Just when you thought Apache Corporation (NYSE:APA) was in the clear, disaster struck in the form of Hurricane Harvey. Early reports from the Houston-based oil industry bigwig indicated that the company's operations were still on track. But all that changed in early October.
The company threw a wrench into the works in a presentation revealing that Harvey's impact on its Q3 2017 might be bigger than anyone thought, and the share price dropped in response. Here's what to look out for when Apache reports Q3 earnings on Thursday, Nov. 2.
Q3 was supposed to be a monster quarter for Apache. Its subsea tieback to its Callater discovery in the North Sea -- which caused significant downtime and production declines in Q2 -- was successfully installed, with oil flowing. Its infrastructure build-out at its new Alpine High discovery in the Permian Basin of West Texas was scheduled to be far enough along that oil and gas could begin flowing in earnest from the major play. And the sales of its Canadian assets earlier in the year meant less low-margin production -- and more cash -- on its books.
And then along came Hurricane Harvey.
At first, things looked as if they were going to be fine. The company, which is headquartered in Houston, reported no significant damage to its corporate headquarters and said in a statement that it experienced only "minor" direct impacts to production. Investors breathed a sigh of relief.
Then, in early October, the company announced that some of its third-party midstream and downstream providers had experienced hurricane-related damage, resulting in lower volumes for Apache. Worse, two Alpine High central processing facilities have been delayed because of "Harvey-related damage to Houston-area manufacturing facilities that are providing key infrastructure equipment." Those facilities will now come online in late Q4 2017 and Q1 2018.
While all of this should be short-term, it's probably going to turn what should have been a banner quarter for production into a middling one. The good news is that the market is aware of these issues and has already priced them into the stock, which is in bargain territory again.
Speaking of production
Apache has adjusted its production guidance downward as a result of these issues, but only slightly. Management had previously predicted production of between 208,000 and 214,000 barrels of oil equivalent per day (boe/d) in Q3 from North America, and it's now anticipating between 206,000 and 208,000 boe/d. Considering it delivered that estimate in early October, after Q3 had already ended, it should be fairly accurate. Q4 North American production estimates were also downgraded.
In addition, extended downtime in the North Sea caused the company to reduce the upper end of its Q3 international production guidance from 156,000 boe/d to just 148,000. The lower end of its guidance remained unchanged at 146,000 boe/d. A dry hole in the North Sea will also affect Q4 production, Apache said.
In spite of all these delays and lowered production estimates, Apache's Permian Basin operations are ramping up nicely, with an estimated 18%-28% production growth in the second half of the year from the region's Q2 lows. That said, it looks as if we'll have to wait until Q1 2018, when the Alpine High infrastructure is fully built out, to get a clear sense of the company's future. For the time being, investors should note whether there have been any changes in the company's production guidance between early October and now.
Apache isn't the only oil driller whose stock price has tumbled this year. Peer companies such as Hess and Anadarko Petroleum have seen nearly identical performance to Apache this year:
That's mostly due to lackluster oil prices, which have spent much of the year stubbornly below $50 a barrel. While all of the major oil drillers have been affected, it's particularly troubling for Apache because of the resources it has committed to Alpine High.
Apache will spend $3.1 billion on Alpine High infrastructure in 2017, and a similar amount in 2018. Unfortunately, it made plans to pay for some of that spending assuming a $50-per-barrel average WTI oil price in 2017, and a $55-per-barrel average price in 2018. That ain't happening in 2017, and 2018 looks iffy, too. There's no way Apache can avoid the big infrastructure expenses without drastically reducing Alpine High production. And the last thing Apache needs right now is to further cut its production guidance.
CEO John Christmann said Apache has several options for 2018 to solve this dilemma:
In 2018, we have a number of levers that we can pull to offset any outspend. These could include changes in planned activity levels, ongoing operational efficiency improvements, continued non-core assets sales, and an Alpine High infrastructure monetization. We also plan to end 2017 with approximately $1.7 billion of cash, so we will have plenty of liquidity going into 2018.
In other words, Apache's not exactly sure what it's going to do. So investors should listen carefully for any hint of what Christmann has planned, because it could have a serious impact on the company's balance sheet.
Will Apache get back on track?
The timing is bad for Apache, which had clearly been hoping to announce that it had "turned the corner" in Q3 with higher production, better margin, and improved prospects. However, it now seems as though it's going to limp into 2018 rather than gallop.
Still, everything the company is reporting from Alpine High seems to bolster the case that building out the infrastructure quickly, despite the expense, is the right move. We can hope that the rest really is a temporary setback. But it's no lie to say that Apache isn't looking quite like the slam-dunk investment it seemed to be only last quarter.