A world economy in sincere recovery, with great improving sings, continues to push up the demand for fossil fuel. It is no secret that oil is the one single most important resource for economic growth. That is the simplest argument for the continued U.S. intervention in the Middle East, and increasing Chinese presence in the African continent. Most importantly, a slowdown of the Chinese economy and comparatively slower recovery of the euro zone, have lifted some pressure form explorers and producers. Nonetheless, Obama’s visit to Saudi Arabia highlights the importance of securing oil resources. Apache (NYSE:APA) is one of the most geographically diversified companies, and its prospects for growth deserve to be considered after a year of heavy guru trading.
Adjusting Capacity Through Non-Core Assets
Asset sales are not always well received by the market, as the signal can be taken to indicate troubling times. Apache, however, has divested non-non non-performing assets while receiving timid market support at the same time. The announcements concerned assets in Canada and Argentina, the first worth $374 million and the second for $800 million, plus a debt assumption of $52 million. Both transactions are part of a process that began last year to focus on assets in North America that can grow more predictably.
- Warning! GuruFocus has detected 5 Warning Signs with APA. Click here to check it out.
- APA 15-Year Financial Data
- The intrinsic value of APA
- Peter Lynch Chart of APA
Part of the funding collected through the transactions are expected to be used on the $30 million-share repurchase program that was authorized by Apache's Board of Directors in 2013. That is a clear sign previous announcements will be followed through amid changes in the executive organization. And the market shouldered the compromise maintaining stock face value through the transition.
Most importantly, the Deutsche Bank raised Apache’s target price by $1 at the beginning of April, while Zacks confirmed a “Neutral” rating. The general trend however, has been a downgrade to a “Neutral” rating through February, most notably at the hands of UBS, Credit Suisse, and Citigroup. The good side to the news is that target price for institutions remains above $100, meaning the firm is expected to continue growing.
Prospects Fuel High Trading
Financially, Apache shows a clean balance sheet, recognized by analysts as one of the company’s highest points. Operating margin is above the industry’s average, but other indicators shed some light over a stagnant performance. For example, revenue and net income stood at similar levels during the last three years. On the other hand, debt has seen some improvement, as has cash flow. Nonetheless, the overall situation is not one of a strongly growing company.
The greatest downside to Apache is the combination of exposure to oil and gas prices and acquire-and-exploit business model. The volatility of the first, materialized on a steep recent dropped, and the lack of current accretive transactions, can gravely curtail future growth. Additionally, long-term contracts signed with Australian authorities are tied to the consumer price index, exposing the company to greater-than-average margin compression.
The upside to Apache is a geographically-diversified reserve base, acquisition and development of existing reserves, and increasing international footprint. That is what gurus looked at last year, and their investment was confirmed thanks to a recovery of oil prices. Nonetheless, the tendency for oil prices is a clear downtrend, making an investment in the company a risky one.
Apache currently trades at 15.6 times its trailing earnings; the stock carries a 43% discount to the industry average. With an annual yield of 1.19%, based on a quarterly dividend payment of $0.20, the stock is not worth a long-term investment. In other words, all the gurus that purchased the stock are in for the short term, the reason for a high trading rate.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.