ELAM: A tale of two As

Despite the run up in crude prices to the mid $60s, creating real cash flow remains difficult for energy firms. I have used Apache APA as bell weather, but it appears I bet wrong. Anadarko APC has way outperformed APA in the last year. Let’s take a look.


Anadarko APC

Apache APA

Proven Reserves

$1.4 Billion Crude Equ.

$1.2 Billion Crude Equ.

Market Capitalization

$36.59 Billion

$16.39 Billion

Price to Book



Both firms have about the same proven reserves at $1.2-1.4 billion. But APC has more than twice the market capitalization than APA. And it trades for 50 percent more on a book value basis.

Now let’s break down the financials. Anadarko has negative net income for the last three years losing $456 million in 2017. The last two quarters have turned positive with the rise in crude prices. First quarter earnings were $121 million. But eventually all firms (save Tesla I guess) must produce enough cash from operations to cover investing activities. Fracking remains an expensive proposition. APC capital expenditures were $1.547 billion for the quarter 2018. Net cash flow has been negative for the last three quarters, currently $1.190 billion in the red. Why APC is spending over one billion each of the last three quarters to re-purchase its own stock is a head scratcher to me. Wouldn’t that money be better left in the bank account?

Apache APA has generated positive operating income for the last four quarters. First quarter 2018 was $473million. Capital expenditures for APA were $877 million for first quarter 2018. Net cash flow overall was negative the last two quarters at ($591 and $274 million) but positive the previous two at $275 and $146 million. APA is not re-purchasing its stock. APA paid back $150 M in debt each of the last four quarters.

The bottom line for investors is the stock price. In the last 18 months, Apache has fallen from $6,750 to just less than $35 and now recovering to $42.89. The moving averages are attempting to turn up and other momentum indicators are positive.

In the same period APC fell from about the same level, $72.50 to $40 and has now recovered back to $71.04. Those are wildly different valuations for two firms with such similar results. But real bottom line is that energy producers are still grappling with how to refine cash from expensively produced oil and natural gas.

The NASD hit a new high this week. Having run up NFLX and GOOGL, now the market is buying Twitter TWTR, up 13.47 percent this week on a Goldman recommendation. And what does Twitter own? Irrational exuberance anyone?