This Oil E&P Company Is Extremely Cheap

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

Apache Corporation (NYSE: APA) is one of the largest American oil exploration and production (E&P) companies, with operations in seven countries.  Apache runs about 100 oil rigs, and has done well in terms of increasing its productivity in recent years.  Despite this fact, and despite the great quarter the company just reported, shares are still trading close to their 52-week low and are valued at around 8 times earnings.  At a time when virtually every other company in the market seems to be making new highs daily, an underperforming oil company like this stood out, and I figured it may be worth a look.

About Apache

Apache has operations in North America as well as in Egypt, Australia, Argentina, and Chile.  Apache’s North American operations account for just over half of the company’s revenue, and are mostly based on and around the Gulf of Mexico and in Canada. 

The company’s largest land holding is their Egyptian operations, which include almost 10 million acres and makes them the largest landholder in Egypt’s Western Desert.  Their Egyptian land holdings present tremendous exploration opportunities, but the operations in the country already make up over 20% of the company’s total production.

In all, Apache has proved reserves of just fewer than 3 billion barrels of oil equivalent (BOE), and the company is currently producing about 750,000 BOE per day. 

Acquisitions, etc…

Apache has made several large acquisitions over the past few years that have significantly added to the company’s global footprint.  Among the most notable is the company’s acquisition of BP’s operations and infrastructure in Egypt and virtually all of BP’s natural gas operations in Alberta and British Columbia, for which Apache paid $6.4 billion in 2010.  Last May, Apache acquired Cordillera Energy Partners for $2.85 billion, adding over 250,000 acres in Texas and Oklahoma to the company’s holdings. 

Historically, the company has done a fantastic job of integrating the assets it acquired, and it has done an excellent job of squeezing more productivity out of their mature reserves.

Valuation and alternatives

The main reason that I’m interested in Apache is that it is laughably cheap right now.  At the current price level of about $76, Apache trades for just 8.2 times last year’s earnings.  The company projects productivity growth of between 6-9% annually over the next several years, which I think is rather conservative considering the company’s focus on exploring for and drilling new wells.

Apache is projected to earn $9.11 per share this year, growing to $9.85 in 2014.  The company trades at a steep discount to its historic average valuation, possibly due to the high volatility of oil prices in today’s market. 

To further illustrate how cheap Apache is, let’s take a quick look at two of its peers, Anadarko Petroleum (NYSE: APC) and Devon Energy (NYSE: DVN).

Anadarko operates in the United States and also has E&P activities all over the world, and the company has over 2.5 billion BOE of proved reserves.  Shares trade for a lofty valuation of 24.7 times last year’s earnings, but the company is projected to grow earnings by an average annual rate of 16.4% going forward.  Even with growth like this, I don’t think Anadarko is such a great deal, especially when compared with Apache.  To put things in a future value perspective, Anadarko trades for 15.7 times 2015’s projected earnings, compared with just 7.1 for Apache.

Unlike the other two, Devon Energy operates in just North American onshore areas, and holds about 14 million acres.  Devon has the most proved reserves of the three, at over 3 billion BOE.  The company is valued right between the others, at just under 18 times earnings.  With 18% annual growth projected between now and 2015, Devon may be a good deal right now. However, bear in mind that Devon’s lack of geographic diversity does add another set of risks.

Conclusion

When it comes to Apache, analysts seem to agree with my bullishness.  The average 12-month price target of the 25 analysts following the company is $98.38, which is more than 20% over the current levels.  I don’t know about you, but I’ll take on a little oil price risk for that kind of upside potential!

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Matthew Frankel has no position in any stocks mentioned. 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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