The third quarter of 2017 should have been Apache Corporation's (NYSE: APA) big moment. The company's surprise Alpine High play in West Texas was ready to start pumping oil in earnest, its subsea tieback in the North Sea was being installed ahead of schedule, and it had managed to do it all without cutting its dividend like ConocoPhillips (NYSE: COP) and many other oil and gas industry companies had.
Unfortunately for Apache, Q3 arrived with a whimper, not a bang, and the company limped to the end of 2017 with a stock price that was down 33.5%.
Here's where things went wrong for Apache in 2017, and why the stock market may be a whole lot kinder to the beaten-down oil driller this year.
First, what went right
It wasn't all bad for Apache in 2017. The company announced that it would be building out the infrastructure of its massive Alpine High find, and those improvements were running ahead of schedule in the first half of the year.
During that time, the company took a page from Conoco's playbook and sold off many of its underperforming Canadian assets. That was good for both the company's balance sheet and its operating margins, because while some companies had been able to get competitive returns out of the resource-intensive heavy crude and bitumen that come from Canadian oil sands, Apache was never one of them (neither was Conoco, for that matter).
In July, Apache went a step further than Conoco and just threw in the towel on Canada altogether, selling what was left of its Apache Canada Ltd. subsidiary to Paramount Resources Ltd. The combined transactions netted the company about $713 million, which management plans to use to reduce debt or fund additional capital expenditures.
Unlike Conoco's share price, though, Apache's didn't jump after any of these transactions were announced. But it sure did take a hit later in the year.
The planned and the unplanned
Apache's stock tanked hard after it reported lackluster Q2 2017 earnings. The company reported an adjusted quarterly loss of $0.21 per share and lowered its production guidance for both 2017 and 2018.
This was actually something the company had been projecting for several quarters. During Q2, the installation of a subsea tieback -- an underwater connection between Apache's new Callater discovery and its existing production fields -- in the North Sea was going to curtail production there. Also, incomplete infrastructure at Alpine High meant it wasn't yet producing at meaningful levels and the sale of the company's Canadian assets was always going to affect 2018 production. So it should have come as no surprise. But the market shaved 8% off the stock anyway.
But in late August, something decidedly unexpected happened: Hurricane Harvey. The storm had three big effects on Apache's operations:
- Apache's corporate headquarters in Houston was closed for a week as floodwaters ravaged the city. Luckily, it escaped without any significant damage, so that impact was minimal.
- Harvey caused production shut-ins of between 1,000 and 2,000 barrels of oil equivalent per day and also impacted third-party downstream infrastructure on the Gulf Coast, disrupting key markets for Apache's Permian Basin oil and gas. Approximately 2% to 3% of Apache's gross operated sales volumes from the Permian Region was impacted during the storm and its aftermath.
- The storm damaged third-party Houston-area manufacturers that were making components for two Alpine High central processing facilities, which were delayed until late 2017 or early 2018, pushing back the big surge in volume from Alpine High.
The third effect in particular turned what should have been a blowout third quarter into merely a profitable one. Investors had expected more, and the stock continued to slide.
The delays in Alpine High production coupled with some unscheduled North Sea downtime in the final week of 2017 is likely to cause Apache to miss its original 2017 production goals. So it won't be until the company reports Q1 2018 earnings that we'll actually start seeing what Apache is capable of when all of its operations (Alpine High, North Sea, and everything else) are online.
It's yet another delay that's trying the tolerance of Apache investors, who have been a very, very patient bunch through one problem after another.
Hopefully, though, there's light at the end of the tunnel now that Hurricane Harvey, the Canada exit, and the North Sea shut-in are all in the rearview mirror. And, of course, Apache is sporting a best-in-class 2.3% dividend yield, which helps the buy thesis for the stock.
Consider this, too: Oil prices have been rising over the past few months. Both Brent and WTI Crude spot prices are well above $50 per barrel. Many oil producers like Conoco have seen their stocks rise accordingly, but Apache has not. That could mean there's still some upside to the stock that the market hasn't yet factored into Apache's low share price.
I'm holding on to my Apache stock, and at the current price of about $42 per share, would even consider buying more. But if the company can't get its act together by the end of Q1 2018, investors will need to make some hard decisions about how to proceed.
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