Apache: Drilling For Deep Value

3/26/2012


  Recent Price
$106
  Dividend
$0.68
  Yield
0.6%
  P/E Ratio
9
  Shares (millions)
400
  Long-Term Debt as % of Capital
19%
  52-Week Price Range
$134.13 - $73.04

Punished by instability in Egypt and weak natural-gas prices in the U.S., Apache ($106; APA) shares plunged 32% in the final eight months of 2011. Neither issue has been fully resolved, but some of the worst fears have begun to ease.

Unlike crude oil, which tends to trade based on global supply and demand, natural-gas prices vary from region to region. Apache produces about a third of its natural gas outside North America, offsetting exposure to weak U.S. prices. The company's average sale price for natural gas has risen more than 5% in each of the past two years, primarily due to strength in Argentina, Australia, and Egypt.

Apache has a large presence in politically fragile Egypt — 29% of 2011 production revenue, 22% of production, and 10% of proved reserves. Apache's operations, located in remote parts of the Western Desert, have yet to suffer any work stoppages. Apache remains vulnerable to policy changes installed by the new regime. Egypt has sought financial help from the U.S. and International Monetary Fund.

Apache shares have surged 17% so far this year, nearly triple the gain of S&P 1500 Energy Sector Index. But the stock still looks cheap, considering all-time highs for sales, net income, and operating cash flow reached last year. With a Quadrix Overall score of 99 and both sector-specific ranks 95 or higher, Apache is a Long-Term Buy.

Apache's balanced portfolio

No geographic region accounted for more than 22% of Apache's production last year. Apache's production, up 14%, is half natural gas, followed by oil (45%) and natural-gas liquids (5%). Oil and natural-gas liquids combined to generate 79% of revenue.

Apache has increased reserves in 23 of the past 26 years and grown production in 31 of the past 33 years. Management anticipates 7% to 13% higher production in 2012. This year, Apache has negotiated a pair of purchases worth a combined $3.29 billion, already surpassing the $3.2 billion spent in 2011.

Capital expenditures are projected to rise 19% to $9.5 billion this year, all to be funded from operating cash flow. More than half of that spending will underwrite long-term projects. Apache owns 13% of the Wheatstone liquefied natural-gas development in Western Australia. Over the next five years, Apache plans to pump $4 billion into the project, forecasted to begin production in 2016. Apache also hopes to move forward with the $15 billion Kitimat liquefied-natural-gas project already approved by Canadian regulators. Apache owns a 40% stake in the project, slated to begin production in 2015 or 2016.

Conclusion

For 2012, the consensus calls for earnings of $12.60 per share, up 7% on 10% higher revenue. Apache shares trade at nine times trailing and estimated 2012 earnings, a 49% discount to the median oil-and-gas producer in the S&P 1500 Index. Relative to its own five-year averages, Apache trades at more than 24% discounts on price/earnings, price/sales, and price/operating cash flow. An annual report for Apache Corp. can be obtained at 2000 Post Oak Blvd., Suite 100, Houston, TX 77056; (713) 296-6000; www.apachecorp.com.

APACHE
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Dec '11
2.94
vs.
2.19
+ 24%
105.64
-
73.04
9 - 6
Sep '11
2.95
vs.
2.20
+ 41%
129.26
-
80.05
12 - 8
Jun '11
3.22
vs.
2.46
+ 47%
134.13
-
114.94
14 - 12
Mar '11
2.90
vs.
2.10
+ 44%
132.50
-
110.29
15 - 12
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
16.81
12.01
0.60
134.13
-
73.04
11 - 6
2010
12.18
8.95
0.60
120.80
-
81.94
13 - 9
2009
8.57
5.59
0.60
106.46
-
51.03
19 - 9
2008
12.33
11.22
0.60
149.23
-
57.11
13 - 5
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
99
88
94
80
95
76
54

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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