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 (APA).
Apache Corporation (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).”
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