Should You Keep This Energy Stock?

Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Apache (NYSE: APA), the fourth-largest independent producer based in the United States, reported results which did not meet expectations. The stock fell by nearly 5% on the earnings release date. The main reasons for the relatively weak quarter were lower price realizations coupled with an increase in labor costs. The average price received for oil fell by almost 4%, while NGL realizations fell by a steep 26%. In this article, I will analyze these results and draw conclusions about the future prospects of the company.

Financials

Apache reported record production for the fourth year in a row, including oil and liquids production. Average daily production during the year increased to 779,000 barrels of oil equivalent (boe) per day, a growth of 5.4% over the previous year.  Oil and gas revenues reached a record $16.9 billion, compared to $16.8 billion in 2011.  Full year earnings amounted to $1.9 billion or and EPS of $4.92 per diluted common share, compared with $4.5 billion and $11.47 per share in the previous year. Excluding certain items, adjusted net earnings were $3.8 billion for an EPS of $9.48 per share compared to $4.7 billion and $11.83 a share in the previous year... Cash flow generated from operations before working capital changes was $10.2 billion maintaining the record level achieved in the previous year.  The company exited the year with a production of more than 800,000 boe daily primarily because of a 12% growth in North American oil production.

Apache has become the leading oil and gas driller in the Permian Basin, and operates more rigs than any other energy company in the region.  It is also one of the most active oil and gas companies operating in the Central Region's Anadarko Basin.  Year-on-year production from these two regions grew by 18% and 37% respectively.  A subsidiary of the company concluded a transaction with Chevron Canada Ltd. to jointly build and operate the Kitimat LNG project.  The incremental resources through Kitimat have the potential to increase Apache's total proved reserves by 300%.

Oil and natural gas liquids production accounted for 51% of total volume in the year while contributing 81% of revenues because of the wide gap between global crude oil prices and natural gas prices in North America. During the year the company added 372 MMboe of reserves amounting to 131% of production, through discoveries and extensions as well as 73 MMboe by rate of acquisitions making for a reserve replacement rate of 156%. The depressed natural gas prices throughout the year had the effect of a ceiling test write-down and were the main component of downward revisions of 299 MMboe. The company ended the year with proved reserves of 2.9 billion boe of the production of 285 MMboe. Investment on exploration and development during the year was $10 billion.

Results versus analysts’ estimates

At the end of the fourth quarter of 2012, Apache was slightly ahead on revenues but missed on estimates on earnings per share. The company chalked up revenue of $4.39 billion while the prediction of 13 analysts polled by S&P Capital IQ was $4.34 billion. GAAP  sales were the same as the same quarter of the previous year. EPS was $2.27 per share while the 23 earnings estimates compiled by S&P Capital IQ averaged $2.31 per share.

GAAP EPS of $1.64 for the quarter compared to $2.97 for the same quarter in 2011 was 45% down. Gross margin for the quarter was 80.5%, 3.4% less than the comparable quarter of the previous year.  Operating margin at 38.3% was down 1.09% and net margin at 15.2% was down 1.28% year on year.  The average estimate for the first quarter of 2013 is revenue of $4.34 billion and EPS of $2.29 per share.  The average revenue estimate for next year is $17.9 billion and the average EPS estimate is $9.61 per share. 

Other energy stocks

EOG Resources (NYSE: EOG) reported a solid performance with a net income of $570.3 million, or an EPS of $2.11 per share for the full year 2012 in comparison to $1.09 billion, or an EPS of $4.10 per share, for the previous year.   EOG showed a net loss of $505.0 million, or $1.88 per share for the fourth quarter in comparison to net income of $120.7 million, or $0.45 per share for the same quarter of the preceding year. Adjusted non-GAAP net income for 2012 was $1.53 billion or an EPS $5.67 per share compared to $1.01 billion or $3.79 per share for 2011. The results for the fourth quarter incorporate write-downs of $849.4 million, net of tax ($3.13 per share) as impairment charges to Canadian natural gas assets. The strong growth in the production of liquids as well as its large portfolio of drilling opportunities act to be judged against production and reserves which are still weighted in favor of gas. Because of this, I would rate the stock a hold. 

Surgutneftgaz (NASDAQOTH: SGTZY) is a Russia based oil and gas company which is also in the business of petrochemicals, gas processing and power generation. The metrics suggest that it is undervalued with a trailing P/E of less than 5 times and a forward P/E of 8 times. The current stock price is below its book value despite satisfactory operating margins and return on equity. Because it is covered only by one analyst on Wall Street, then is not much research to be had on the company.

Another interesting stock outside the United States, CNOOC (NYSE: CEO) is the biggest Chinese offshore oil and gas exploration company and has rights to Chinese offshore oil and gas reserves. It also has stakes in natural gas and liquefied natural gas onshore operations in China.  It is acquiring Canadian oil and gas assets in conventional oil, oil sands, and unconventional gas.  The deal awaits approval from the U.S. government.  The dividend yield at around 2.5% is below the industry average of around 5.6%, but the stock looks cheap with a forward P/E of under 9 times earnings. 

Conclusion

Apache ended up short of the expected results and even missed its own expectations. This is in line with many gas weighted energy producers who only have upstream businesses without the cushion of downstream earnings. Though I rate the company as a hold, I believe that it should be carefully watched with the intention of making an investment when there are more favorable developments.


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