Image source: Apache Corporation.
Apache (APA 7.67%) is weathering the downturn better than many of its peers. That's largely due to the progress the company made over the past year to position itself to run on lower oil prices. Here are five things CEO John Christmann noted about the company's progress on its third-quarter conference call.
1. We've repositioned the portfolio
Christmann started off his prepared remarks on the call by pointing out that:
We have significantly streamlined and high graded our portfolio. The result is a focused North American onshore position with significant visibility and an international portfolio, which delivers tremendous free cash flow and very good exploration upside.
Apache has undergone a major transformation of its portfolio over the past few years, which is noted on the following slide.
Image source: Apache Corporation Investor Presentation.
One of the important accomplishments of this transition is a big reduction in the risk -- both geopolitically and in terms of project execution -- within the portfolio. This is after the company exited or reduced its exposure to politically unstable locales (Argentina and Egypt), while at the same time offloading projects that have a greater risk of cost overruns or coming up empty (LNG and the Gulf of Mexico).
Despite these changes, the company was still left with a balanced portfolio, but one that can deliver much more visible growth as well as a lot of cash flow, which is helping it manage through the downturn better than some of its peers.
2. We've enhanced our financial position
The other major accomplishment of this repositioning, according to Christmann, was that Apache
... Strengthened our balance sheet and liquidity. We used the proceeds from asset sales to pay down debt and to increase our cash position. During this time, we also refreshed and extended our credit facility. Apache's balance sheet is now a leader among our peers, which we have accomplished without issuing new equity.
Instead of using asset sales to fund a growing gap between cash flow and capex, Apache used these sales to bolster its balance sheet. The result is a financial position that's stronger than many of its rivals.
APA Debt To Capital (Quarterly) data by YCharts.
Chesapeake Energy (CHK +0.00%) is a prime example of a peer that used asset sales to plug a hole in its cash flow. After selling $5 billion in assets late last year, Chesapeake Energy used nearly $2 billion of that cash to fund a portion of its growth-focused capex plan, which is why its net debt continues to rise. Meanwhile, Anadarko Petroleum's (APC +0.00%) debt has risen partially due to the fact that it has a lot of long-term projects that are still under construction, including some in the Gulf, where Apache once was a partner.
3. We're ahead of the crowd in capex discipline
Speaking of capex, Christmann noted:
Over the last three quarters, we reduced our drilling and completion program to a level that is appropriately aligned with the current commodity price environment. Notably, we generated a cash flow to CapEx surplus in the second quarter and would have maintained a surplus in the third quarter if commodity prices hadn't further eroded. This need for spending discipline is something that many in the industry are just beginning to realize and pursue.
Apache's strategic shift provided it with much more capital flexibility than its peers, enabling it to generate free cash flow despite weak pricing. This is flexibility that Anadarko, for example, doesn't have right now because it has a number of major projects it needs to fund. Meanwhile, others like Chesapeake Energy have continued to pursue short-term growth to their detriment, with Chesapeake's financials really being eroded this year after vastly outspending cash flow. Chesapeake, like so many others, is just starting to realize that growth isn't being rewarded by the market right now.
4. We've made exceptional progress on cost reductions
Christmann continued with the progress update:
We have relentlessly pursued cost reductions both through supply chain efficiencies, as well as self-help through such things as improving wellbore and completion design. We made significant reductions in our run rate for both LOE and G&A costs, and we are taking steps to realize additional savings through the fourth quarter and into 2016 and beyond.
While cost reductions aren't unique to Apache, it was still a critical aspect of the company's multi-leg approach. This progress has been a key reason why it has been able to generate free cash flow at a time when peers like Anadarko and Chesapeake are piling on debt.
5. We're still exploring for future growth
Christmann concluded:
... We continue to leverage our technical expertise and experience to seek out potentially high impact, new resource plays by consolidating acreage and expanding our footprint within our existing operational basins. We remain highly disciplined in this effort. And it is important to note that we are not paying the high prices for acreage that are common in the high profile resource plays.
While a lot of oil companies have given up on exploration, Apache has continued to invest to lock up acreage in new resource plays that aren't yet industry hot spots. This is a move that could really pay off in the future.
Investor takeaway
Apache's success during the downturn is largely attributed to two key decisions it made. First, it started to transition its portfolio away from risky assets before prices even plunged. Even more importantly, it used the cash from those asset sales to bolster its balance sheet instead of using it to fund growth during the downturn. That's why the company has been much more resilient than some of its peers, which is putting it in a much stronger position to survive the downturn so it can thrive during an eventual industry recovery.
