Apache Corporation (NASDAQ:APA) has just announced the disposal of Apache Energy in Australia for $2.1 billion, which marks APA's complete exit from Australian Oil & Gas activity. APA is thus now firmly focused upon North American onshore, with International exposure in Egypt and the UK's North Sea. Despite a sharp rig count reduction, FY'15 production could be flat y/y, which is the best news I can currently identify. Given the absence of any likely catalysts, I view today's share price as fairly valuing the company, so wait until the Q1-15 earnings release before taking a stronger view.
Apache, re-focusing back on North American onshore
As a quick reminder, Apache Corporation is one of the largest independent oil & gas exploration, development and production companies in North America. It has around 2 billion BOE of proved reserves, which historically was about 60% located in North America and 60% liquids. Its international operations are now in Egypt and the UK North Sea, with APA having just fully exited its Australian operations, with the sale of Apache Energy Australia for $2.1 billion. Over the past five years, APA has been reshaping and re-positioning its operations, such that its primary growth engine is North American onshore activity, which now accounts for 70% of the company's production barrels. Having said this, APA's International operations remain important growth engines and complement its NA production and cashflow, exemplified by the recent announcement of strong appraisal and development drilling results in Egypt's Western Dessert.
Q4-14 asset write-downs impact sentiment, with 2015 outlook similar
APA reported a $4.8 billion pre-tax loss in Q4-14, mainly the result of a number of asset write-downs due to the now much weaker global oil price environment, with the prospect of further write-downs, albeit of much lower value, during 2015. Although these are non-cashflow items, such write-downs do impact sentiment in the stock, so while the possibility of further write-downs exist, new investors are likely to remain on the side-lines. Looking at production, APA's global production in Q4 averaged 673k BOE/day, with North America production contributing 56% of this, some 378k BOE/day. This provided cash flow from operations in the quarter of $2.1 billion. Looking forward to 2015, despite a sharp reduction in rig-count and a 60% reduction on capex in the year, APA still expects 2015 production to be flat y/y at around 650k BOE/day, mainly due to a deep backlog of well completions kicking in during the year, which, if true, clearly is a near term positive factor investors should note.
"Cashflow is the limitation, tapping the balance sheet currently does not make sense"
Due to the much weakened global oil price environment, with WTi trading around $50/barrel compared to around $100/barrel this time last year, cashflow is now the key consideration for the management team. CEO John Christmann stated that while the current pricing environment prevails, APA will operate within current operating cashflow constraints and that tapping the balance sheet to fund drilling activities currently does not make sense, which I agree with.
FY'15 assumptions and valuation, stock probably fairly valued
On my assumption of flat production in FY'15 at an average oil price achieved some 45% below FY'14 levels, I expect APA's FY'15 revenues to also be down some 45% to around $7.5 billion, giving EBITDA of approximately $4 billion as shown in my DCF below.
My DCF valuation model indicates a fair market value around the current share price. Additionally, APA's projected FY'15 EBITDA multiple of 8.1x is right in line with peers such as ConocoPhillips (COP) and Occidental Petroleum Corporation (OXY) as shown in the table below. So I think it prudent to wait until APA's Q1 earnings release before taking a stronger view on this stock.
