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Apache: Focus On North America Is Value Creating

July 14, 2014 | About:
Faisal Humayun

Faisal Humayun

4 followers

Apache Corporation (APA), an independent energy company has done well in terms of stock upside in 2014. From 2014 lows of $78, the stock has not gained by 25% to current levels of $97.4. This article discusses the reasons for the upside and the reasons to remain bullish on Apache for long-term.

Apache has been on an asset selling spree in 2014 and I will discuss the reason for this asset sale strategy.

In February 2014, the company sold all of its operations in Argentina to YPF Sociedad Anonima for cash payment of $800 million plus the assumption of $52 million of bank debt.

In March 2014, Apache announced an agreement to sell producing oil and gas assets in the Deep Basin area of western Alberta and British Columbia, Canada, for $374 million.

In June 2014, Apache completed the sale of non-operated interests in the Lucius and Heidelberg development projects and 11 primary deepwater exploration blocks to Freeport-McMoRan (FCX) for $1.4 billion.

With the sale of these assets, Apache intends to focus on its next phase of growth, which is likely to come from the company’s North American assets. As of 2009, 34% of the company’s production came from North America onshore. With the sale of assets, 62% of the company 1Q14 production is expected to come from North America onshore.

The percentage of liquids to total production has increased 58% in 1Q14 from 50% in 2009. The company has accelerated liquids growth with industry-leading positions in the Permian and Anadarko basins.

In 2013, the basins achieved 34% increase in oil, condensate and natural gas liquids production while replacing 200% of the company’s produced reserves. A high reserve replacement ratio is an indication of the potential in the two basins.

Further, the company’s strong position in North America is evident from the fact that the company was the most active driller in 2013 onshore North America operating an average of 79 rigs on a daily basis and completing nearly 1,300 wells. With 1.7bboe of proved reserves and 14.0bboe of resource base, the strong drilling activity in North America is likely to continue.

For 2014, Apache has a big capital expenditure plan of $8.5 billion and 64% of the investment will be directed to North America. This implies that strong drilling activity and strong production growth will keep coming from the region. Apache expects 15% to 18% growth in North America onshore liquids production in 2014 and this will translate into strong revenue growth for the company.

I strongly believe that the company’s strategy of focusing on few core, but rich assets than looking for diversification of assets, will be value creating for shareholders over the long-term.

In relation to shareholder value creation, Apache increased its share buyback program to 40 million shares in May 2014. The company has already purchased 24.3 million shares for $2.1 billion and the purchase of remaining shares will continue to boost the EPS besides the growth coming from strong production.

On the value creation front, the company has also been increasing dividends at a robust pace and this is another reason to own Apache. A high growth company with an increasing dividend is certainly an attractive option. For 2014, the company’s annualized dividend of $1 per share translates into a dividend yield of 1%. The fact that Apache has increased its dividend by 67% since 2012 is more attractive than a seemingly low 1% dividend yield.

Another factor, which I like about Apache in the recent past, is the company’s increased focus on financial discipline. Apache has reduced its long-term debt from $11.4 billion in 2012 to $9.7 billion in 2013. Further, with asset sales in the recent past, the company has closed 1Q14 with a strong cash position of $1.4 billion.

Apache also generated $9.8 billion in operating cash flows for 2013 and similar cash flow in 2014 will ensure that the company’s capital expenditure is covered by the cash flows and the company is also free cash flow positive.

Taking into consideration all these factors, Apache certainly looks attractive with a long-term investment perspective. The company is currently trading at an attractive valuation of 4.0 times trailing twelve month EV/EBITDA.

In comparison, Anadarko Petroleum (APC) is trading at an EV/EBITDA of 6.6 and ConocoPhillips (COP) is trading at an EV/EBITDA of 5.4. Anadarko is therefore a value buy at current levels and the company’s change in asset focus strategy is likely to bring in long-term shareholder rewards. I consider Anadarko as a strong buy and investors can consider exposure to this stock at current levels.

About the author:

Faisal Humayun
Senior Research Analyst with experience in the field of equity research, credit research, financial modelling and economic research

Rating: 4.0/5 (1 vote)

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