I'll be honest: I probably should have sold this stock the minute Saudi Arabia and Russia announced they were both going to boost oil production in April, which sent oil prices (and oil stocks) spiraling downward on March 9. When Occidental Petroleum announced an 86% dividend cut on March 10, the writing was really on the wall.
But I hung onto my shares of independent oil and gas exploration and production company (E&P) Apache Corporation (APA -2.26%) anyway, and on March 12, I got burned after the company slashed its dividend by 90%.
In the months since, I went back and forth on whether to sell or not. Here's why I finally pulled the trigger.
Apache Corporation looked set to outperform the stock market in 2017. Now it's one of the industry's biggest losers. Image source: Getty Images.
A bet on the Basin
I first bought shares in Apache in May 2017. The company's stock price had just dropped below $50 per share, which looked to me like a bargain.
In 2016, Apache announced it had picked up a huge plot of West Texas Permian Basin land on the cheap. That acreage, which Apache dubbed "Alpine High," turned out to contain far more oil and gas reserves than anyone expected. The area was undeveloped, so Apache immediately focused its efforts on building out the site's infrastructure.
After Apache's announcement, its share price shot up, and a bunch of copycat companies started paying top dollar for the land around Alpine High. So when Apache's share price fell to to $48 per share -- cheaper than it had been trading prior to the Alpine High announcement -- I bought more shares.
In July 2017, when the share price sank to $44, I picked up even more Apache stock, because at that point, the company's Permian acreage alone seemed to be worth more than half of its entire market cap. I was tempted to buy again when the share price dropped below $40, but didn't, and it's a good thing, too.
I sold my shares on May 28 for just over $12 each, about a 75% loss.
Busted thesis
Needless to say, Apache's big coup didn't pay off. Almost right as it got Alpine High up and running in mid-2018, oil and gas prices began to tumble thanks to global oversupply. Worse, Alpine High turned out to contain more natural gas and less oil than initially anticipated.
Worst of all, pipeline bottlenecks in the Permian Basin meant that producers like Apache couldn't get their oil and gas to the Gulf Coast for refining and processing. At one point, natural gas spot prices at the Waha Hub, which served the Permian Basin, turned negative, meaning producers like Apache needed to pay "buyers" to take the gas off their hands. By 2019, some new long-haul pipelines to the Gulf Coast were just beginning to ease the bottleneck. Then the price of oil collapsed.
In response, Apache announced it would "reduce its Permian rig count to zero," which means the billions of dollars it's sunk into Alpine High infrastructure has basically been for naught. Sure, if oil and gas prices rise significantly, those Permian reserves and existing infrastructure might be worth something. However, that doesn't seem likely anytime soon. Meanwhile, Apache may still be on the hook to pay for the capacity it's reserved on third-party Permian pipelines.
Much of this was due to industrywide trends outside of the company's control, although management is to blame for overestimating the amount of oil at Alpine High. But regardless of who's at fault, the Permian thesis for buying Apache is totally busted.
Not much left
So my initial Apache thesis didn't play out. But before I sold the stock, I double checked to make sure there wasn't some other compelling reason to hang onto it. What's left of the dividend definitely isn't worth it: at current prices, it only yields 0.8%.
Beyond its Permian position, Apache has operations in the North Sea and Egypt. Both of these have lower costs per barrel than its U.S. onshore production. Even so, neither is likely to be profitable at current oil prices, and the company has announced it will be reducing activity in both locations.
Apache has also begun exploration offshore Suriname, after ExxonMobil (XOM -0.72%) made a big discovery in next-door Guyana. That exploration is slated to continue, but it's unclear how much appetite Apache has for developing the deepwater project.
Basically, until oil and gas prices recover, Apache's stock is unlikely to recover either. And even when (or if) that happens, there's nothing particularly compelling about its portfolio to suggest that it's likely to outperform.
Not a strong pick
Perhaps the only reason to potentially pick up Apache shares right now is if you're very bullish on Permian Basin gas. A strong recovery there would increase the value of Alpine High and reignite the thesis I initially bought into. However, I'd rather put my money into a stronger thesis rather than wait around while only earning 0.8% from Apache's dividend.
Ultimately, we don't know when -- or if -- a recovery will come to the Permian Basin or to oil and gas prices in general. And even if it arrives sooner rather than later, there are better picks in the energy industry -- including the aforementioned ExxonMobil, which has maintained its dividend and has much stronger fundamentals besides.
