Apache 4Q Net Fell 44% on Write Downs, Lower Prices

Apache Corp. said Thursday it plans to trim its portfolio with $2 billion in asset sales this year, bringing an end to a three-year buying spree that expanded the company's footprint around the world and helped it ramp up oil production to record levels.

In the past three years, Apache has snapped up $16 billion worth of assets in the U.S., the U.K., Egypt, Australia and other regions. But chief executive Steven Farris told analysts on an earnings conference call that it's time for the Houston-based company hunker down, repay debt, and focus on long-term value for shareholders.

"We have to make some choices--we can't be all things to all people," he said.

High costs and low commodity prices hampered Apache's fourth quarter profits, which missed analysts' expectations for the fourth consecutive quarter. The company reported a profit of $668 million, or $1.64 a share, down 44% from $1.19 billion, or $2.98 a share, a year earlier. Excluding items such as merger and acquisition costs and write downs on Canada and other oil and gas property, earnings per share fell to $2.27 a share from $2.94--narrowly missing the average estimate of $2.30 a share by analysts polled by Thompson Reuters.

Revenue increased 2.2%, to $4.39 billion, compared with analysts' average estimate of $4.36 million in revenue. Production increased 5.4% and reached a new quarterly milestone of 800,005 barrels of oil equivalent per day. But lower natural gas prices and write downs on properties in Canada have hampered the exploration-and-production company's profit.

Despite the earnings miss, analysts praised Apache's successful pivot toward oil production during the fourth quarter. Facing stubbornly low prices for natural gas, many energy producers have had to scramble to make that shift toward the more profitable commodity.

"While the earnings per share was a headline miss, the underlying earnings report was positive as the company generated better than expected oil production (5% better than our expectation)," Simmons & Co. analysts wrote in a note Thursday morning.

By signaling a stop to its expansion, Apache intends to focus on exploiting the U.S. unconventional formations that it recently acquired, such as acreage in the Permian Basin, where it has become the most active player, Mr. Farris said.

"For the present time we're going to grow wells. That doesn't mean we won't pick up an acre or two, but in terms of making major acquisitions in existing core areas, that's not something that's part of our strategy right now," he said, adding that the company currently plans to use the proceeds from its sales to reduce debt.

Though not all the assets to be sold will be producing, the plan could slow Apache's progress toward its ambitious annual growth targets. Mr. Farris said potential sales haven't been factored in to Apache's expectation that it will grow production by 3% to 5% next year. The company is still in the process of picking the assets it will sell, but Mr. Farris said the company is "dedicated" to making divestitures.

Argus Research analyst Phil Weiss said Apache has issued stock and debt to fund its acquisitions, but production hasn't always met expectations.

"I think it makes sense to pare back a little bit," he said. "Their execution hasn't been great, so anything that helps them to reduce their focus and to get things back on track, I think is a plus."

For the fourth quarter, Apache's average realizations for natural gas fell 1%. The average price per oil barrel sold by the company was down 3.7% and its average realization per barrel of natural gas liquids dropped 26%. The company said low prices throughout the year for Canadian natural gas resulted in a ceiling test write-down, driving negative revisions totaling 299 million barrels of oil equivalent.

Wells Fargo analysts also highlighted the increased crude production, writing Thursday that Apache's natural gas production was slightly lower than they had expected, but the company "showed very strong sequential crude growth" during the quarter, with oil production volume up 9% from the third quarter.

That growth came primarily from the Permian Basin, where oil production is up about 20% over last year's fourth quarter.

Apache's higher production came with higher costs. Operating margin fell to 37.4% from 45.2% as costs and expenses jumped 17%.

Chevron Corp. agreed in December to buy out Apache's partners--EnCana Corp. and EOG Resources Inc.--in two shale-gas fields in western Canada and a facility to ship that gas to Asia. The Kitimat, British Columbia, liquefied natural gas project has run into strong competition and some expect Chevron's extensive experience building LNG terminals and marketing the super-cooled fuel to Asia will help resolve this problem.

Melodie Warner contributed to this story.


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