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Apollo Investment (NASDAQ: AINV) reported that its oil and gas investments weighed on its earnings in its fiscal third quarter earnings for 2017. The company reported operating income of $36.4 million this quarter, partially offset by net capital losses of $25 million.

Apollo’s Q3 by the numbers

Apollo Investments’ earnings have two moving parts. The first is net investment income, or how much it makes in dividends, fees, and interest income from its investments minus its operating expenses like management fees and interest. The second substantial driver of its net income line is any gains or losses on its investment portfolio.

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Generally speaking, net investment income (operating income) is a steadiersource of income whereas capital gains and losses can swing wildly as its investments rise and fall in value from quarter to quarter.

Metric

Fiscal Q3 2017

Fiscal Q3 2016

Year-Over-Year Change

Net investment income per share

$0.17

$0.21

(19.0%)

Capital gains or losses per share

($0.12)

($0.32)

62.5%

Net income per share

$0.05

($0.11)

145.5%

Net asset value (book value) per share

$6.86

$7.56

9.3%

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Data source: Company filings.

What happened this quarter

  • For the first time in more than a year, the company’s portfolio grew by about $6 million on a net basis. Apollo reported that it made about $201 million in investments during the quarter compared to $195 million of sales and repayments. The company ended the quarter with an investment portfolio worth about $2.5 billion.
  • Apollo took large impairments in its oil and gas portfolio, specifically its investments in Venoco and Spotted Hawk. The company hedged some of its risks with a "costless collar" options trade in which it simultaneously bought puts and sold calls on the cost of oil. Executives addressed their options strategy on the conference call, suggesting they simply wanted to reduce volatility in quarterly results while working toward the goal of slashing energy exposure in its portfolio. Importantly, no new investments were added to its non-accrual list this quarter.
  • The company repurchased about 2.3 million shares during the quarter for a total cost of about $13.6 million. In all, the company has spent about $100 million repurchasing shares, and has approval for up to $50 million in additional repurchases. Share repurchases below book value have added about $0.13 to book value on a per-share basis over the course of its repurchase program, and show alignment between the interest of shareholders and management.
  • The company ended the quarter with net leverage of about 0.66x, well below a legal limit of 1x, as well as leverage of 0.76x in the same period last year. While lower leverage reduces recurring earnings power, it also dampens the impact of changes in the value of its portfolio companies. Lower leverage also gives it more capacity to make new investments, or relever the portfolio by buying back stock below book value.

What management had to say

In its earnings press release, CEO James Zelter said:

We believe that we have made considerable progress repositioning the portfolio, consistent with the strategy that we outlined last year. We have meaningfully reduced our exposure to structured credit and renewables. In addition, we funded three transactions entered into pursuant to our co-investment exemptive order during the quarter. Since receiving the order, we have entered into eight transactions including several in the March quarter.

Looking ahead

Apollo Investment continues to reduce its most volatile investments by working through its oil and gas and structured credit investments. In the future, it anticipates that plain-vanilla corporate loans will make up about 50% to 60% of its portfolio thanks to its increasingly important relationship with MidCap Financial, an originator of middle-market credits that are frequently shared across Apollo’s credit funds.

For now, though, shareholders can look forward to a $0.15-per-share dividend to be paid to shareholders on April 6, 2017, a current yield of about 10%.

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Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends Apollo Investment. The Motley Fool has a disclosure policy.

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