Apache earnings- and another large cap beats

(note this is one of three E&Ps I own, along with Whiting and Chesapeake)

$1.78 vs 1.62 estimates, but shares stayed pretty flat on a down day for the sector.  Bought back $500mm in stock in the quarter (very rare for an E&P right now).  Revenues and production were down YOY but that is due to asset sales of mostly gas assets in Canada for $374mm and all of Argentina for $850mm. 

Why do I own them?  I’m a sucker for low valuations, and they trade at the lowest for an independent E&P.  They have a huge portfolio of mid continent and Permian basin assets, although I’m not convinced that these assets have great economics overall.  Their 150 mboed of Permian production is only just shy of Pioneer’s production, and Pioneer is the largest Permian pure play valued at $30b.  Apache’s EV is just over $40b, and the Permian is less than 25% of their production!   Also, people give them a discount because they have so much riding on Egypt.  But Egypt is an absolute cash flow gusher.  I’m going to do a post on this later, but this is absolutely the best part of the whole company from a financial returns perspective.

Apache basically milks their incredible Egypt assets, and to a lesser extent their North Sea assets, to grow their far less impressive on-shore US production in the Permian where they run 38 rigs and Anadarko/Midcontinent, where they run 28 rigs.   One analyst asked a question that implied that the midcon assets were showing lower returns than the Permian, and if they might shift capital away from the Midcon.  The way they answered the question implied that they agreed with this. They’ve been selling Canadian assets, they just sold all their Argentina acreage, and then they just sold their non-op interest in two GOM projects for $1.4.  They’re clearly looking to sell down their Australian investment in the Wheatstone LNG, and seem to be well along in discussions for this.  They are also looking to sell down the Kitmat LNG project in British Colombia.  Apache is also one of these companies that has tremendous overseas cash, with no way to bring it home without tax consequences.

Although they only have a bit of Eagleford acreage it is interesting to note that they mentioned realocating capital to the Eagleford from the Permian and raising eagleford rig count to 8 from 4.  This is another affirmation that Eagleford returns are significantly better than Permian returns in general.  They are in the condensate window of the Eagleford.

Montney and Duvernay- they've drilled two wells each.  Usually drilling takes off in the winter in Canada because much of it is impassible due to mud later on.  They haven't announced results here but they did mention that they are "stellar" and this could be something to use all the international cash on.

On the Gulf Coast, it sounds like they are basically going for GOM shallow shelf drilling, and selling down deepwater. They say much of the shelf hasn't been explored at deeper layers.  They probably won't be drilling much though until 2015, since there's a lot of technical work to do first.

GOM Transaction- For $1.4b FCX got 55mboed of 3p reserves (an odd metric to report). They bought Apache interest in the Lucious (11.7%) and Heidleberg (12.5%) projects in the GOM deepwater, along with 11 exploration blocks of relatively marginal value.  This gives FCX a total of 35% interest in Lucious.  Anadarko operates with 35% interest, Exxon holds 15%, Petrobras 9.6 and Eni 5.4%.  Heidelberg is also operated by Anadarko (35.5%), with minority partners  Marubeni, Eni, Statoil, Exxon, Cobalt, and now FCX.

It’s interesting that FCX selling onshore operated assets, and buying offshore non-operated assets.  Clearly their focus has been in the Deepwater Gulf with the PXP acquisition right after they bought all the BP assets, and the MMR acquisition at the same time (announced at the end of 2012).  $25/3p barrel all non-producing, doesn’t really seem like a great deal, but maybe they see further upside, or front-loaded production or something.