aug. 3.
That's in contrast to its bigger industry rival, ConocoPhillips (NYSE:COP), which reported improved adjusted earnings on July 27. Here's what to look for as Apache reports on Q2.
Alpine High or Alpine lower-than-expected?
Apache has been plowing resources into its big Alpine High find in West Texas. Part of the Delaware Basin -- which in turn is part of the larger Permian Basin -- Alpine High is projected to contain 3 billion barrels of oil and 75 trillion cubic feet of natural gas.
The company has devoted plenty of resources, especially in the form of capital expenditures, to getting Alpine High ready for prime time. And the initial results from wells drilled there during Q1 have been promising. The two new test wells yielded the highest oil-to-gas ratios to date, and an azimuth test well was successful. Even better, the company reported in Q1 that its infrastructure projects at Alpine High were two months ahead of schedule and under budget.
You can bet that Alpine High will once again be front and center on the earnings call. Smart investors should make sure things are still firing on all cylinders and that there are no unexpected issues announced, which would almost certainly derail the company's production projections for the year.
Earlier this year, the company sold its entire Canadian operations in three separate transactions, which netted the company $713 million in cash. This has been a popular strategy among non-Canadian oil companies this year. ConocoPhillips, for example, sold many of its Canadian oil-sands assets to Cenovus for $13 billion in March, and Royal Dutch Shell sold most of its Canadian oil-sands assets to Canadian Natural for $7.25 billion in May.
Compared with those monster transactions, Apache's exit may seem like small potatoes, but considering Conoco is three times Apache's size, and Shell is nearly 13 times its size, it's still a significant sale for the company. The question now is what Apache will do with all that cash.
When it announced the sale, Apache said it would use the cash for additional capital improvements, for debt reduction, or to increase the company's liquidity. Apache also will have some money left over from its $125 million Canadian capital expenditure allocation for 2017 that it said it would allocate to other areas of its portfolio.
I'll be listening to see whether Apache makes a definite announcement about where it intends to deploy this cash, or whether it keeps things flexible for now. If management decides to put it toward additional Alpine High infrastructure development, it would send a very different signal about the company's priorities than if it used the money for debt reduction or overseas development.
Apache has been forecasting a production decrease for Q2, in part because of maintenance in its North Sea operations, where the installation of a subsea tieback to its new Callater field will require some downtime. Meanwhile, production at Alpine High hasn't yet begun to ramp up, and a seismic 3D project that should improve the company's production in Egypt hasn't wrapped up yet.
Still, investors should look at the company's total production in Q2 to see how it compares with the company's projected 386,000 barrels of oil equivalent per day, before adjustments. That should give some insight into how accurate the company's projections are for future quarters.
And speaking of future quarters, while the Canadian dispositions will reduce production from the company's projections, investors should still see how well the company's projections are holding up for Q4 2018 -- the farthest out Apache has estimated. In May, the company predicted production of 537,000 barrels of oil equivalent per day, before adjustments. We'll see how well that number is holding up after the Canadian dispositions and with two additional months of Alpine High data factored in.
Even in what's predicted to be a lackluster quarter for Apache, there's plenty of information that can tell us what the future may hold for the company. The progress -- or lack thereof -- at Alpine High, where the company deploys the cash from its Canadian asset sales, and the company's production numbers will all be important indicators of what to expect from Apache.
One other thing to look for is how the company's share price reacts to the earnings announcement. If it drops, and there's no corresponding shift in the company's prospects, it may be an excellent opportunity to buy.