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Can Alpine High Aid Apache (APA) to Turn Around in 2018?

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Apache Corporation (APA - Free Report) , with a large geographically diversified reserve base, has been bearing the brunt of contracting production volumes and weak cash flows. Shares of Apache have declined 33.8% in a year compared with the industry’s decline of 15.6% and the S&P 500 index’s rally of 18.2%.

The company has also reported an average negative earnings surprise of 23.33% in the trailing four quarters.

However, it’s not the end of the road for Apache and the company has been leaning on its Alpine High discovery to remain afloat in the market, which could be its major growth driver in 2018.

Now let’s delve deep into the troubles looming over this Texas-based upstream energy player and see if its strategic endeavors can help it turn around in the year ahead.

Major Deterrents to Apache’s Growth Story

The three-year oil industry downturn due to the global supply glut had hit Apache hard. The company had to slash its spending and capex budget over the last two years to realign itself with the changed dynamics. This led to lower production in all the three quarters this year and marred the company’s earnings for the first two quarters. The company’s most recent adjusted quarterly output was 7% lower than the year-ago level.

From January to September, Apache’s production averaged 345,495 barrels of oil equivalent per day (BOE/d), down 13% from the first nine months of 2016. The effect of the commodity price slump already hit Apache’s bottom line as the energy explorer did not hedge production to ward off risks.

However, with the improving commodity price environment, Apache intends to tap the growth opportunities by increasing its capital investment. With high-yielding growth in mind, Apache announced 2017 capital budget of $3.1 billion, representing 60% increase over its 2016 spending. Nonetheless, the company has not been able to generate a strong cash flow from operations to meet its capex budget unlike other oil producers, which have successfully covered their capex and dividends with the internally generated cash flows.

Last quarter, Apache generated $554 million in cash flow compared with a capital investment of $843 million. In the first nine months of 2017, Apache recorded a cash flow deficit of $334 million after incurring capital expenditures.

Moreover, Apache is burdened with a high leverage ratio of 53.1%, restricting its financial flexibility and limiting growth in process. The company is compelled to rely on its asset sales to generate funds to clear all debts along with funding capex and dividend payments.

Can Alpine High Play Offer Respite in 2018?

We consider Apache's Alpine High discovery in West Texas a vital game changer. Estimated to hold massive oil and natural gas reserves, the wells are expected to drive strong economics and top-tier returns.

Moreover, Apache has been focused on streamlining its portfolio and strategically redeploying capital to reap maximum value opportunities.In this regard, the company has already departed from its high-cost Canadian operations to increase focus on the Permian basin, known for its high internal rates of return and low costs. Alpine High particularly looks very promising and boasts thousands of highly economic drilling locations.It is likely to aid the company to drive crude production. 

Apache’s production volumes are expected to ramp up its growth profile, primarily from its US assets, mainly driven by Alpine High and Midland Basin. The company expects to more than double its product portfolio by virtue of its Alpine High shale play in 2018 compared with the last year’s tally as it begins to tap more than 5,000 drilling locations.

The company also plans to rapidly develop and deploy infrastructure assets at Alpine High in 2018 with a view to support its production growth.  Having spent around $389 million on developing Alpine High’s midstream assets in the nine months ending Sep 30, 2017, Apache intends to invest $1 billion in the region in 2018.

The company has maintained its huge capex of $3.1 billion for 2018. However, whether the increased spending will proportionately contribute to the total production volumes of the company in the near term is something to wait and see. The huge capex might pose cash flow problems as well.

Nonetheless, once Apache completes developing infrastructural assets (by late 2018 or early 2019), its Permian Basin volumes will rev up considerably. Henceforth, the capex is also expected to fall. The increased output and reduced capex will thereby drive the free cash flows and earnings, leading to addition in shareholders’ value.

Wrapping Up

While it’s not apparent whether Apache’s cash flow issues will cease to exist in 2018, the company’s operational efficiency and divestment initiatives however, provide enough support in the long term. Also, only if the company generates sufficient cash from operating activities to meet its capex and dividend, the overall financial picture of Apache will then be sound.

Now it remains to be seen if the ramped-up production from the much-hyped Alpine High Play can help this Zacks Rank #3 (Hold) company make a comeback in 2018.

Meanwhile, one can consider some better-ranked players from the same industry including the likes of Bonanza Creek Energy, Inc. , Northern Oil and Gas, Inc. (NOG - Free Report) and Carrizo Oil & Gas, Inc . All the three companies sport Zacks Rank #1 (Strong Buy). You can see the  complete list of today’s Zacks #1 Rank stocks here.

Bonanza Creek delivered an average positive earnings surprise of 188.7% in the trailing four quarters.

Northern Oil and Gas came up with an average positive earnings surprise of 175% in the trailing four quarters.

Carrizo pulled off an average positive earnings surprise of 33.37% in the last four quarters.

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