Apache’s Rally Is Just Getting Started

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The oil price recovery has sent Apache [stock_market_widget type="inline" template="generic" color="default" assets="APA" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] stock upwards this year. The stock is up 35% so far in 2019, which is not surprising as the oil price recovery will allow the company to deliver solid financial growth.

Let’s take a closer look at the reasons why Apache is on track to deliver strong growth this year and beyond.

Apache’s Financial Discipline Will Be a Tailwind

After suffering from a massive drop in oil prices in the final quarter of 2018, Apache has decided to be prudent with its spending not only for 2019, but through 2021. According to John J. Christmann IV, Apache’s CEO:

Looking forward through 2021, we expect to spend between $2.5 and $2.8 billion per year, assuming $50 to $55 WTI. This investment level will deliver continued, attractive growth while enabling Apache to achieve cash-flow neutrality. We intend to return to investors at least 50 percent of cash flow in excess of plan, inclusive of asset sale proceeds, before increasing planned activity levels.

Apache’s outlook and spending forecast for the current year is a clear indication of the fact that the company is on track to achieve its goals. The company has outlined an upstream capital budget of $2.4 billion for the year, which represents a drop of 22% as compared to 2018 levels. The good part is that this massive capex reduction won’t impact the company’s output.

Apache expects to deliver annual adjusted production 425,000 to 440,000 barrels of oil equivalent per day. That’s up from the company’s prior guidance of 410,000 BOE/day to 440,000 BOE/day, and represents an impressive increase over 2018’s adjusted production of 395,000 BOE/day. So, Apache’s production will increase around 8% at the mid-point of its guidance range, all while achieving a massive reduction in the capex.

Some More Positives

Apache reported net cash of $3.8 billion from operating activities, an increase of 30% from the prior year.

Apache’s average price per barrel of oil was $65.30 in 2018. More specifically, its North American average realized price of oil came in at $59.36 per barrel, while international oil prices averaged $69.73 per barrel.

Now, oil prices in the U.S. are currently at more than $63 per barrel after a rapid rise in the first quarter of the year. Similarly, Brent crude has breached the $70 per barrel mark, and it won’t be surprising to see the commodity gain further momentum on the back of supply actions and improving demand.

In such a scenario, Apache will be able to deliver better financial results as it is on track to boost production at a lower capital expenditure. The higher cash flow resulting from its efficient production will allow it to boost shareholder returns and reduce the debt.

Last year, Apache reported net cash of $3.8 billion from operating activities, an increase of 30% from the prior year. Thanks to this solid increase in the net operating cash flow, the company was able to return $1 billion to investors in the form of share repurchases, dividends, and debt reductions.

As a result, Apache investors can expect the good times to continue in 2019 because of the operational positives highlighted above.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.

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