Lagging Energy Sector Hides Apache's True Potential
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Apache (NYSE: APA) is a favorable asset for any investor interested in the long-term growth potential in the E&P industry. Apache is experiencing a lull in its stock price as is the majority of the industry at this time. Despite record-low gas prices, Apache managed to post record high revenues through the first quarter of 2012. Apache has a balanced and diversified portfolio focused on liquid and gas production in North America and internationally as well. Its expansive portfolio creates more options and opportunities to mitigate costs and financial loss in the face of unfavorable market conditions.
The current stock price is around $82 right now, this may be the best time to invest with Apache before its stock price recovers with the rest of the industry throughout the year. The price has been trending slowly downward since the start of the year but this is mostly attributed to the strained natural gas market. Apache has been growing and increasing earnings despite the low natural gas prices that have been troubling many competitors. Apache’s beta is over one, the PEG ratio is less than one and the market cap is more than $7 billion less than the enterprise value. This all indicates the potential for significant growth from the current stock price.
Apache’s success into the future derives from expanding its international asset portfolio while increasing capacity for an improved production rate and growth. Throughout the past two years, Apache put around $14 billion towards additional acquisitions and joint ventures in eight of its ten regions around the world. Apache is focused equally on natural gas and liquids production as well. Recent earnings have been slightly hampered by the recent dips in natural gas pricing, but acquisitions and increased production rates have prevailed thus far. Expect the stock price to increase considerably once the natural gas market normalizes again.
Apache currently has a 13 percent stake in the Australia Wheatstone project run by Chevron (NYSE: CVX) for LNG production in the eastern hemisphere. Chevron is the major player in this venture but Apache still stands to benefit from strengthening its presence in the eastern hemisphere. There is currently a contract with one of the major Japanese utilities to supply LNG from the Australian location for another 20 years. Apache’s stake in this project creates opportunities to increase its earnings from the other Asian markets as well. The well drilled on the Beryl Field in the North Sea has also paid off substantially for Apache. This well is in a territory acquired from Exxon Mobil (NYSE: XOM) and is now peaking at the highest production rate recorded in years. To investors this means that Apache has acquired an extremely valuable liquid asset that will lead to increased growth and earnings in the near future. The ability to capitalize efficiently off a highly divergent series of assets is a sound principle to help mitigate rates and foster growth synonymously.
Apache has had its highest production rates ever to start off 2012. Daily production has increased over seven percent from 2011. Apache produced 11 percent more oil year over year than in 2011 by increasing the well count aggressively from 36 up to 56. Apache has managed an adequate balance sheet through its recent reinvestments and acquisitions, and the stock price can increase by five to percent as soon as natural gas prices begin to normalize with the changing of the seasons. Apache is consistently improving the liquids in its international portfolio so it’s not as susceptible to pricing reductions in particular markets.
Apache expects corporate production growth at a rate between seven and 13 percent year over year from 2011. So far, Apache is on schedule to exceed its goal of 13 percent with its increased plans for production throughout the year in multiple plays worldwide. Apache is one of the largest producers in the Permian Basin, this began 2012 with 26 running rigs, and it ended the first quarter with 31 moving onto 34 rigs. At the start of 2012 Apache had 6 running rigs for the Mid-Continent liquids play and increased the number to 22 rigs by the end of Q1. The inventory in this play is similar to the Permian Basin and asset strength from its Central region play has allowed Apache to increase its activity by more than three fold. Apache is beginning to focus more on liquids in Canada as 83% of its production is still used for gas. Revenue in this sector continues to decline throughout 2012, the long-term outset is to export to demanding markets that express value for natural gas.
Apache has a more substantial asset portfolio than Marathon Oil (NYSE: MRO) while it has lower potential and probability for growth than EOG Resources (NYSE: EOG). Marathon Oil is currently trading at a discount in comparison to Apache, at around $24. Marathon Oil holds $31.85 billion worth of total assets currently, compared to Apache's $53.24 billion and EOG's $25.56 billion. Marathon Oil recently expanded another 20,000 acres in the Eagle Ford shale by acquiring Paloma Partners II LLC for $750 million in early May. Also operating in the Eagle Ford shale, EOG Resources reported oil and natural gas growth of 48% during the first quarter of 2012. The company also operates in the Permian Basin and Bakken shale. EOG has more substantial assets and production capabilities than Apache.
I think Apache is on track for high growth throughout the remainder of 2012 and into next year. With higher production rates than ever, a growing portfolio of acreage under aggressive discretion, and a willingness to embrace technology for innovation, Apache is a strong candidate for a promising international E&P investment.
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