Is Apache's Growth worth the Risks?
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With a company like Apache (NYSE: APA), it takes a lot of effort to form a clear opinion about its future. Given the same data, analysts' expectations and price targets vary quite widely. Much of this is due to the market for oil and gas exploration. The market is not where investors would like it to be. Natural gas is at almost unprofitable prices, and oil prices are dropping as well. In my opinion though, Apache should still be a profitable investment.
There are many good reasons to invest in Apache. It is an oil and gas exploration company that is heavily weighted in gas. As a result, it has a fairly consistent source of revenue. As people continue to drive and use gas, especially with it being summer, Apache should do fairly well. Toward the end of last month, Apache developed its North Sea Well, so it should have plenty of oil to sell as well. Apache considers this well to be among its best-drilled, giving it the highest production in ten years.
There are plenty of risks for an oil drilling company, however, as macroeconomic conditions can drastically change demand. If these risks stay at bay, however, Apache will be in a great position to profit immensely. It has taken care of its finances and is in a great place to capitalize on the North Sea, which has plenty of room for expansion. In addition, Apache has been able to secure favorable contracts by leasing out its wells into the future. This means that volatility of oil and gas prices will not cause as much volatility in its revenues, so this should dampen the negative feelings investors currently have about the low gas prices.
There are other reasons to be optimistic about the company as well. Apache has rushed into Asia in an attempt to gain traction with liquefied natural gas (LNG). Gas demand is projected to increase by 50% in China in five years, and early traction in this market will bring massive profits. This could also help soak up some of the excess supply of natural gas, helping to achieve more stable prices once again.
Apache is not alone in its rush to supply Asia with LNG, but it is amongst the first to do so. Energy companies need more places to sell natural gas. With demand expected to increase this drastically, I certainly would not bet against Apache doing well. Through the lens of a long-term investment, traction in Asia now will reward the company and shareholders very well once natural gas prices start to rise.
As I mentioned, its competition wants to do the same thing as Apache. Notably, Shell (NYSE: RDS-A) is first in the race to Asia, as it has presented the strongest proposal for a pipeline through Canada. It is in the process of developing an agreement with TransCanada and is likely to get one of the two licenses to sell LNG out of Canada. This will certainly put Shell in a strong position.
The other license will likely be secured by Apache, leaving other competitors at a loss. EOG Resources (NYSE: EOG) has invested heavily in natural gas, and it will be one of the companies losing in this deal. EOG does have some stake though, as it was a crucial part of planning the LNG terminal in the first place. In fact, it owns 30% of Apache's project to export LNG to Asia, which allows it to make money indirectly. This is a very smart move, and it should keep EOG stock fairly consistent, despite what initially appears to be bad news for the company.
Anadarko (NYSE: APC) has a different focus, as it has just announced a second natural gas discovery project around Mozambique. This project is a significant long-term investment. Anadarko expects this project to fuel many others and provide long-term, sustainable drilling. Due to how recently this discovery has been made, these results are yet to be seen. If things work as expected, however, it will give the company a source of natural gas that is geographically close to many emerging markets. The potential to be the first mover in these markets is hard to overlook, and I expect this to have large positive effects on Anadarko stock.
Despite these developments, an important event to remember is that the industry has received the support of President Obama. With fracking under scrutiny due to possible environmental concerns, there was reason to be skeptical of investing. The potential regulation of fracking increased the already-volatile prices of natural gas. This support will benefit all of the companies I have mentioned, therefore, and it will also help other industry notables such as Noble (NBL). This should allow stocks to do well, rather than being held back by these potential problems. With the industry growing so quickly, the last thing it needs is regulation to grind it to a halt.
Overall, I agree much more with the positive analysis of Apache's situation. I think that Apache is a good stock to own, especially if you plan to hold it into the future. While energy prices are volatile now, this is unsustainable, and this will likely change over time. When the dust settles, those who gained a strong hold in the market early will be rewarded, and I believe that Apache will be amongst these winners. I expect the stock to see major gains once again over time.
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