U.S. Energy firm Apache Corp. (APA) reported weaker-than-expected fourth-quarter results, mainly due to higher lease operating expenses.
Earnings per share, excluding one-time items, came in at $2.19, below the Zacks Consensus Estimate of $2.44, while revenues of $3.4 billion missed our projection by 1.1%.
However, compared to the year-ago period, Apache’s adjusted earnings per share improved 11.7% (from $1.96 to $2.19) and quarterly revenue rose 34.4% (from $2.6 billion to $3.4 billion), driven by increased volumes and higher realized prices.
Operational Performance
The production of oil and natural gas averaged 728,657 oil-equivalent barrels per day (BOE/d) (50% liquids), up approximately 23.5% year over year. Oil and natural gas liquids (NGLs) production was up roughly 24.2% to 363,263 barrels per day (Bbl/d), while natural gas production, at 2,192.4 million cubic feet per day (MMcf/d), was 22.9% above that achieved in the fourth quarter of 2009.
Apache’s upstream growth momentum is retained organically as well as through acquisition. The reported quarter’s production increase was on the back of contribution from two Australian fields (Van Gogh and Pyrenees), as well as higher output from the recently-acquired Permian Basin, Gulf of Mexico, and Canadian fields.
The average realized crude oil price during the December quarter was $82.81 per barrel, representing an increase of 14.0% from the corresponding period of the previous year. The average realized natural gas price during the fourth quarter of 2010 was $4.06 per thousand cubic feet (Mcf), up 1.5% from the year-ago period.
Lease operating expenses totaled $639 million, up 54.4% from the $414 million in the year-ago quarter.
Balance Sheet
As of December 31, 2010, Apache had approximately $134 million in cash. The company had a long-term debt of $8.1 billion, representing a debt-to-capitalization ratio of 24.9%.
Our Recommendation
Apache currently retains a Zacks #3 Rank (short-term Hold rating), in line with its closest peers Anadarko Petroleum Corp. (APC) and Devon Energy Corp. (DVN). We are also maintaining our long-term ‘Neutral’ recommendation on the stock.
We like Apache’s large geographically-diversified reserve base, balanced exposure to natural gas and crude oil, and multi-year trends in reserve replacement and production growth. A pristine balance sheet helps the company to capitalize on investment opportunities and the option to make strategic acquisitions, thereby further improving growth visibility. However, taking into consideration Apache’s sensitivity to gas/oil price volatility, as well as drilling results, costs, geo-political risks, and project timing delays, we see limited upside potential for the shares.
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