Apache Making Bets on CNG
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Apache (NYSE: APA) recently celebrated the opening of Louisiana’s first publicly accessible compressed natural gas (CNG) fueling station. Apache President and Chief Operating Office Rod Eichler indicated that the station “is a step toward building the infrastructure needed to fuel America’s cars and trucks with natural gas, a cleaner-burning and abundant domestic resource.”
The station is Apache branded, indicating that it is happy with other Apache branded stations, such as the one opened earlier this year in Tulsa, Oklahoma. Apache also has fueling stations close to its operations in Texas, Louisiana, and New Mexico. Though there are few private CNG fueled vehicles on the road, the city of Lafayette, where the Louisiana station is located, plans to convert its entire fleet of buses and a number of its city vehicles to natural gas. 274 of Apache’s own vehicles already run on CNG, with plans to raise that number to 350 by year end and 800 by 2015. To further encourage CNG conversion Apache offers an interesting employee perk: Employees who convert their vehicles or purchase a CNG fueled vehicle receive a $5,000 Visa credit card for purchasing fuel.
Chesapeake Energy (NYSE: CHK) is also interested in encouraging greater adoption of CNG vehicles, and small wonder: Since Chesapeake still relies on natural gas for its revenues, anything it can do to stimulate demand would help it recover from its current cash short falls. Earlier this year Chesapeake began a collaboration with GE (NYSE: GE) to “develop infrastructure solutions that will help accelerate the adoption of natural gas as a transportation fuel,” under a memorandum of understanding rather than a committed joint venture. Chesapeake Energy and GE plan to develop and market CNG and liquefied natural gas (LNG) transportation and home energy alternatives. However, Chesapeake’s current financial woes are putting a dent in the company’s ability to move on these initiatives, allowing Apache to pull ahead.
Exxon Mobil (NYSE: XOM) is taking the opposite tack. Despite the fact that it is now the leading natural gas producer in the continental U.S., Exxon Mobil believes that the various challenges CNG vehicles face aren’t worth the cost. Instead, it advocates pursuing increased efficiency for traditional and hybrid vehicles and better U.S. energy security.
I expect that others in the industry are disappointed by Exxon Mobil’s stance, but I also agree that the company's position has merit. It’s one thing to convert fleet vehicles with limited duties and predicable routes to CNG at company cost, and another to ask consumers to change their driving habits and absorb the cost not just of a more expensive vehicle, but of an entirely new infrastructure. Although I think it’s likely we will come to see more CNG vehicles on the road, I do not think that adoption will be as widespread as Apache and Chesapeake hope.
Still Looking for Hedges Against Nat Gas Exposure
Among its peers, Apache has a somewhat larger than average exposure to natural gas. 83% of Apache’s Canadian production is gas, and gas realizations for the firm are steadily declining as prices continue to flirt with new lows. This is partially offset by Apache’s operations in Australia where prices are stronger; Apache reported an average price in the region of $4.18 per mcf in the first quarter. Internationally, Apache reported 17% year over year gains in natural gas price realizations and primarily credited its contracts in Australia and Argentina for the rise.
Deutsche Bank, while reiterating its buy rating on Apache, lowered its price target for the stock to $110 from $119 earlier this week, noting “crude’s 25% retreat from its earlier highs” and Apache’s outlook’s dependence on this and natural gas pricing. Although I think that Deutsche Bank’s new target is too low for the long term, I can see why the firm would be pessimistic about prices stabilizing given current market turmoil.
Despite production disruptions, Apache posted a strong first quarter, driven by a 7% rise in production overall, which averaged a record 769,000 boe per day in the first quarter, leading to $4.5 billion in revenues for the period. Oil revenues alone accounted for $3.5 billion of those revenues, or about 80% of Apache’s take. This was a good start towards Apache’s full year guidance of between 7% and 13% production growth over 2011 rates, though it also means that Apache will need to post at least 7% growth in the second quarter or face the necessity of posting higher growth rates in the second half.
Last quarter Apache did miss expectations, coming in $0.09 below the average estimate to land at $3.00 per share. Analysts estimate that Apache will report between $1.89 and $2.98 earnings per share this quarter, a fairly wide spread that is only partly explained by uncertainty over calculating Apache’s international gas price realizations. The average estimate for Apache’s revenue comes in at $4.28 billion, which would be negative growth at 1.3% below its revenues in the year ago quarter, which were $4.34 billion.
Many of these misses are due to the depressed price environment and not serious mistakes by Apache’s leadership. Over the past three years, Apache was careful to keep its debt at manageable levels, and after a spike in long term debt in 2010 to $8 million, reduced its long term debt in 2011 to $6.7 million. Its cash flow from operating activities is healthy, although this is mitigated by its cash flow from investing activities. In each of the past three years, Apache reported massive losses on its investments, at $3.2 million in 2009, $13.4 million in 2010, and $8.6 million in 2011.
Apache is currently trading around $83, with a price to book of 1.2 and a forward price to earnings of 6.9. Indications are that after a tough summer for natural gas and crude oil prices Apache’s second quarter earnings will miss analyst expectations again, but I believe that the miss will not have a long term impact on Apache’s stock. A lower entry point may open after the company’s earnings announcement later this month, but even at current levels I am looking at Apache as a value.
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