Apache Corporation (APA) reported its third quarter 2010 results on November 4. The reported results were disappointing, based on stagnant natural gas volumes and increased lease operating expenses.
Third Quarter Flashback
The company’s earnings per share, excluding one-time items, stood at $2.19, slightly behind the Zacks Consensus Estimate of $2.26. Total revenue of $3.00 billion missed the Zacks Consensus Estimate by 2.4%.
However, on a year-over-year basis, earnings per share improved 38.6% and revenues upped 29.2%, attributable to increased liquids volumes and higher realized prices.
Oil and natural gas production registered a 9.9% year-over-year growth, while oil and natural gas liquids (“NGLs”) production was up approximately 20.3%. The production of natural gas remained relatively flat compared with the prior-year quarter.
(Read our full coverage on this earnings report: Apache Misses Despite Strong Gains)
Earnings Estimate Revisions – Overview
Following the third quarter earnings release, estimates have been lowered, justifying the limited upside potential of the company’s shares based on an unstable natural gas pricing environment, project completion delays and geo-political headwinds.
Agreement of Analysts
Looking at the estimates’ revision trends, it becomes clear that the majority of the analysts project a bearish outlook for Apache’s fourth quarter and fiscal year 2010 results.
Of the total 19 analysts covering the stock, 2 have raised their estimates for the fourth quarter 2010, while 2 analysts have moved in the opposite direction, in the last 7 days. Over the last 30 days, only 4 analysts have shown a positive sentiment toward the stock, while 7 analysts have slashed their estimates.
For FY10, out of 20 analysts covering the stock in the last 7 days, 1 analyst has upped the estimate, while 1 analyst has downwardly revised the estimate. However, over the last 30 days time frame, 6 analysts hiked their yearly forecasts and 10 analysts curtailed their earnings estimates.
Magnitude of Estimate Revisions
Taking into effect the majority of the analysts’ downward earnings revision, the Zacks Consensus Estimate for the fourth quarter of 2010 sloped to $2.45 per share from the estimate of $2.48 per share over the last 30 days.
Similarly, the earnings estimate for FY10 also declined to $9.21 per share from $9.33 per share over the last 30 days, reflecting the analysts’ skeptical outlook toward the stock.
Earnings Surprise
With respect to earnings surprise, Apache exhibits a mixed trend in the last 4 quarters. The company’s trend expands from a negative surprise of 5.83% in the first quarter of 2010 to the positive of 4.72% in the second quarter of 2010. On an average basis, the earnings surprise was a negative 0.93%.
Our Recommendation
We believe Apache benefits from a large geographically-diversified reserve base, optimistic outlook for the foreign market in Egypt, well-executed asset acquisitions from BP Plc (BP) and efficient cost control initiatives.
However, the company’s vulnerability to the current economic downturn and commodity-price uncertainty compels us to maintain a long-term Neutral recommendation for the stock.
Apache currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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