Apache's Momentum Running Low on Energy

NEW YORK ( TheStreet) -- For the most part, 2013 will be remembered as a "so-so" year for companies that deal in exploration and production of oil and gas. Even with the volatility and weak demand, Apache ( APA) was a notable outperformer, despite persistent unrest in areas like Egypt, where Apache have some strong, albeit risky, assets.

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Aside from a strong drilling program and timely acquisitions, Apache is doing well because management has consistently placed winning bets (even on the long-shots). The problem is that in the process of outperforming the likes of Chesapeake Energy (CHK) and Anadarko Petroleum (APC), Apache is no longer an underdog.

When Apache first demonstrated struggles with production growth, I defended the company. This was at a point when the Street turned negative, calling management's maneuvering as "too scattered." But Apache wasn't hardly alone. While management did look for growth through acquisitions, no one can debate that these deals have paid off.

Today, the Street is supportive of Apache management's ideas. While I do still like this company, I worry that expectations may soon get out of hand. As I've said, Apache has done well beating the odds, yes. But this is still a highly volatile commodity-driven industry. So although it is a top-notch energy company, there's still an open question as to whether Apache is the best way to play this recovery.

There are several energy majors, including Exxon Mobil (XOM) and Chevron (CVX), with very compelling outlooks for debt-adjusted production growth over the next three to five years. While both Exxon and Chevron are trading at much cheaper valuations/multiples than Apache, they also come with significantly less risk.

Apache reports fourth-quarter and full-year results on Thursday. Management will have an opportunity to update investors on what has been an eventful 2013. One of these events was selling a third of its Egypt business to China Petrochemical, or Sinopec, for $3.1 billion. This deal just completed in the fourth quarter.

Thus management reduced some investor fears regarding to Egypt's instability. But how much of a difference will it make? A couple of weeks ago, the company advised that its fourth-quarter results were going to be adversely impacted due to downtime and outages caused by severe winter weather that hit its Permian Basin and Central Region operations.

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The Street didn't react too negatively to the news, a good thing since weather impacting Apache more than likely means rivals are also affected. This isn't a fundamental issue and/or a company-specific deficit. Still, that doesn't mean there won't be some sort of reaction (good or bad) when the actual numbers are released.

Investors will be looking for earnings of $1.82 per share on revenue of 43.7 billion, or a year-over-year revenue decline of 15%. But I wouldn't hit the panic button here solely on the weak revenue number.

Let's not forget the Egypt asset sale that closed during the quarter. Egypt has been a consistent growth contributor. And I suspect Apache's business took a substantial hit from divesting a third of those assets. Egypt generated some above-average production returns for what I have to believe were pretty meager ongoing costs.

The good news for Apache is that there is a clear recovery in the global energy market. And management has hinted about selling more assets in areas like Argentina, where Apache has rights to Argentina's Vaca Muerta Shale oil and gas field.

As much as I value what Apache has done and the maneuvering that has gotten it to this point, the stock has nonetheless gotten too popular. I was right to defend the company at several points last year when these shares were getting punished. The stock price's significant rise of late raises new questions regarding cash flow and production growth that need to be answered. Until there's more clarity, I can't stick my neck out at this point.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.