Apache's Performance Declining

Austin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Apache (NYSE: APA) has had a tough year. Their stock price is down 28% over the last 12 months and earnings have decreased since 2011 while expenses have increased. This is not a recipe for success. 

<img src="/media/images/user_16267/screen-shot-2013-02-18-at-10308-pm_large.png" />

Their earnings have had a significant increase from 2009 to 2011, ranging from -$0.87 per share to $12.02 per share in 2011. However, 2012 earnings per share were only $4.92 per share. When compared to their main competitors Anadarko (NYSE: APC), Devon Energy (NYSE: DVN) and EOG Resources (NYSE: EOG), their earnings per share took the deepest dive and also the steepest recovery through 2011. Fourth quarter 2012 saw a drop in the energy sector and was the only sector in the S&P 500 to see a loss last Friday. 

<img src="/media/images/user_16267/screen-shot-2013-02-18-at-11454-pm_large.png" />

The current P/E and EPS put Apache at the top of the list for relative value. $1 of earnings is considerably cheaper from Apache than from its competitors. 

<table> <tbody> <tr> <td><strong>Company</strong></td> <td><strong>Market Cap</strong></td> <td><strong>12 Month %</strong></td> <td><strong>P/E</strong></td> <td><strong>EPS</strong></td> </tr> <tr> <td>Apache</td> <td>$30.13B</td> <td>-28.63%</td> <td>15.62</td> <td>$4.92</td> </tr> <tr> <td>Anadarko</td> <td>$41.04B</td> <td>-6.21%</td> <td>17.32</td> <td>$4.74</td> </tr> <tr> <td>Devon</td> <td>$24B</td> <td>-17.35%</td> <td>36.69</td> <td>1.62</td> </tr> <tr> <td>EOG</td> <td>$35.09B</td> <td>12.5%</td> <td>61.23</td> <td>2.11</td> </tr> </tbody> </table>

The end of fiscal year 2012 brought a reduction in earnings of -59%. This reduction in earnings, if capitalized at the weighted-average cost of capital, would produce a value considerably lower than what they are trading at. 

The WACC is calculated as 12%. The market value, market value of debt and market value of invested capital of Anadarko, Devon and EOG were used with their levered Beta to determine an unlevered Beta. With a risk free rate of 3.01% and an assumed market risk premium of 5%, Apache' WACC was determined. 

Using this discount rate and 2012 year-end earnings of $2.001 billion, the stock should be trading at a steep discount. 

<table> <tbody> <tr> <td> </td> <td><strong>Growth Rate</strong></td> <td><strong>Company Value</strong></td> <td><strong>Share Price</strong></td> </tr> <tr> <td>Capitalized</td> <td> </td> <td>$16.675B</td> <td>$42.54</td> </tr> <tr> <td>Cap. with Growth</td> <td>4.67%</td> <td>$27.298B</td> <td>$69.64</td> </tr> </tbody> </table>

This is a discount of 44% and 9%, respectively. 

The growth rate was calcuted using the last four year's earnings from Anadarko, Devon, and EOG. This was averaged over time and across each year and weighted with Apache's actual earnings growth. Because investors are valuing Apache at $76.85 per share, they are assuming a future growth rate of 5.6% from the current earnings. 

The current earnings of $4.92 per share when capitalized at 12% with a growth rate of 5.6% yields a per share value of $76.85. 

Now is not the time to purchase Apache. It has been a strong company with a long history of success, but they are overvalued based on earnings and competitive analysis. There is an opportunity for a short-sale or a put-option play in the near future. 

Here are some highlights - or rather lowlights - about their earnings drop last year. 

  • Apache had lower-than-expected production growth. They were not producing as much as they had anticipated.
  • They have a $10.5 billion capital expenditure this year but won't show any real returns until 2014. This represents roughly 20% of their total operating budget.
  • In an effort to repay debt, they are selling $2 billion worth of assets with a shift towards providing value to investors.

There are signs of good things to come, though. The capital expenditures can yield future production next year. Also, the sale of assets to pay down debt and to focus on future value is a positive sign from management. They have not announced what assets are being sold, though. The $16 billion in recent acquisitions by Apache may yield future earnings as well. 

Right now, the company may be overpriced based on current earnings. Earnings are expected to increase in the next two years. Until there is solid evidence, hold off on buying this once-great stock.

higginsaustin has no position in any stocks mentioned. Austin Higgins is the Principal Consultant for Build. Invest. Grow. and focuses on building businesses through innovation, growth and investment. Learn more at BuildInvestGrow.com and follow him on Twitter @Austin_Higgins.

The Motley Fool owns shares of Apache and Devon Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus