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Apache Will Surge on Oil, Wait on Natural Gas

April 16, 2012 | About:
Apache (APA) is an independent oil and gas operator. In this article I explain where the company and its competition are headed in the future.

Apache is currently hovering around $96 a share, and the stock has followed the seasonal driving cycle over the last year by peaking in the summer and bottoming in October. Oil has moved up over $100 a barrel the last six months and it's not even summer yet. I don't believe oil has finished its climb, and there's still time left to move up before the seasonal cycle turns downward for oil. Apache is focusing on oil rather than natural gas due to the rise of oil and the 10-year low that natural gas recently hit. Natural gas just isn't worth looking for in the current market.

Apache announced for this reason that the search for gas off the coast of Louisiana had ended. Apache also announced a $3 billion note sell to the public which will finance the acquisition of Cordillera Energy and pay off the principal for $400 million in old notes. The remainder will go for general company purposes. Apache recently opened its first public access compressed natural gas station in Tulsa.

Apache also opened a natural gas processing plant in Western Australia calledDevil Creek this year and announced it would produce another 5,200 barrels a day from a well drilled in the Western Egyptian desert in the Faghur Basin. Apache also bought interests in two ammonia fertilizer plants and a plant that will make explosives from the same raw materials in Western Australia in the last few months. This allows Apache to increase revenue in this part of the world and be vertically connected using Apache's oil and gas for the ammonia plants.

Exxon Mobil (XOM), a behemoth of a company with a $399 billion market cap, is spending a lot of money just to slightly exceed production. The old saying "It takes a lot to make a lot" holds true with Exxon. Due to its market cap of $37 billion, Apache is considered a mid-major sized company. I prefer Apache because of their size. Apache can make quicker moves to market changes. For example, when oil turns back down or natural gas rises from historic lows, Exxon-Mobil won't able to take advantage of the changes like the smaller Apache.

Apache doesn't require the huge overhead and huge risky outlays (like deep water rigs) just to make nominal profit gains. Due to the amount of expense needed to tap new production, when there's a failure it can be costly. Exxon also has a retail sector that sometimes is more trouble that profitable. The company has to have management to run that division that doesn't blend well with the rest of the exploration and production side of the company. Exxon-Mobil should sell off unnecessary parts of the company and "trim the fat." Some reorganization might also help. I guess that's the trouble of having a company with a $399 billion market cap. I like Apache stock better than Exxon Mobil.

ConocoPhillips (COP) is working toward getting rid of some assets and reorganizing the company. Conoco sold off all its Vietnam interests for $940 million and is getting payments for North Sea and North American natural gas assets, some of which may continue to be partly owned by Conoco. The majority of these payments will be received in the second and third quarters. In all, these payments will total $10 billion for Conoco in positive cash flow in 2012. Further, the retail portion of the company is being spun off and into a separate company to be called Phillips 66. The rest of Conoco will be made up of oil/gas exploration, production and petrochemicals. $5.8 billion from selling senior notes was set aside in escrow for Phillips 66.

Debt and stock will be reorganized between the two units. This will make ConocoPhillips more efficient and more profitable. Apache did sell some senior notes to fund an acquisition and pay down some debt. However, Apache being a smaller company doesn't have all the organizational and inefficiency issues of ConocoPhillips. Apache is currently a better buy, but ConocoPhillips should become a better stock pick in the third quarter after the Phillips 66 spin-off and the rest of the $10 billion in payments are completed.

Anadarko (APC) is another mid-major oil and gas exploration and production company of similar size to Apache. Anadarko has successfully found new reserves offshore in Mozambique, signed a deal to produce gas in the Salt Creek oil field in Wyoming, and found new oil reserves off the coast of Ghana. Anadarko really relies on the ability to use its own people to find and develop oil and gas fields. As a result, Apache has had more mergers and acquisitions than Anadarko; however, Apache has a higher profit margin (27.50% to -19.08%) and a better operating margin. (50.24% to 17.94%) than Anadarko. Apache has a better cash flow with plenty of proven reserves so I prefer Apache stock over Anadarko.

Devon Energy (DVN) has huge cash reserves of over $7 billion and with no plans to acquire any companies according Devon Energy's CEO. Devon Energy also has an amazing profit margin of 44.49% compared to Apache's 27.50%. Devon's strategy, based on the way it conducts business, is to find and produce its own oil and gas fields rather than buy out a competitor. Devon also saves its cash and keeps its debt lower than a lot of other mid-major oil and gas companies. Both Devon and Apache have good cash flow and profit margins. Apache has good leadership, is well run, and has sound debt structure, but I like the stock for both Devon Energy and Apache. You can't go wrong with either company. Where does Apache go from here and what does the future hold?

Apache will continue to build compressed natural gas stations. I wouldn't be surprised to see Apache get more help from the government to build more of these stations as one of the solutions to our dependence on gasoline and foreign oil. Apache will probably build more gas infrastructure such as pipelines, processing plants and wells. Some of the infrastructure will support the compressed natural gas stations. This will be done a little at time to spread the cost. I also expect Apache will ramp up natural gas production when the price starts to go back up. Apache will also return to coastal Louisiana to continue looking for natural gas. Apache will be a good stock investment for years to come.

About the author:

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