Apache's Timing, Patience Pay Off

5/23/2011


  Recent Price
$121
  Dividend
$0.60
  Yield
0.5%
  P/E Ratio
13
  Shares (millions)
397
  Long-Term Debt as % of Capital
25%
  52-Week Price Range
$134.13 - $81.94

Founded in 1954, Apache ($121; APA) has increased reserves in 22 of the last 25 years and production in 30 of the last 32 years. That consistency is impressive given the capricious nature of oil exploration.  

Since its first big oil strike in Wyoming in 1967, Apache has grown into one of the country's largest independent oil-and-gas producers. In 2010, annual daily production rose 13% and proved reserves 25%, as Apache set all-time highs for revenue, net income, and cash provided by operations.

Apache has generated sales growth above 30% in six consecutive quarters, while operating margins have expanded. Crude oil and liquids accounted for 52% of 2010 production and 77% of revenue. The stock is a Buy and a Long-Term Buy.

Opportunity knocks

Based on 2010 production levels, Apache has 10 years of proved reserves for oil, 14 years for natural gas, and 22 years for natural-gas liquids. About 70% of proved reserves lie in the U.S. and Canada, though that percentage should decline in coming years. Apache drills in the U.S. (35% of 2010 revenue, 35% of 2010 production), Egypt (28%, 24%), the North Sea (13%, 9%), Australia (12%, 12%), Canada (9%, 13%), Argentina (3%, 7%), and Chile.

On the acquisition front, Apache kept a low profile from 2007 to 2009, mostly avoiding what it viewed as an overheated market. But in 2010, the company spent more than $11 billion on acquisitions, including $4.4 billion for Mariner Energy, known for its deepwater operations in the Gulf of Mexico. Apache paid $26.22 per share for Mariner — two years after its offer of $30 per share was rebuffed.

Also in 2010, Apache picked on BP ($43; BP), desperate to shore up its balance sheet as lawsuits piled up after the disaster in the Gulf of Mexico. Apache paid $6.4 billion to acquire assets in Canada, Egypt, and West Texas. In addition, Apache acquired Gulf of Mexico shallow-water properties from Devon Energy ($82; DVN) for $1.05 billion.

Now Apache, and its enlarged asset base, are benefiting from stronger energy prices. Apache's realized oil prices surged 31% in the March quarter, while production rose 25%. North American production jumped 47%, with the rest of the world up 6%.

Apache launched its first deepwater project in the Gulf of Mexico during the March quarter. The company plans to spend $8.1 billion on capital projects this year, up 65% from 2010 levels. Apache sees production rising 13% to 17% this year, excluding any acquisitions.

Conclusion

Apache, when compared to its peers, represents a compelling value. Shares trade at less than 13 times trailing earnings, versus 19 for the average exploration-and-production stock in the S&P 1500 Index. Wall Street sees per-share earnings surging 34% to $11.94 on 37% higher revenue. Yet shares trade at just 10 times that 2011 profit estimate, versus averages of 17 for the energy sector and 18 for the exploration-and-production group.

An annual report for Apache Corp. can be obtained at 2000 Post Oak Blvd., Suite 100, Houston, Texas 77056; (713) 296-6000; www.apachecorp.com.

 

APACHE
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Mar '11
2.86
vs.
2.08
+ 44%
132.50
-
110.29
16 - 13
Dec '10
1.77
vs.
1.96
+ 35%
120.80
-
96.51
14 - 11
Sep '10
2.12
vs.
1.58
+ 31%
99.09
-
81.94
12 - 10
Jun '10
2.53
vs.
1.41
+ 43%
111.00
-
83.55
16 - 12
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2010
12.18
8.46
0.60
120.80
-
81.94
14 - 10
2009
8.57
5.60
0.60
106.46
-
51.03
19 - 9
2008
12.33
11.65
0.60
149.23
-
57.11
13 - 5
2007
9.96
8.39
0.60
109.32
-
63.01
13 - 8
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
94
89
73
67
94
82
61

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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