Insiders Have Been Buying Shares of This Energy Company

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William Montgomery, a member of Apache's (NYSE: APA) Board of Directors, purchased 2,000 shares of the company’s stock on March 5 at an average price of $73.11 per share. He now owns a little over 12,000 shares directly, and so in percentage terms this is a significant increase in his holdings. Studies show that insider purchases are bullish signals, and we’d explain this by pointing out that the principles of diversification should guide insiders against purchasing shares (and therefore increasing their company-specific risk) unless they are confident in the stock price. When multiple insiders are buying within a short period of time, as is the case with Apache, this turns out to increase the chances of outperformance (learn more about consensus insider purchases).

Apache’s oil revenues grew by 4% last year compared to 2011 (for all of 2012, oil was responsible for 78% of the company’s revenue). This was partially offset by falling natural gas sales, but Apache was still able to report a small amount of revenue growth overall. However, higher operating costs caused earnings to fall substantially. The stock price has fallen 31% over the last year, partly because the company seems to have increased its natural gas production and therefore run up more expenses while prices sagged.

Analyst expectations are for fairly rapid improvement at Apache. At a market capitalization of $29 billion, the stock is priced at 15 times its trailing earnings but at only 7 times the consensus for 2014. This makes it cheaper than many other energy companies if it can hit its earnings targets, but at a premium to many oil majors in terms of its historical results.

13F filings, which we also use to develop investment strategies (for example, the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year), can tell us which funds owned Apache at the end of December 2012. Billionaire Ken Griffin’s Citadel Investment Group increased its holdings of the stock during Q4 to a total of 2.6 million shares (see Griffin's stock picks). Eagle Capital Management, which is managed by Boykin Curry, was also buying Apache and had 4.6 million shares in its portfolio at the beginning of January (find Eagle's favorite stocks).

Apache’s peers include Anadarko Petroleum (NYSE: APC), Devon Energy (NYSE: DVN), BP (NYSE: BP), and Exxon Mobil (NYSE: XOM). BP and Exxon Mobil, as we’d implied earlier, have trailing earnings multiples of about 10, a significant discount to where Apache trades, but the Street expects less improvement on the bottom line at those two companies with the result being that they have slightly larger forward P/Es. BP has also been reporting a declining business, with revenue and net income down last quarter compared to the fourth quarter of 2011.

Anadarko carries trailing and forward P/E multiples of 17 and 16, respectively, reflecting that its earnings are also expected to show little change; that company’s sales also dipped in the fourth quarter versus a year earlier. Devon reported a similar decline in revenue to Anadarko, and its stock price has fallen 25% in the last year. It’s another company where analysts are forecasting an improvement over the next couple years, which would pull its forward earnings multiple down to about 10.

The value case for Apache depends on it hitting its earnings targets, because it is not cheap compared to the oil majors we’ve discussed in terms of trailing earnings. It’s certainly possible that the company will do so, but we would hesitate to be too trustworthy of analyst expectations of a significantly stronger business. As a result we would avoid the stock, at least until Apache began reporting results that were in line with the sell side’s trajectory.

This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. 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!

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