Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Apache can Oil Companies Make Money?

The oil business seems to have gone insane lately, the price of oil has collapsed and revenues are tumbling, yet companies seem to be adding more production right and left.

Case in point Apache Corporation (NYSE: APA), which just announced the discovery of a new field that holds three billion barrels of oil; even though its revenues have fallen by $11.077 billion in the past two years. News reports indicate that Apache’s latest field; Alpine High in a lonely corner of West Texas, contains up to 75 trillion feet of natural gas in addition to oil.

That’s right folks Apache is planning to open a huge new oil field, when we already have a glut of black gold. At the time of the Alpine High announcement; the standard American oil Brent Crude was trading at $48.24 a barrel on September 9, 2016, while the global price was $46.08 according to the Oil Price.

Nor was Apache alone, on September 9, 2016, Baker Hughes reported that the US rig count had been rising for 10 straight weeks. The oil count had risen to 508 which was still a 40% decline from 2015. The number of gas rigs had fallen by 53% from 196 in 2015 to 92 in 2016; meaning that exploration is actually down even as production seems to be increasing.


The Incredibly Shrinking Revenues

Apache reported revenues of $13.19 billion in June 2014 that fell to $10 billion in June 2015 and $5.19 billion in June 2016. Over the past year alone, Apache has seen nearly half of its revenues disappear. Since June 2015, Apache’s revenues have fallen by $4.807 billion. If that repeats itself over the next year, Apache would have no revenues next year.

Okay we don’t know if that’s possible but Apache already has a negative profit margin, diluted EPS and net income. On June 30, 2016, Apache reported a profit margin of -17.66%, a net income of -$13.6 billion and an earnings-per-share (EPS) number of -35.97, ouch.

All that punished investors with a return on equity of -183.4% and an earnings yield of -60.79%. Your eyes are not deceiving you folks these numbers; provided by ycharts, show us that Apache shareholders lost $1.83 for every dollar they invested.

Is Apache a Value Investment?

Naturally many investors will wonder if this horror story makes Apache a value investment. After all it owns a lot of oil, which puts it in a good position if prices ever recover. All that natural gas is potentially valuable too with the United States exporting LNG and natural gas becoming the fuel of choice in power plants.


A major opportunity here is the possible closure of 15 to 20 nuclear power plants in the United States in the next few years. Motherboard reported that the reactors are shutting down because they cannot compete with natural gas. Utilities are turning to natural gas because it is cheap, easier to move than coal (moving gas through a pipe is cheaper than loading coal on a train) and less polluting.

The opportunity for companies like Apache is huge because nuclear power plants now produce 20% of the electricity in the US. Now Exelon (NYSE: EXCU) is planning to shut down three reactors in Illinois and Pacific Gas & Electric; or PG&E (NYSE: PCG), is planning to shut down the last reactor in California.

This means there’s going to be a lot of demand for natural gas in the near future. Prices might go up; because as Baker Hughes reported, the number of gas rigs is down by 52% from 2015 which might lead to shortfall in production at some point. That might make Apache a good contrarian play because it has large new gas reserves here in the United States.

Is Apache Making Money?

Despite the potential value investors will ask if Apache has any money, because of its revenue collapse. The answer surprisingly enough is yes, Apache seems to have some cash even if it is not making any money.

On June 30, 2016 Apache reported a free cash flow of $266 million, assets of $24.35 billion, cash and short-term investments of $1.201 billion and $2.185 billion cash from operations. The company has some float and extra cash in spite of its revenue fall.


Surprisingly it even managed to pay investors a dividend of 25¢ on July 20, 2016. Apache also delivered a dividend yield of 1.69% on September 9, 2016. So Apache can be considered an income stock despite all its problems.

Okay, so Apache might be a good long-term contrarian play that might generate a little income but should you buy it? My advice would be to wait because this stock seemed overpriced at $59.21 a share on September 9, 2016.

The most probable scenario is that Apache and other oil producers will see their oil prices fall again later this year. Investors should wait for a few months because Apache and other oil stocks have not yet hit bottom, my prediction is that will come in November or December of 2016. If that comes true, Apache will be a good buy then.

Apache’s long term prospects are good but its present is bleak. If this oil producer can survive the next year or so it probably has a decade of decent profits and good returns to investors ahead of it. That makes Apache a potential long term investment.