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Apache Re-Loaded for Growth

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

Energy patch divestitures, mergers and acquisitions have picked up recently as companies strategically position their core businesses for further developing resource scarcity. Among the most active companies has been Apache Corporation (NYSE: APA) which spent about $15 billion to acquire several major productive assets among other strategic acquisitions. 

Apache is one of America's leading mid-major oil and gas exploration and production companies with global operations.  It's business model has historically included buying assets that other companies did not find core to their operations or when other companies needed capital.  During the later part of the last decade the company had greatly slowed acquisitions as it exploited other assets and adjusted to the post financial crisis environment. 

Among its major recent asset purchases was a $7 billion deal with BP (NYSE: BP) for acreage and infrastructure in the Permian Basin of West Texas and New Mexico, as well as, in Egypt, and upstream natural gas assets in Alberta and British Columbia.  The purchase was made at a perceived discount as BP undertook a massive reorganization in the wake of the Gulf of Mexico Deepwater Horizon spill.  The two major portions of the BP acquisition added over 260 million barrels of oil equivalent. 

Apache also made two major moves to enhance its position in the Gulf of Mexico.  First it spent a cool 1.1 billion dollars to acquire Devon Energy's (NYSE: DVN) shelf assets which Devon considered non-core to its operations as it heavily shifted to horizontal drilling activities instead.  The former Devon Gulf of Mexico shelf assets adds nearly 84 million boe proven and was accretive to Apache earnings in the first year.  Then, Apache completed a $4.3 billion merger with Mariner Energy which added substantial capacity to its Gulf operations.  Combined, Apache has become a Gulf of Mexico leader just as drilling permits have begun to be issued again.

Recently, Apache also acquired Cordillera Energy Partners for $2.3 billion. This deal added about 72 million boe in the Anadarko Basin of Texas and Oklahoma which has been increasingly profitable for producers.  While integration risk is always a hurdle, Apache has been successfully acquiring and exploiting assets for a long time. The Cordillera acreage is in close proximity to other Apache acreage and it is expected that efficiencies of scale will develop. 

Apache has significant other assets, including a 40% share of the Kitimat facility in Canada which is being developed to ship LNG across the Pacific, assets in Western Australia in the Carnarvon basin, the North Sea including Beryl which it acquired from Exxon, Egypt and Argentina. While the assets in the U.S., Canada, Australia and U.K. are all considered extremely safe, political risks in Argentina and Egypt have increased and should be monitored.  As a group, the diversified asset base of Apache offers both growth potential and a margin of safety in case it should have to raise its own capital at some point.

Over the five quarters prior to the Cordillera acquisition, Apache steadily increased production and reduced debt.  Its balance sheet is strong relative to many of its competitors with free cash flow of over $2 billion per year available to service net debts of about $7 billion. Presuming no negative surprises, I would expect Apache to continue to reduce debt on a consistent basis and then potentially use its financial flexibility to buy other assets, as has been its pattern.

After a recent share price decline, Apache currently has a price to earnings ratio of about 8 and forward P/E of 6.5.  With industry peers trading at an average current P/E in the upper teens, Apache seems inexpensive relative to its peers. The company is also trading with below industry price to book, price to sales and price to cash flow ratios. 

The company's recent growth rates have been negative as it has brought its recent spat of acquisitions on line.  Again, if history is a guide (and no guarantee), Apache would appear to be ready to hit the growth trail again, as it exploits its conquests, first with its Texas assets.  If you are looking for a fairly valued or undervalued diversified investment in the energy sector, Apache could be your next long-term holding.

Kirk Spano and clients of his Wisconsin Registered Investment Advisor Bluemound Asset Management do not own positions in any company mentioned in this article.  Neither Kirk nor Bluemound clients have made any transactions in the previous 3 days or plan any transactions in the next 3 trading days in the mentioned company's securities. Opinions subject to change at any time without notice. Follow Kirk on Twitter @GALPinvesting.


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