With Activist Investors on the Warpath, Apache Is Still Priced Too Low

NEW YORK (TheStreet) -- Apache (APA) is the kind of energy company attracting savvy investors who know a good deal when they see one. That's one of the reasons shares popped over 7% in the last few trading sessions and, at $101, are up 18% for the year to date.

There are still many reasons why the company's stock has room to run besides the fact that Apache is one of the world's leading independent energy companies. It also happens to be undervalued and is about to become much more productive by staying closer to home.

That's what motivated activist hedge fund Jana Partners to take a $1 billion stake in the company while urging management to enhance shareholder value including exploring a sale. The investment firm reminded Apache it has under-performed its peers, especially those operating exclusively in domestic shale formations such as the Permian basin.

To its credit, Apache quickly welcomed the specific concerns that activities should focus more exclusively on U.S. drilling activities. The company claims it is actively involved in selling international projects and targeting more profit-oriented production growth in North America.

With that emphasis combined with Jana breathing down its neck, Apache seems motivated to expand its sales of overseas interests. This will soon add up to $10 billion of cash proceeds which can be used for shareholder friendly decisions like raising the dividend or buying back shares.

Like Jana Partners, I'd rather see the company's management prepare for a friendly takeover. With a market cap of only $39 billion it would make a digestible target for Chevron (CVX) or BP  (BP), which are looking to grow production through smart acquisitions.

There's another big activity involving Apache that has tremendous money-making potential. But first let's look at a five-year chart that illustrates that the stock price has begun a new upward era.

APA Chart
APA
data by YCharts

Shares have climbed decisively above the 50-day and 200-day moving average prices. It's my opinion that APA has the momentum to reach the 2011 highs of $130, even without a buyout offer from a bigger energy firm.

Few investors realize that shares are trading at a forward price/earnings ratio of only 14, 20% lower than many of its peers. Yet the story that's sure to be a future price driver of Apache's stock concerns liquefying natural gas, or LNG.

The company owns 50% of the Kitimat LNG plant in Canada with Chevron. Apache also controls 5.4 million acres of natural gas shales in British Columbia, Alberta and Saskatchewan.

The company is poised to become a LNG powerhouse and Chevron knows it. The demand for LNG is just beginning to take off. With a deep-pocketed partner like Chevron, Apache is virtually assured a successful outcome.

In 2015 the project will begin to ship 10 million metric tons of LNG per year. So this facility will ship close to 500 billion cubic feet of natural gas annually, and with Apache's natural gas holdings there's close to a 100-year supply of LNG to process and sell.

None of this is priced into its shares, which helps explain its low price-to-book ratio of 1.2. The average price-to-book ratio of its peers is 3.1, so even if its stock doubled shares would trade with only a 2.4 ratio.

These are the compelling reasons to begin accumulating Apache before another activist investor takes a big stake or a competitor acquires it. Buy half soon and buy more after it announces earnings Thursday.

At the time of publication, the author was long APA and CVX, although positions may change at any time.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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TheStreet Ratings team rates APACHE CORP as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate APACHE CORP (APA) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its expanding profit margins, solid stock price performance, largely solid financial position with reasonable debt levels by most measures and notable return on equity. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • APACHE CORP reported flat earnings per share in the most recent quarter. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, APACHE CORP increased its bottom line by earning $5.63 versus $4.91 in the prior year. This year, the market expects an improvement in earnings ($6.94 versus $5.63).
  • The gross profit margin for APACHE CORP is currently very high, coming in at 76.75%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 6.47% trails the industry average.
  • APA's debt-to-equity ratio is very low at 0.29 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Although the company had a strong debt-to-equity ratio, its quick ratio of 0.95 is somewhat weak and could be cause for future problems.
  • Looking at where the stock is today compared to one year ago, we find that it is not only higher, but it has also clearly outperformed the rise in the S&P 500 over the same period, despite the company's weak earnings results. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • APA, with its decline in revenue, slightly underperformed the industry average of 3.5%. Since the same quarter one year prior, revenues slightly dropped by 9.3%. The declining revenue appears to have seeped down to the company's bottom line, decreasing earnings per share.

Marc Courtenay is a financial research analyst and the founder of Advanced Investor Technologies LLC as well as the publisher and editor of www.ChecktheMarkets.com.

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