Four Reasons to Like Apache

Anh 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 underperformed the general market, as it has gained only 6.11% since the beginning of the year while the S&P 500 has increased by 13.24% during the same period. However, Apache seems to be a favorite stock of many famous investors including Martin Whitman, T Boone Pickens, Brian Rogers and Wallace Weitz. While Brian Rogers holds around 5 million shares in the company, T Boone Pickens and Martin Whitman own nearly 125,000 and 750,000 shares of Apache, respectively. Is Apache a good buy now? Let’s take a closer look.

Four reasons to be bullish on Apache

Indeed, there are four main reasons to like Apache. The first is about its potential reserves. It has the oil & gas operation in several countries such as the U.S., Canada, the U.K. North Sea and Egypt. In 2012, the company reported that it had around 2.85 billion BOE in total proved reserves, with around 28% of the total proved reserves in the U.S. Permian Basin. When mentioning the Permian Basin, people would think of Apache as the most active company with around 38 operating rigs in that area. Its proved reserves, including the Permian/Central Resources reaches as much as 11.7 billion BOE.

Second, Apache has quite a strong balance sheet. As of March, it had $32 billion in equity but only $11.5 billion in long-term debt. Its cash position came in at $248 million. Investment guru Martin Whitman likes the fact that the majority of its debt is low coupon with an A credit rating. Its interest coverage is quite high at 10.6 with a debt/equity ratio of only 60%.

Third, its shareholders will get a decent yield from its potential cash return program including dividends and share repurchases. At the current trading price, Apache offers its investors dividends with a yield at 1% with the very conservative payout ratio at only 15%. Investors might get excited by the company’s plan to divest $4 billion in assets by year-end 2013. The initial $2 billion will be used to reduce the company’s debt while the remaining $2 billion will be returned to investors via a 30 million-share repurchase program.

Last but not least, it is valued quite cheaply on the market. Apache is trading at $83.70 per share with the total market cap of $32.8 billion. The market values Apache at only 3.8 times its trailing EBITDA (earnings before interest, taxes, depreciation and amortization). The forward earnings valuation comes in at quite a low level as well at only 9.1.

Highest operating margin but lowest valuation

Compared to its peers including ExxonMobil (NYSE: XOM) and Anadarko Petroleum (NYSE: APC), Apache is the cheapest valued among the three. ExxonMobil is trading at $90.90 per share, with the total market cap of around $404.2 billion.

The market values ExxonMobil much more expensively at 5.7 times its trailing EBITDA and 11.06 times its forward earnings. ExxonMobil is the largest company among the three with the highest level of proved reserves of around 25.2 billion BOE in 2012, including 74 trillion cubic feet equivalent of natural gas.

ExxonMobil also seems to have tremendous potential resource base. In addition to the existing 25 billion BOE in its proved reserves, ExxonMobil estimated to have an additional of 62 billion BOE in the development stages and for future development. Moreover, the company’s long-term growth could be driven by 31 projects including Papa New Guinea LNG, Kearl Oil Sans and Angola Satellites Deepwater.

Anadarko is the most expensively valued company of the trio. At $87.80 per share, Anadarko is worth more than $44 billion on the market. The market values Anadarko at 7.14 times its trailing EBITDA and 16.3 times its forward earnings. Despite the higher market value, Anadarko had a lower total proved reserves than Apache of around 2.56 billion BOE.

For the full year 2013, Anadarko seems to be quite optimistic about its future with 279 – 287 million BOE in sales volume. It also estimated that it would spend around $7.2 to $7.6 billion in capital expenditure to boost the company’s reserve replacement ratio to around 150%. At current prices, Anadarko believes that it could grow its annual production by 5%-7%.

Among the three, Apache is considered the most profitable company with its highest operating margin at 38%. Anadarko ranked second with only 15% operating margin while the operating margin of ExxonMobil is the lowest at 13%.

My Foolish take

Personally, I think that Apache could be a good stock for energy investors to hold in a long run because of its high operating margin, conservative capital structure, low valuation and its huge potential resources. Moreover, with the potential divestment of $4 billion, Apache could further reduce its debt level and increase its share buybacks to effectively drive the company’s EPS higher. If Apache has the same valuation to ExxonMobil, it should be worth more than $125 per share, a 50% premium to its current trading price. 

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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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