This Large Cap Explorer is Looking Very Attractive
By Dan Dicker - Aug 28, 2014, 8:35 PM CDT
In a recent column, I proposed a ‘super spike’ in oil prices – implying a super opportunity continued to exist in the exploration and production oil companies, particularly because they’ve been underperformers on the back of recently weak oil prices.
I proposed a lack of production growth in the traditional oil areas of the Middle East as the primary cause of spiking prices, again implying that US-focused E+P’s were likely to benefit the most. In the end, only an individual assessment of E+P stocks will benefit the investor, and in this column I revisit an old favorite of mine, Apache.
Apache earned its favored status with me for having a most disciplined leadership team, as seen by their sector leading debt to total equity ratio of 0.27%. But good debt control is only one aspect of a ‘great’ E+P and not enough to deliver returns on its own.
Most important in the past few years has been the execution of production growth. Consistently rising growth numbers and the way they are generated translates most often into rising stock prices. And in this, Apache has been a mixed bag, to be sure.
Before the rise of shale production of oil and gas here in the US, Apache made strong moves to increase its production in international arenas. The most important of these areas for Apache has been Egypt, where it owns the rights to 9.4m acres. It was the disruptions caused…
In a recent column, I proposed a ‘super spike’ in oil prices – implying a super opportunity continued to exist in the exploration and production oil companies, particularly because they’ve been underperformers on the back of recently weak oil prices.
I proposed a lack of production growth in the traditional oil areas of the Middle East as the primary cause of spiking prices, again implying that US-focused E+P’s were likely to benefit the most. In the end, only an individual assessment of E+P stocks will benefit the investor, and in this column I revisit an old favorite of mine, Apache.
Apache earned its favored status with me for having a most disciplined leadership team, as seen by their sector leading debt to total equity ratio of 0.27%. But good debt control is only one aspect of a ‘great’ E+P and not enough to deliver returns on its own.
Most important in the past few years has been the execution of production growth. Consistently rising growth numbers and the way they are generated translates most often into rising stock prices. And in this, Apache has been a mixed bag, to be sure.
Before the rise of shale production of oil and gas here in the US, Apache made strong moves to increase its production in international arenas. The most important of these areas for Apache has been Egypt, where it owns the rights to 9.4m acres. It was the disruptions caused by the Arab Spring revolution and subsequent government changes in Egypt that helped crater Apache stock through 2012 and into 2013, becoming by far the least favored large cap US E+P, even though less than 25% of Apache’s assets are Egyptian. It was on the basis of that overdone shellacking that I last recommended Apache in 2012. But that was a long time ago.
Since then, Apache has taken on a very extensive restructuring program, shedding Egyptian assets as best it can, divesting Canadian assets and trying (as so many US E+P’s) in concentrating on US onshore assets. Apache boasts significant acreage in the Permian and Anadarko basins as well as offshore in the Gulf of Mexico. It has been this relatively timely restructuring effort that has allowed Apache stock to gain over 23% since April of 2014, now trading over $100 a share. But is it still a buy, especially compared to other large cap US E+P’s?
Normally, when I haven’t recognized and recommended a value in E+P’s, which Apache so clearly was at under $80 a share, I’m hard pressed to jump onto a rising stock after such a large move. But with Apache, I’m ready to bring it back into ‘most favored stock’ status.
It’s not the new Apache Canning basin Australian find that was heralded recently that has again piqued my interest in this old friend either -- total projected reserves there of 120m barrels will hardly move the needle. But the conference call also reiterated Apache’s desire to sell off the proposed Kitimat LNG project in Canada, continue to lower exposure to Egypt but more tellingly, commit $2.6B in planned capex to North America, more than 40% of the total budget. With every motion towards US focused production targets, Apache moves closer to being priced like other US focused E+P’s in it’s class like Noble (NBL), Anadarko (APC), Hess (HES) and Marathon (MRO).
And that’s the key.
Even with a recent run of almost 30%, Apache is still nowhere close to where these others are being similarly priced on a P/E basis. Apache currently sports a 14.3 P/E while Anadarko and Noble, two of my other favorites in the space, are carrying a much loftier 19.4 and 19.2 respectively.
What Apache ultimately needs is the market’s respect – it is the Rodney Dangerfield of large cap US E+P’s. It has recently gained some of that back with it’s current run-up but still hasn’t fully shed Rodney’s trademark ill-fitting grey suit and red tie. But I predict it will.
Recommend Apache at $101.
