As members of the energy sector continued to check in with their individual results this week, Apache (NASDAQ:APA), the fourth-largest U.S.-based independent producer, clearly didn't impress Mr. Market. With earnings results falling short of expectations, its shares dipped by 4.7% on Thursday, the company's release day.
May I call you miss?
For the quarter, Apache reported net income of $649 million, or $1.64 per share, down significantly from $1.17 billion, or $2.98 per share, for the final quarter of 2011. After backing out items, however, adjusted per-share earnings were $2.27, representing a miss from the $2.30 expected by analysts.
The primary culprits in shaping the weaker quarter were lower oil and gas realizations and increased labor costs. It appears that the average price that Apache received for oil dropped by nearly 4%, while NGL realizations were fully 26% lower.
From the standpoint of oil, gas, and liquids production, the company averaged 800,005 barrels of oil equivalent in the quarter, a 5.4% increase on a year-over-year basis. Of that total, 53% constituted liquids. The company's output of oil and natural gas liquids was about 11.4% higher at 425,867 barrels per day. However, natural gas production retreated to 2,244.9 million cubic feet per day, slippage of 0.8% from the comparable year-ago quarter. According to CEO G. Steven Farris, but for unplanned downtime in the North Sean and the traipsing of Hurricane Isaac through the Gulf of Mexico, the overall production total would have been higher.
Apache's capital spending totaled $2.83 million in the quarter, bringing the full-year total to $10.03 billion. Management indicated an expectation that capital expenditures will constitute about $10.5 billion during 2013. At the same time, the company anticipates jettisoning about $2 billion in assets this year, although the specific locations of its for-sale signs are unclear at this point.
Solid reserve replacement
In a related area, Apache managed to add reserves totaling 372 million barrels of oil equivalent during the entirety of 2012. Importantly, that figure came to 131% of the year. And if acquisitions were added to the mix, the reserve replacement rate would have come to a relatively impressive 156%, excluding revisions.
Following the close of the quarter, Apache completed a transaction that raised its stake in northern British Columbia's Kitimat LNG project to 50%. At the same time, it transferred operator status to Chevron (NYSE:CVX), which, through a series of transactions involving prior partners in the project -- namely, EOG Resources (NYSE:EOG) and Calgary-based Encana (NYSE:OVV) -- had accumulated a 50% interest of its own.
A quick tour of operations
Focusing on Apache's operations during the quarter, it's appropriate to begin with the Permian Basin of southwester Texas and southeastern New Mexico. The company is the majordomo in that relatively elderly -- albeit revitalized -- play. For the fourth quarter in the Permian, Apache produced nearly 118,000 barrels of oil equivalent per day, 74% of which was liquids. That output accounted for about 15% of the company's total output.
In the Gulf Coast onshore regions, management intends to average four working rigs during 2013, of which three would be operated. The result is likely to be approximately 39 well completions for the year. In the nearby deepwater Gulf of Mexico, the company expects to drill three operated exploration wells and four non-operated development wells.
As for the the company's operations in the British Commonwealth, Apache expects to drill about 150 wells in Canada in 2013, with a focus on oil and liquids-rich gas plays and the horizontal exploration of several plays. Also receiving attention will be testing of the sizable Montney and Duvernay plays, where the company controls substantial acreage. In Australia, management anticiaptes spending about $1.9 billion, largely for the drilling of about a half-dozen wells.
According to Rodney Eichler, the company's president and chief operating officer, in Egypt, "Our operations continue uninterrupted. This asset remains a highly profitable piece of (the) Apache portfolio, and as such we plan to make a similar investment in 2013 as we did in 2012. This will allow us to drill over 270 wells, including over 60 exploration wells." And in Argentina, the company expects its investment level will also be consistent with recent years. The result is likely be the drilling of about 20 wells in the South American country this year.
In concluding the company's post-release call, CFO Thomas Chambers said, "We had a solid year of production revenues, cash flows resulting from our active drilling program. We have built a strong foundation for cash flow generation and support (for) both our ongoing drilling program and our inventory of longer-term development projects as we head into 2013."
The bottom line
So, Apache fell significantly short of the solid results of the somewhat smaller EOG, for instance. Indeed, it even missed expectations for its own results. But while the larger company is down, it's hardly out. I'm inclined to monitor it carefully, while avoiding the slippage of any pesos in its direction for now.