This Cheap Energy Company Has a Positive Outlook

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

Since the beginning of the year, Apache (NYSE: APA) has appreciated 8%, much lower than the S&P 500’s return of 14%. Interestingly, Apache is in the portfolio of many famous investors including Brian Rogers, Wallace Weitz, and oil guru T. Boone Pickens. What might make investors excited is the fact that Apache is the second-largest position of Pickens, accounting for 9.5% of his portfolio. Is Apache cheap now? Let’s find out.

Business snapshot

Apache is an oil & gas company operating in several countries including the U.S., Canada, the U.K North Sea, Argentina, Australia, and Egypt. At the end of 2012, it had around 2.85 billion BOE in proved reserves, concentrated in the U.S. and Canada. The proved reserves and the Permian/Central Resources total around 11.7 billion BOE, four times higher than the current proved reserves. The U.S. Permian Basin accounted for around 28% of the company’s total reserves. The company is considered the most active driller in the Permian Basin with around 38 operating rigs.

What makes me interested in Apache is its conservative capital structure. As of March 2013, it had nearly $32 billion in equity, $248 million in cash, and only $11.5 billion in long-term debt. Moreover, Apache is a consistent dividend payer. Its dividend increased from $0.21 per share in 2003 to $0.66 per share in 2012. For the full year 2013, Apache expects to push its costs down, increase its dividend, and restructure its asset portfolio. The company expects to divest $4 billion in assets, and then it would use $2 billion to reduce its debt level and the remaining amount to repurchase 30 million shares.

Apache is trading at $84.90 per share with a total market of nearly $33.3 billion. The market values Apache at only 9 times its forward earnings. Compared to peers Anadarko Petroleum (NYSE: APC) and ExxonMobil (NYSE: XOM), Apache is valued the cheapest.

Anadarko and ExxonMobil are more expensive

Anadarko is trading at $86.10 per share with a total market cap of more than $43.1 billion. The market values Anadarko at a much higher valuation of 15.9 times its forward earnings. Anadarko had around 2.56 billion BOE in its proved reserves at the end of 2012. In the first quarter of 2013, the company achieved record daily sales volume of 793,000 BOE and monetized around $1.2 billion of assets. The EPS came in at $0.91 per share, much lower than $4.28 per share last year. The higher EPS last year was due to the profit tax settlement of more than $1.8 billion in and lower depreciation, depletion, and amortization.

For 2013, Anadarko expects to have around 279 million to 287 million BOE in sales volume. With an estimated capital expenditure of around $7.2 to $7.6 billion, Anadarko’s reserve replacement would be more than 150%. By 2020, the company is confident that it could deliver 5% to 7% annual production growth at current prices.

ExxonMobil is cheaper than Anadarko but still more expensive than Apache. At $90.60 per share, ExxonMobil is worth around $402.8 billion on the market. It is valued at 11 times its forward earnings. ExxonMobil had the largest proved reserves of around 25.2 billion BOE at the end of 2012. It is also considered the largest natural gas producer in the U.S., owning more than 74 trillion cubic feet equivalent of natural gas proved reserves.

In 2012, ExxonMobil had around 115% in reserves replacement, delivering $44.9 billion in earnings with ROCE of 25.4%. There seems to be a lot of potential for ExxonMobil in the long run with its huge resource base. Apart from 25 billion BOE in proved reserves, it is estimated to have 27 billion BOE of resources in design and development stages and an additional 35 billion BOE in future development, including shale gas, tight gas, and heavy oil sands. The company is positioned for long-term growth with 31 major project startups in the period 2012-2017, including Angola Satellites Deepwater, Papa New Guinea LNG, and Kearl Oil Sands.

Income investors might like ExxonMobil the best with its highest dividend yield at 2.80% while Apache and Anadarko only pay shareholders dividend yields of 0.90% and 0.40%, respectively.

My Foolish take

Oil investors should really consider Apache due to its lowest earnings valuation, strong balance sheet, and the potential asset sales. If it could divest $4 billion in assets this year, Apache could drive its EPS higher, thanks to the potential share repurchases and debt reduction. 

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Anh HOANG has no position in any stocks mentioned. The Motley Fool owns shares of Apache. 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!

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