Apache Corporation (NASDAQ:APA) has been one of my favorite oil and gas stocks for a year now, even as its shares were losing more than 30% of their value over the course of 2017 -- this while some competitors, such as ConocoPhillips (NYSE:COP), saw shares rise by nearly 10%. But I'm not giving up on Apache, and neither should you.
Here's what to expect from this beaten-down oil and gas driller this year, and why.
First, a middling quarterly report
Coming up on Feb. 22, Apache is set to give its Q4 2017 earnings report, and while there are likely to be some bright spots, the overall picture will probably look decidedly mixed.
The company had originally projected very strong North American production, thanks to its monster "Alpine High" find, which should have been fully operational by Q3 2017. Unfortunately, Hurricane Harvey had other plans, damaging a Houston-area equipment manufacturing facility where key components of two Alpine High central processing facilities were being built. One of those facilities was scheduled to come online late in Q4 2017, but the other has been delayed until Q1 2018, which means the anticipated surge in Alpine High volume may not be as big as planned.
Couple that with some unscheduled downtime plus a dry hole in the North Sea in December, lower-than-expected quarterly volumes in Egypt, and the sale of the company's Canadian assets last year, and production is likely to be down. In fact, the company recently released a statement lowering its production guidance. That's unlikely to make the market happy.
Still, with average oil and gas prices higher in Q4 than in Q3, when the company was profitable, it's likely that the company will still manage to post positive net earnings and strong free cash flow, which should mitigate any fallout from the lower-than-expected production. CEO John J. Christmann IV said as much in a statement, announcing, "Robust Brent crude prices enabled our international operations to generate strong free cash flow during the fourth quarter despite the reduction in production volumes."
Once 2017 is fully in the rearview mirror, on the other hand, Apache's production numbers should ramp up significantly. The company is experiencing strong growth in oil production in its Permian Basin holdings -- which includes Alpine High. In fact, according to Christmann, "at Alpine High, we achieved our production target of more than 25,000 barrel of oil equivalents per day by the end of December." This should only continue to improve once the second central processing facility comes online this quarter.
In the North Sea, the company's successful subsea tieback installation -- which connected its new and promising Callater field to existing subsea infrastructure -- in 2017 should also help maintain production in the region, especially if there are no further third-party pipeline mishaps.
Meanwhile, in Egypt, Apache has been exploring some new land concessions that it has been granted in the country's Western Desert in 2016, adding to its 3 million existing undeveloped acres in the region. In Q3, the company initiated a new 3D seismic survey of its Western Desert holdings, and Christmann has stated that Apache intends to drill exploratory wells there once the survey is completed.
For the win
But of course, the biggest boon for the company in 2018 is likely to be the improved price of oil. Both Brent Crude prices, which generally govern Apache's North Sea and Egyptian plays, and WTI Crude prices, which govern Apache's North American assets, have stayed above $60 a barrel since the first of the year, and both finished January above $65. Considering Apache managed to turn a profit in Q3 2017, when crude prices averaged less than $52 a barrel, at current levels, the company should flourish.
Also, it makes it unlikely that Apache will cut its dividend. Many of its peers -- including ConocoPhillips -- were forced to slash their dividends as low oil prices cut into their cash flow. Apache kept its dividend intact, so that it now yields 2.2%, far higher than Conoco's 1.8% current yield. Of course, if the company's share price keeps rising, that yield will shrink. But either way, investors win.
It hasn't been easy being an Apache investor over the past few years. Between low oil prices and production delays, the company has underperformed both its sector and the broader market. But with a new year comes new potential, and Apache is in exactly the right position to finally give investors the win they deserve.