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Holly LaFon
Holly LaFon
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Marty Whitman's Third Avenue Management Buys Apache Corp

July 02, 2013 | About:
Marty Whitman founded Third Avenue Management in 1986 and remains its chairman and portfolio manager. His firm’s philosophy centers around finding undervalued companies with a strong balance sheet and low book value (closely related to net asset value). They are less concerned with attempting to predict a company’s revenue and earnings potential in the future.

Several days after releasing his semi-annual manager letter, Whitman’s Third Avenue Management announced their second quarter portfolio update. The only new stock included was Apache Corporation (NYSE:APA).

Apache Corporation (NYSE:APA)

Apache Corp. is an oil and gas exploration and production company operating in the U.S., Canada, the UK North Sea, Egypt, Australia and Argentina. It has a $32.09 billion market cap.

Third Avenue purchased 750,000 shares of the company for $79.50 on average, amounting to a 2.4% portfolio weight and 0.19% of Apache’s shares outstanding.

Financially, Apache has achieved growing revenue annually since 2008 and experienced one year of losses in the same period:


In the first quarter of 2013, earnings were down to $698 million from the previous year’s $806 million, while barrels of oil equivalent production increased as North American onshore liquid hydrocarbons increased 45%.

Simultaneous with earnings, Apache said it plans to divest $4 billion in assets by the end of calendar year 2013 and use $2 billion of the proceeds to reduce debt, repurchase 30 million shares and boost its finances. In the past three years, the company has made more than $16 billion of acquisitions.

Apache has $248 million in cash and outstanding debt of $12.5 billion.

True to Third Avenue’s concern with book value, Apache in the first quarter traded near its lowest P/B ratio since 1999. See its historical range:


When they purchased, the stock was also approaching fair value according to the Peter Lynch chart:


Whitman commented on the new position in Apache in his semi-annual 2013 letter:

“The Fund initiated a new position in Apache Common (APA) during the quarter. Apache is a Houston based oil and gas exploration and production ("E&P") company. Apache Common seems to be very inexpensive—the shares were purchased at a slight discount to book value, 3.5x earnings before interest, taxes depreciation and amortization ("EBITDA"), 8x expected 2013 earnings and a 20% discount to our conservative estimate of net asset value ("NAV"). The management team, led by CEO Steve Farris, has an impressive long-term track record of growth, and several recent acquisitions, including assets opportunistically acquired from BP after the Macondo oil spill, provide the company with a wealth of development opportunities to drive future net asset value growth. Apache's financial position is strong as most of its debt is long term, low coupon (A-credit rating) and easily supported by cash flow (interest coverage totals about 24x).”

Whitman holds several other oil and gas companies in his portfolio, including Encana Corp. (TSX:ECA) and Devon Energy Corp. (NYSE:DVN).

See Marty Whitman’s portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of Martin Whitman.

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