At first glance, Apache's (NYSE:APA) fourth-quarter results may look pretty awful. Quarterly earnings plunged 73%, as companywide production fell 14% year over year. But a closer look reveals a company in much better financial health and with a more streamlined portfolio capable of generating stronger returns in the years ahead. Let's take a closer look.
Why Apache earnings plunged
Apache reported fourth-quarter earnings of $174 million, or $0.43 per share, down from $649 million, or $1.64 per share, a year ago, largely because of lower output affected by asset sales and unusually harsh winter weather in the United States.
Companywide production in the fourth quarter averaged 688,000 barrels of oil equivalent, or boe, per day, down from an average of 800,000 boe per day in the same quarter a year ago. On the plus side, however, the company's onshore North American liquids production surged 34% in 2013, while it replaced 140% of 2013 production through the drill bit.
Asset sales allow greater focus on U.S. assets
In my view, this is what's really important, since the company's growth over the next few years will come increasingly from its onshore North American operations, as opposed to from its international assets. Apache has made major strides in whittling down its global asset portfolio to focus on higher-value opportunities in the U.S., particularly in Texas' Permian Basin and Oklahoma's Greater Anadarko Basin.
Several of Apache's peers are also zeroing in on onshore U.S. resource plays, while shedding riskier international assets. ConocoPhillips (NYSE:COP), for instance, has divested foreign assets in Kazakhstan, Algeria, and Nigeria to focus on higher-margin opportunities in the Bakken, Eagle Ford, and Permian Basin, while Occidental Petroleum (NYSE:OXY) is looking to offload a minority stake in its Middle East business as it plans to ramp up activity in California and the Permian basin.
Similarly, Anadarko Petroleum (NYSE:APC) sold its interest in a gas field offshore Mozambique last year and will use the proceeds to accelerate activity in the Eagle Ford and Colorado's Wattenberg field, while Devon Energy (NYSE:DVN), one of the first companies to kick off this trend, unloaded almost all of its international assets back in 2009 and 2010 to focus primarily on the Permian Basin.
Positive impacts of asset sales
The proceeds from these asset sales have allowed Apache to greatly improve its financial flexibility, as well as return more cash to shareholders. Last year, it used a portion of the sales proceeds to reduce its debt by $2.6 billion, while also repurchasing $1 billion of its own shares. This allowed the company to exit the year with a healthy debt-to-market capitalization ratio of 22% and $1.9 billion in cash.
But perhaps more importantly, asset sales will allow Apache to make its onshore North American operations the centerpiece of its growth strategy. These assets, which offer more attractive and more predictable rates of return in excess of 30% after taxes, now represent about 71% of the company's reserves, up from around 30% in 2009, and continue to deliver robust production growth.
In the fourth quarter, production from its Permian and Central regions grew 13% and 18%, respectively, as Permian volumes surged to a record 134,000 boe per day. Meanwhile, operating costs continue to fall, with fourth-quarter lease operating expenses down 11% year over year to around $10 per boe, making Apache one of the lowest-cost operators in these regions.
Though Apache won't provide its 2014 capital budget until later this month, investors can expect the company to once again allocate the largest portion of its budget toward its Permian and Central operations. Already, these regions account for 33% of companywide production, up from 27% just in the second quarter of last year.
Going forward, I expect these areas to account for an even larger share of companywide production, which bodes well for stronger cash flow growth and further dividend increases. Indeed, Apache announced earlier this month that it will raise its 2014 quarterly dividend by 25% to $0.25 per share -- a reflection of its confidence in delivering solid growth from its onshore U.S. operations.
The bottom line
Despite near-term production concerns resulting from recent asset sales, Apache is extremely well positioned to capitalize on the U.S. oil boom. Its assets in the Permian and Central region should continue to drive robust double-digit production growth, while its international assets will keep pumping in cash. With shares of Apache trading at just 10.3 times forward earnings -- a significant discount to its peer group -- I believe the stock presents compelling value.