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Tickers in this Article: APA, XOM
U.S. energy firm Apache Corporation (APA) reported weak third quarter 2012 earnings, mainly due to deteriorating natural gas realizations.

Earnings per share - excluding one-time items - came in at $2.16, below the Zacks Consensus Estimate of $2.27 and the year-ago period adjusted profit of $2.95.

Revenues of $4,179.0 million were down 3.4% from the third quarter of 2011 but were ahead of our projection of $4,100.0 million on the back of increased volumes.

Operational Performance

The production of oil and natural gas averaged 770,783 oil-equivalent barrels per day (BOE/d) (51% liquids), up approximately 2.4% year over year. Production for oil and natural gas liquids (NGLs) was up roughly 4.3% at 390,582 barrels per day (Bbl/d), while natural gas production of 2,281.2 million cubic feet per day (MMcf/d) inched up 0.6% from the third quarter 2011 level.

Apache's upstream growth momentum is retained organically as well as through acquisitions as it continues to explore the extensive, multi-year inventory of drillable locations in the Permian and Anadarko basins of North America.

The average realized crude oil price during the third quarter was $102.62 per barrel, representing an increase of 0.9% from the corresponding period of the previous year. The average realized natural gas price during the September quarter of 2012 was $3.76 per thousand cubic feet (Mcf), down 15.3% from the year-ago period.

Lease operating expenses totaled $801.0 million, up 21.2% from $661.0 million in the year-ago quarter.

Balance Sheet & Capital Spending

As of September 30, 2012, Apache had approximately $318.0 million in cash and cash equivalents. The company had a long-term debt of $10,670.0 million, representing a debt-to-capitalization ratio of 25.8%.

During the three months ended September 30, 2012, Apache's capital investments (excluding acquisitions) totaled $2,774.0 million.

Rating & Recommendation

Apache - which completed the purchase of Exxon Mobil Corporation's (XOM) Beryl Field, together with other properties in the U.K. North Sea earlier this year - currently retains a Zacks #3 Rank (short-term Hold rating). We are also maintaining our long-term Neutral recommendation on the stock.

We like Apache's large geographically diverse reserve base, its balanced exposure to natural gas and crude oil, and its multi-year trends in reserve replacement and production growth.

Despite being one of the largest domestic exploration and production companies, Apache still boasts annual output growth in excess of 10%. A pristine balance sheet helps the company to capitalize on investment opportunities and strategic acquisitions, thereby further improving growth visibility.

However, we see limited upside potential for shares, taking into consideration Apache's sensitivity to gas/oil price volatility, its drilling results, costs, geo-political risks and project timing delays. As such, we expect Apache to perform in line with the broader market.

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