Merrill
Company Updates
Apache Corp
2Q05 Earnings Review and Outlook. Reducing 2H05 estimates.;
Production +2% sequentially. A price beneficiary. More unit cost
creep, but 2H05 volumes +6%.
APA doesn’t like to talk about the future, but is frequently retrospective. A
function of small company heritage. Second quarter’s EPS/DCFPS results of
$1.76/$3.18 were nominally under our $1.84/$3.19 estimates and Street EPS
consensus of $1.84. Cause? Some spillover adjustments from 1Q05, more PRT
taxes in the U.K. North Sea and higher operating and unit DD&A expense.
Overall, APA’s operations profit ratio was quite high @ 33%.
Cap-ex increasing to $3B for 2005. We had been modeling $2.6B. More
spending in Canada, Egypt, Australia and the U.S. Part of the increase is for
oilfield services inflation. Management stated that onshore drilling efficiencies
were dropping in the U.S., but given high operating margins, no lines were drawn
in the sand as in past years regarding spending.
Our key takeaway from the MD&A discussion is that APA management felt it had
the wherewithal (fiscal, operational and captive acreage) to not be aggressive in
the M&A market, but to drill or seek transactions similar to the XOM farmout or
APC purchase where they sold the PDP (proven developed producing) reserves.
We think that is smart. Today’s acquisitions can become tomorrow’s ceiling tests
or impairments.
We still view APA as a core holding, but with minimal hedges, our concerns about
short term op cost inflation, investor group think and weakening commodity
prices, we don’t see APA as a septuagenarian ($70s) stock.
Other news: APA has signed a JV in Yemen with drilling to spud in ’06, and
wants to be contrarian in Argentina, which makes us wonder about Repsol’s assets
whose output is declining (old MXS stuff).
Overall, we view the quarter to have been clean. APA is planning to ramp up
2H05 output, and has longer term visibility. We think the risk/reward is balanced
and are neutral.
John Herrlin, Jr. |
