Apache Corp. (APA, Financial) outperformed in 2016 in spite of tight market conditions and oil trading at multiyear lows of around $27 per barrel in February. With oil prices back on track and with less volatility, I believe Apache will continue to perform well in 2017. The company has upside potential despite a 72% gain last year.
From an asset perspective, Apache has a robust portfolio of global assets. The Permian Basin is one of the most lucrative assets because it has very low drilling costs with one of the highest resources available in the U.S. The company’s recent discovery of Alpine High lies in the southern portion of the Delaware Basin. The ares is estimated to hold 75 trillion cubic feet (tcf) of natural gas and 3 billion barrels of oil. The asset has more than 3,000 future drilling locations with nine of 19 wells currently producing in limited quantities due to infrastructure constraints.
In addition to this, the company also has a very balanced asset portfolio. The company's international and offshore assets are the positive free cash flow generators and exploration center. The free cash flow generated could be used to grow North American onshore assets. In fiscal 2016, the company estimated to invest 28% of its $ 2 billion capital expenditure in Alpine assets, 22% in the Permian Basin and the remaining in Egypt, the North Sea and other assets. This strategic investment is to create value through increased free cash flow generation. It is this balanced approach towards capital allocation that has resulted in stable production for the company.
Based on fiscal 2016 capital allocation, the company plans to continue its investments in the Alpine High and Permian Basin, which would drive growth of other assets.
Apache’s strategic transformation from acquisition and exploitation to organic growth is the key to its survival through downturns. While other companies have been focusing on acquiring resources, Apache has taken the contrarian approach of investing in its existing assets and creating value through innovation and operational excellence. During the downturn, the company significantly cut down on its capital expenditures and simultaneously preserved relatively stable production volumes in high margin areas. Apache is also well positioned for long-term operations by allocating a high percentage of its capital in North American assets and deleveraging.
Apache’s debt profile looks manageable with sufficient liquidity to meet its short-term obligations. As of Sept. 30, 2016, the company has total debt of $8.7 billion. According to the latest presentation, the company has total liquidity of $4.7 billion including cash and cash equivalents of $1.2 billion. With no near-term debt maturities and a strong operating cash margin across areas of operation, I believe Apache has a manageable debt position and sufficient liquidity to meet its capital expenditure requirements and dividend requirements.
As discussed earlier, the company has produced 72% returns in the past year. The stock still trades at attractive valuation however. Apache is currently trading at an EV/EBITDA of 11.3, which is well below peers Occidental Petroleum’s (OXY, Financial) EV/EBITDA of 17.9 and Devon Energy’s (DVN, Financial) EV/EBITDA of 14.6. Considering attractive valuations and a balanced portfolio, the company has the ability to provide good returns in 2017.
Apache posted net loss of 40 cents per share in its first-quarter 2016 report when WTI Crude Oil was $33. In third-quarter 2016, however, the net loss narrowed to three cents per share when oil was around $45 per barrel. Assuming oil continues to trend higher in 2017, good days are ahead for Apache.
Disclosure: No position in the stock discussed.
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