Apache Corp.: Could a Santa Claus Rally Be on Its Way?

In 2019 so far, Apache Corp. (APA) stock has fallen 28.8% and underperformed the Energy Select Sector SPDR Fund’s (XLE) 2.7% rise. A major portion of this decline came this month. In December so far, APA has fallen 16.1% and touched its 18-year low level.

On Monday before the market opened, APA released its operational update on the Maka Central – 1 Well Offshore Suriname. The new target depth increased to 6,900 meters. Based on its press release, “Following the drilling operations, further testing and evaluation will be conducted as appropriate.”

Q4 2019 earnings

Analysts’ consensus estimates project Apache Corp.’s Q4 2019 adjusted EPS (earnings per share) at -$0.12. If Apache reports negative earnings, then it would be the second consecutive quarter for negative earnings.

Between Q2 2015 and Q2 2016, APA’s earnings were negative. Notably, the market share war between Saudi Arabia and US shale oil producers dragged oil prices to their 11-year low in February 2016. To learn more, please read OPEC Could Lose Its Shine: It Isn’t Ready for a Production Cut.

However, if OPEC+ surprises the market with a greater production cut package, we might see a surge in oil prices. That scenario might push APA’s earnings into positive territory. In Q3 2019, APA operated with a production mix of 67.2% in oil price–linked commodities (or oil and natural gas liquids).

A possible upside in oil prices might cause a Santa Claus rally in APA. Moreover, if natural gas rises this winter, it would be a positive development for APA.

Company outlook

APA’s 2020 capital expenditure is expected to be 10%–20% lower than in 2019. This year, its total capex in upstream activities is expected at $2.4 billion. Moreover, the company plans to generate positive free cash flow. In the first three quarters of 2019, APA’s cumulative free cash flow was -$160.5 million.

Analysts’ recommendations

On Tuesday, CFRA reduced its price target on APA by $2 to $19. Last month, J.P. Morgan reduced its target price by $3 to $24.

Out of the 30 analysts tracking APA, seven analysts recommended a “buy” or a “strong buy.” Eighteen analysts gave a “hold” recommendation on APA. The remaining analysts recommended a “sell,” based on Reuters data. Analysts’ mean price target suggests an upside of 47.4%.

Moving averages

Yesterday, Apache closed 18.5%, 18.2%, 18.9%, and 31.6% below the 20-, 50-, 100-, and 200- DMA (day moving average), respectively. Apache closing below its key moving average levels indicates bearishness. The $23 level is an important resistance zone for APA.

The 20-, 50-, and 100-DMA levels all almost fall at $23. If APA decisively breaks this level, then a sustainable rise can be expected.

On Wednesday, APA’s implied volatility was 50.38%. Plus, its implied volatility declined with the fall in APA stock. Usually, volatility rises with the fall in asset prices. Until next Wednesday, APA could close between $17.60 and $19.80. We assumed a normal distribution of prices and a confidence interval of 68%.

In November, APA’s short-interest-to-equity float ratio was at 6.3%. Since October, this ratio has hovered near 6.0%–6.5%. Energy stock Chesapeake Energy’s (CHK) short-interest-to-equity float ratio was 11.5%. To learn more, please read Chesapeake Energy: Is a Santa Claus Rally in the Cards?