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Can Apache Corporation Successfully Ride Out This Oil Market While Maintaining Growth?

A good balance sheet and solid liquidity may not be enough to bring Apache through this low-price oil environment.

Why Apache can continue to defend its dividend - for now.

Low budget is good for costs and defense but weak for opportunity and offense.

Retains investment grade ratings even after downgrades.

source: Stock Photo

Since closing at $34.38 on January 19, 2016, the share price of Apache Corp. (NYSE:APA) has skyrocketed over 50 percent, closing on April 15, 2016 at $52.06. The obvious concern now is what will happen now that the oil rally is leveling off, and a good chance it will at best be range bound for the rest of the year, with a good chance of dropping if the price of oil reverses direction.

It's apparent oil producers like Apache are still heavily reliant upon the price of oil rebounding, but in Apache's case it has taken steps to endure a prolonged period of a low oil price by divesting of non-core assets, cutting costs and paying down debt, all of which was done without diluting the stock by raising equity or having to cut the dividend, as many of its peers have chosen to do.

The company has a healthy balance sheet and liquidity, which will be tested if the price of oil doesn't at best remain in the high $30s to low $40s per barrel. If it falls closer to $30 or maybe worse, there is a strong likelihood it will have to re-evaluate its dividend, even though it doesn't have the need for liquidity in the short term.

There is also the additional question of whether or not it'll be able to keep its investment grade ratings in place after being downgraded in February by Standard & Poor's and Moody's.

Apache has said it should be able to operate at cash flow neutral into 2017, but I believe that will be determined by the ability of the company to continue to remove costs from its onshore assets, along with the already mentioned price of oil remaining close to where it is trading at now. Neither of those are guaranteed.

source: StockCharts.com

Balance sheet and liquidity

As of the end of 2015, Apache used its divestment of non-core assets to help build its cash balance to almost $1.5 billion, and to slash its debt by $2.5 billion. At the end of the last quarter total debt stood at $8.8 billion. Overall liquidity, including available credit, is about $5 billion. In the last reported quarter the net debt-to-EBITDA ratio of the company was 2.1x.

Short-term maturities are between $650 million to $700 million through 2020. This is a competitive advantage against most of its peers.

Even after the February downgrades it has retained its investment rating, so it won't be forced to pay more for capital when it needs it. That could change, but that's where it stands at this time.

Interestingly, some analysts and investors consider the smaller budget of the company a negative catalyst because it could cause the company to have a weaker response than its peers when the price of oil rebounds. More than...


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