I'll be honest: I probably should have gotten out of oil the minute Saudi Arabia and Russia announced they were both going to boost oil production in April, which sent oil prices spiraling downward on March 9. And when Occidental Petroleum announced an 86% dividend cut on March 10, the writing was really on the wall.
But I hung onto my shares of independent oil and gas exploration and production company (E&P) Apache Corporation (APA) anyway, and on March 12, I got burned after the company slashed its dividend by 90% and announced an effective end to its Permian Basin operations.
In spite of that, I'm still hanging onto my shares. Here's why.
Apache Corporation looked set to outperform the stock market in 2017. Now it's one of the industry's biggest losers. Image source: Getty Images.
Practical concerns
For me, the decision to hang on is easy. I bought my Apache stock starting in May 2017, when it had just dropped below $50 per share, which looked to me like a bargain. When the price fell to to $48 per share, I bought a bit more, and in July, when it sank to $44 per share, I picked up even more.
Today, Apache's stock is trading at about $5 per share. My first purchase has lost 89.5% of its value, although if you factor in the dividends I've earned over that stretch, I've "only" lost 88.6% of my initial investment.
That's the primary reason I'm hanging on to my shares: At this point, once you factor in the brokerage fees to sell, the amount of cash I'd get from my stake wouldn't be enough on its own to make a substantial investment in anything else. I may as well hang onto the shares and see what happens. Most of the damage may have already been done.
That said, if I need a couple of bucks to round up a stock purchase, Apache would be one of the first stocks I'd consider liquidating.
Busted thesis
But what if I didn't have such a small position in Apache? If I had a more substantial stake, would I still hang onto it? If I didn't have any stake at all, would I buy in now?
In short: Heck no!
My initial thesis for buying Apache in 2017 was the strength of its Permian Basin operations. Apache had picked up a huge plot of Permian Basin land on the cheap, which turned out to contain far more oil and gas reserves than anyone expected. But the area was undeveloped, so Apache focused its efforts on building out the infrastructure in the area, which it dubbed "Alpine High."
But Apache's big coup didn't pay off. Almost right as it got Alpine High up and running in mid-2018, oil and gas prices began to tumble thanks to global oversupply. Worse, pipeline bottlenecks in the Permian Basin meant that producers like Apache couldn't get their oil and gas to the Gulf Coast for refining and processing.
Now, Apache has announced, "Over the coming weeks, the company will reduce its Permian rig count to zero." If oil and gas prices rise again, those Permian reserves may pay off for Apache, but that doesn't seem likely anytime soon. And in fact, Apache may still be on the hook to pay for the capacity it's reserved on Permian Basin pipelines.
Hardly any of this was the fault of Apache's management, which was the victim of industrywide trends outside of its control. But that's cold comfort to investors -- like me -- who bought into Apache's promising growth story only to see it implode.
Could it pay off?
Even though my initial thesis in Apache went bust, it's worth checking to see if there's another thesis that would make the company a compelling investment.
Beyond its Permian position, Apache has operations in the North Sea and Egypt, both of which have lower costs per barrel than its U.S. onshore production. However, neither is likely to be profitable at current oil prices, and the company has announced it will be reducing activity in both locations.
Apache has also begun exploration offshore Suriname, after ExxonMobil (XOM -0.36%) made a big discovery in next-door Guyana. That exploration is slated to continue, but it's unclear how much appetite Apache has for developing the deepwater project.
Basically, until oil and gas prices recover, Apache's stock is unlikely to, either.
Not a strong pick
Perhaps the only reason to potentially pick up Apache shares right now is as a deep-value play. The company is trading at less than two-thirds of its book value. If oil prices recover, Apache's Permian acreage alone would be worth well over $5 per share. And its newly cut dividend will yield 2% at a $5-per-share price.
However, we don't know when -- or if -- a recovery will come to the oil markets. And even if it arrives sooner rather than later, there are better picks in the energy industry -- including the aforementioned ExxonMobil, which is also trading below its book value and has much stronger fundamentals.
