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Apache Corp: Correction Presents Attractive Buy Opportunity

March 03, 2014 | About:
Value Investor

Value Investor

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Long-term prospects for Apache Corp. (APA) are still alive in spite of the recent plunge in stock price. Severe winter storms in the Permian basin and Central region has affected the production of the company, but this will only have a temporary impact. The company has good fundamentals and attractive valuations to be considered as a long term investment opportunity. The recent decline can therefore be considered as a good entry point for this stock.

Upside Based on Current Valuations

I will compare Apache based on EV/EBITDA valuation, which is most relevant for Oil and Gas companies. Trailing 12 months EV/EBITDA for Apache, Spectra Energy Corp. (SE) and Anadarko Petroleum Corporation (APC) is 3.6, 16.3 and 5.7, respectively. This clearly suggests that Apache is trading at a deep discount to its peers. In addition to the valuation, Apache's operation in the resources rich Permian and Central basin makes it a strong buy at current valuation.

Improving Balance Sheet

From a fundamental perspective, the company is in good health. An important parameter to consider in the balance sheet is the company's debt/EBITDA. A decreasing ratio indicates the company's leverage is not a concern and the financial flexibility is also high. Apache fits well in this parameter with a declining debt/EBITDA (table below) in the last four quarter. One reason for an improved debt/EBITDA ratio is the company's ability to cut down on its drilling and completion cost. Below is the per-well cost reduction which is expected to increase in 2014.

 

Fourth Quarter 2012

First Quarter 2013

Second Quarter 2013

Third Quarter 2013

Apache Corp

8.2

4.4

4.1

4

Anadarko Petroleum

8.8

5.9

6.5

9.4

Devon Energy

NA

NA

5.5

6.9

Spectra Energy

23.3

20.9

26.3

31.9

Source: Msn Money

Source: Company Presentation

On the contrary, peers like Anadarko Petroleum Corporation, Devon Energy and Spectra Energy have shown an increasing trend in leverage. Spectra Energy has been increasing its debt by 7% quarter over quarter from $12.8 billion in fourth quarter 2012 to $16.8 billion in third quarter 2013; this has resulted in an increasing debt servicing cost. The debt has been used for the acquisition of 100% ownership interest in Express-Platte pipeline system from Borealis Infrastructure and also to construct $3 billion interstate pipeline into Florida.These investments would however yield cash flows in the long term. Therefore, I would prefer Apache over Spectra as the latter has projects with a relatively long gestation period. The upside potential for Apache in the medium-term therefore looks more promising.

Permian Basin Outlook

Apache is benefiting from its performance in the Permian basin. The region controls over 3.5 million gross acres and Apache is the largest operator, operating more than 12,000 wells in 152 fields. The Permian region has been exceeding expectations and this could be evident from the record 133,713 Boe per day production for the fourth quarter 2013. Permian has also replaced 323% of production through drilling activities and increased proved reserves by 14% to 910 mn BOE in 2013. The basin therefore promises to be a long-term money spinner for Apache.

Source: Company Presentation.

A conservative estimate by Apache suggests 170MMBOE production in Permian region by 2016. This estimate is based on the production of Wolfcamp and Cline Shale. According to the Oil and gas industry, 50 billion BOE are yet to be drilled in WolfCamp Shale. Considering the price of oil at $100, Wolfcamp's value turns out to be $5 trillion. Apache holds 345,000 net acres in Wolfcamp shale and has 347 million Boe of resource potential from 971 drilling locations, bringing Apache's Wolf Camp value to $35 billion.

Final Thoughts

In addition to the company's healthy balance sheet and attractive valuation, Apache has achieved CAGR of 12% since its entry in the international market. Also, considering the company's continuous expansion effort in North America, wherein Apache has reported a 34% growth in onshore liquid production, I think Apache will break the trend and outperform its peers.

About the author:

Value Investor
A value investor.

Rating: 3.0/5 (3 votes)

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