One of the larger oil and gas companies on the market today is Apache Corporation (APA). Though its size pales in comparison to the majors, it’s still large enough to be able to hold its business steady during even some of the toughest of times. Case in point, we need only look at the firm’s results for the second quarter of its 2020 fiscal year. Despite being forced to curtail output at some of its higher-cost locations, and during one of the most volatile three-month windows energy markets have ever been through, the business managed to remain in a positive operating cash flow position. Not only this, but output from the firm also remained higher than analysts anticipated, and though debt is rising, the business is showing signs of keeping costs down and optimizing its operations. Apache is most certainly not a riskless play, but its performance does continue to demonstrate that the company offers investors with a sizable alternative in the space that has exposure to both onshore and offshore projects.
Putting performance in context
At a high level, it’s clear that Apache managed to do well in the latest quarter. Take, for instance, a look at the firm’s output. During the quarter, the firm was responsible for 435 thousand boe (barrels of oil equivalent) per day in output. This was, unfortunately, 33 thousand boe per day below the 468 thousand boe per day seen just one quarter earlier. However, it handily topped the 417.3 thousand boe per day that analysts had anticipated. The drop, it should be said, was due in large part to curtailed production of around 28 thousand boe per day in the second quarter as management cut output at the business’s higher-cost locations. The company also experienced a 7 thousand boe per day hit that was not planned that was due to unscheduled pipeline downtime at its Alpine High location. On an adjusted basis (ignoring output from Egypt), output fell from 423 thousand boe per day in the first quarter to 394 thousand boe per day.
In light of the improving energy environment, management has returned its output to prior levels. This alone is positive and indicates that management will only keep production shuttered for as long as necessary and no longer. In addition to trying its best to optimize output, the company also surprised investors with some improvements on the cost side. According to management, Apache has finally achieved more than $300 million in annualized cost savings as of the end of the second quarter. $225 million in all should be realized in 2020. The firm also announced, without offering a view reflecting less output, that its capex budget for the year should be toward the low end of its $1 billion to $1.2 billion range. Total spending in the second quarter was $216 million, and the expectation is for this to shrink to $190 million in the current (the third) quarter.
With energy prices so volatile during the second quarter, it wouldn’t have been a surprise for Apache to report negative operating cash flow, but it managed to avoid that. During the quarter, operating cash flow was $84 million. If you adjust by ignoring changes in working capital, this figure would have been $150 million. Though these figures pale in comparison to the $502 million seen a quarter earlier and the $856 million seen the second quarter of the company’s 2019 fiscal year, any sort of positive cash flow is a positive for shareholders to rejoice over.
For the first six months of 2020, Apache’s operating cash flow totaled $586 million. This compares to $1.45 billion a year earlier. On a TTM (trailing twelve month) basis, operating cash flow was about $2 billion. Given the firm’s capex budget, assuming that the third and fourth quarters don’t look as bad as the second and look, instead, more like the first or even half of what the first accomplished, Apache should be on track to be free cash flow positive this year.
It is worth mentioning that there are other ways to evaluate the cash flow condition of the firm. Take, for instance, the company’s EBITDA. During the quarter, this metric was $235 million. This compares unfavorably to the $764 million seen in the first quarter this year. Year-to-date, EBITDA stands at $999 million due to the strong performance in the first quarter. More likely than not, subsequent quarters will look better for the business, but by how much is anybody’s guess at this point.
One way in which Apache did not fare particularly well during the quarter relates to the business’s debt. Gross debt ended the quarter at $8.90 billion. This compares to $8.66 billion as of the end of its 2019 fiscal year, translating in effect to an increase in indebtedness of $242 million in just six months. The situation for net debt was even worse. Based on my math, net debt rose by $222 million between the first quarter and the second quarter. Since the end of 2019, it has grown by $354 million.
To properly put net debt into context, we really should compare it to the firm’s EBITDA. EBITDA on a TTM (trailing twelve month) basis ended the second quarter at $3 billion. Assuming net debt remains unchanged at $8.77 billion, this implies a net leverage ratio of 2.92. That’s a bit elevated considering that the energy industry prefers players in this space to have leverage of closer to 2 to 1, but it’s not at the danger territory. This is not to say that it can’t move in that direction. If we were to annualize EBITDA to match what we saw in the first two quarters, net leverage would be high at 4.39. That’s not a great place to be. Even if EBITDA in the third and fourth quarters average what we saw in the first quarter, debt would still be lofty at 3.47. Fortunately, if the company is free cash flow positive this year as it looks set on being (absent a major downturn in pricing again), management should be able to reduce this net debt some.
Right now, it looks like Apache is doing pretty well. The company managed to navigate a severe and uncertain downturn and still come out with positive operating cash flow. Net debt is higher than I would like it to be considering the firm’s cash flow and EBITDA path moving forward, but if you ignore the short-term impact associated with the downturn in pricing and temporary curtailing of output, even net debt doesn’t look awful. Uncertainties still exist for the firm and for others in the space, but so long as we don’t revisit the volatility seen earlier this year and stay there for an extended period of time, Apache should be in a pretty good position in the long run.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.