In the hit Netflix series Stranger Things, we're introduced to the "upside-down," a bizarre sort of alternate universe. Lately, it seems like Apache Corporation (NASDAQ:APA) is living in the upside-down, because its stock goes down when it meets its goals, and despite giving a recent update that unnerved investors and sent shares tumbling, it still managed to turn in a respectable quarter, in which it returned to profitability after a dismal Q2 2017. Here's what the quarter ended up looking like.
The raw numbers
|Metric||Q3 2017||Q3 2016||Change|
|Production (adjusted)||354,000 BOE/d||438,000 BOE/d||(19.2%)|
|Net cash from operations||$554 million||$651 million||(14.9%)|
|Net long-term debt||$6.1 billion||$7.5 billion||(18.7%)|
|Earnings (loss) per share (adjusted)||$0.04||($0.03)||N/A|
Those raw numbers don't look so great, particularly the lower production and less cash from operations. But there are some great big asterisks to attach to those figures.
Earlier this year, Apache made deals to divest all of its low-margin Canadian operations, and finally closed those sales during Q3. So those Q3 2017 numbers reflect the loss of that production while the Q3 2016 numbers do not. The company's production actually finished right at the midpoint of the guidance it delivered in early October (hardly a surprise, given that Q3 had already ended at the time those projections were made).
So, the company had a decent quarter. But just a few months ago, Q3 was poised to be a blowout. What happened?
The Harvey situation
Hurricane Harvey is what happened. Although Apache's Houston headquarters and Texas operations only sustained minimal damage and disruption from the storm, hurricane-related disruptions hit the Texas oil and gas infrastructure pretty hard. Some of Apache's third-party midstream and downstream providers experienced hurricane-related damage, resulting in lower volumes for Apache, which contributed to some of the lower-than-expected volumes experienced during the quarter.
Another reason volumes were lower than expected is that two Alpine High central processing facilities have been delayed because of Harvey-related damage to their Houston-area equipment manufacturing facilities. Those facilities will now come on line in late Q4 2017 and Q1 2018, which means that the big surge in Alpine High volume that was supposed to come along this quarter will have to wait, probably until next year.
In spite of all that, production actually increased from Q2 2017, which the company had (correctly, it turns out) projected to be a low point for its production due to scheduled maintenance in the North Sea and the incomplete infrastructure buildup at Alpine High.
The transformation continues
It's safe to say that the Alpine High discovery has radically altered the company's strategy, with management now devoting more than two-thirds of its capital expenditures to developing the West Texas play. And early indications from the play indicate that these moves are already bearing fruit, with the play already producing 13,300 BOE/d, even with the Harvey-related infrastructure delays.
CEO John Christmann was pleased with the quarter's results:
During the third quarter, Apache delivered strong operational results and made great progress in our ongoing portfolio transition. In the United States, we returned our production to a growth trajectory and advanced our development program at Alpine High bringing new wells online, ramping up production, and further progressing our build out of infrastructure in the area. ... With our recent Canadian divestment, our portfolio is now increasingly weighted to our Permian assets including Alpine High, which offers a unique combination of high returns and tremendous scale. This portfolio rotation is a key step in transforming Apache's long‐term return on capital employed.
It's good to hear Christmann call out return on capital employed (ROCE), a key metric for gauging management's efficiency in deploying capital. With the oil price downturn, and then the delays in ramping up Alpine High production, Apache's trailing-12-month ROCE has been negative for nearly two years. It's good to know that management has its eye on the issue.
The price is right
All in all, it was a good -- if not stellar -- quarter for Apache, so of course the stock price declined over the course of the day after the announcement.
Ultimately, the company was able to increase production sequentially and turn a profit despite a hurricane and WTI crude prices staying below $50 per barrel during the quarter. And although the big Alpine High payday now seems a bit further off, the company's current share price of under $42 still seems like an "upside-down" bargain.