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Why Apache’s Earnings May Halve in Q1 2019

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Apache’s earnings

Apache (APA) is set to announce its first-quarter results on May 1. Analysts expect its adjusted EPS to fall ~52% sequentially in the quarter. Meanwhile, they expect ConocoPhillips’s (COP) and Occidental Petroleum’s (OXY) earnings to fall 24% and 38.5% sequentially, respectively.

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Why APA’s earnings could fall so much

APA’s production comprises ~51.7% and ~12.7% oil and natural gas liquids, respectively, and the rest is natural gas. Oil contributed ~77.6% of the company’s top line in its most recent quarter.

On average, WTI and Brent crude oil prices were 7.5% and 7% lower sequentially in Q1 2019. The Permian Basin accounts for 53.8% of APA’s natural gas production. Because of takeaway capacity constraints, natural gas prices at the Waha Hub turned negative a few times last quarter, meaning drillers would have to pay to remove the natural gas glut without getting anything in return. Waha Hub natural gas prices are important to Permian Basin producers.

In Q1 2019, the Cushing-Midland WTI spread averaged at $1.20, compared with $6.26 in Q4 2018. Sunrise Pipeline, which has a capacity of 300,000–350,000 barrels per day and has been operational since November, could be behind the spread’s contraction, as it connects the Permian Basin to Cushing, Oklahoma. This contraction could boost Apache’s realized commodity prices because the Permian Basin accounts for 89% of its US oil production.

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