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How Could Lower Production Impact Apache Corporation’s Revenues?

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Apache Corporation’s 4Q15 operating revenues

Excluding the effect of hedges, Apache Corporation’s (APA) average realized crude oil (USO) price in 4Q15 was $38.86 per barrel, down ~45% from $70.81 per barrel in 4Q14. In 4Q15, APA’s average realized price for its natural gas (UNG) production decreased by ~31% to $2.66 per Mcf (thousand cubic feet), compared to $3.83 per Mcf during the same period in 2014.

For 4Q15, Apache Corporation (APA) reported operating revenues of ~$1.26 billion, which is lower by ~53% when compared with its 4Q14 operating revenues of ~$2.68 billion. APA’s 4Q15 operating revenues are lower mainly due to the YoY (year-over-year) decline in production volumes, as well as lower realized prices for its production.

For a more detailed look at Apache’s 4Q15 earnings, please refer to Why Apache’s 4Q15 Loss Was Lower than Estimated.

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Effect of APA’s production volumes on its operating revenues

As illustrated in the above chart, Apache Corporation’s operating revenues have been declining since 1Q14, mainly due to the lower YoY production volumes and lower realized prices for its production. APA’s production volumes topped out in 1Q14, when even its operating revenues peaked. Since their peaks, APA’s production volumes and operating revenues have been down by ~23% and ~65%, respectively.

APA’s 1Q16 operating revenues estimates

For 1Q16, Wall Street analysts expect Apache Corporation (APA) to report operating revenues of ~$1.11 billion, which is lower by ~39% when compared with 1Q15 revenues of ~$1.82 billion. The lower operating revenues estimates can be attributed to APA’s lower production guidance in 1Q16.

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Apache’s capital expenditure

Lower production guidance results in reduced drilling activities. According to its lower production guidance, Apache Corporation decided to reduce its drilling activity in 2016. For 2016, APA expects its capex to range from $1.4 billion–$1.8 billion, a midpoint reduction of ~60% from 2015.

Other players

Apache has offshore operations, so reduced capex could be bad for its potential vendors like Diamond Offshore Drilling (DO), Transocean (RIG), Seadrill (SDRL), and Atwood Oceanics (ATW). The SPDR S&P Oil & Gas Equipment and Services ETF (XES) generally invests at least 80% of its total assets in oil and gas equipment and services companies. The iShares US Oil Equipment and Services (IEZ) generally invests at least 90% of its total assets in companies that supply equipment or services to the oil and gas industry.

In the next part, we will see why Southwestern Energy (SWN) reduced its natural gas production guidance for the first time since 2013.

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