Apache Finds Black Gold, Stock Remains Cheap on Production Outlook

 

NEW YORK (TheStreet) -- It took a while but energy giant Apache (APA) has answered that all-important question for oil companies: Where has the production gone?

Monday, the energy giant said it struck oil in Australia's Canning Basin.

Apache believes one of its wells, the Phoenix South-1, discovered oil in four locations and may hold as much as 300 million barrels. As management put it, "Phoenix South may represent a new oil province for Australia.”

If this is true, it erases prior concerns about whether Apache, which competes with larger rivals Exxon Mobil (XOM) and Anadarko (APC) , can regain its reputation as a strong exploration and production play for oil and gas. Investors shouldn't waste time to find out, however. Now's the time to buy.

The stock, at $98, is up 14% for the year to date but still down more than 6% from its 52-week high, so they are cheap. This is even with Apache posting gains for close to 15% on the year to date, besting the energy sector's 11% gain.

With the stock trading at a P/E of 22, which is two points higher than the industry average, there was concern Apache's shares had outrun its production capabilities. Not to mention, the share traded at a much higher multiple than both BP (BP) and Exxon, even though both BP and Exxon are growing revenue at a faster rate.

Today's development, however, changes the story.

Consider, Australian oil production is projected to rise by an 385,000 barrels per day. This is expected to last throughout the next nine months, according to the country's Bureau of Resources and Energy Economics. For some context, during that same span the same report suggests that total global output may be 95.1 million barrels per day.

In the most recent quarter Apache produced roughly 636,000 barrels per day. Combine this with potentially 385,000 barrels per day from its Phoenix South-1 well and investors are looking at more than one million barrels per day in production. That's more 1% of the projected global oil output over the next year.

Analyst will have to revise their models on the basis of the company's new discovery. What's more, after recent asset sales, including selling its Egypt business to Sinopec for $3.1 billion, Apache's business has become less risky. The company infused itself with cash while (at the same time) reduced exposure in an unstable Egyptian environment.

Whether through its strong drilling program, timely acquisitions and divestments, Apache one of the best energy stocks to own today. Despite the year-to-date outperformance, investors can still do well. This is because based on next year's earnings estimates of $6.99, Apache's P/E drops to 14, or six points lower than the industry average.

The way I see it, striking black gold today is only part of the story. Apache's management, which has shown a strong commitment to shareholder value, has pushed all of the right buttons in the past year. And there's no meaningful signs of slowing down.

On the basis of growing free cash flow and debt-adjusted production growth, these shares can command a fair-market value of $115, which still represents 17% premium.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

Follow @Richard_WSPB

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

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 some important positives, 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 largely solid financial position with reasonable debt levels by most measures, expanding profit margins and solid stock price performance. 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's earnings per share declined by 48.4% in the most recent quarter compared to the same quarter a year ago. 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 ($6.75 versus $5.63).
  • APA's debt-to-equity ratio is very low at 0.30 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 0.81 is somewhat weak and could be cause for future problems.
  • The gross profit margin for APACHE CORP is currently very high, coming in at 71.33%. Regardless of APA's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, APA's net profit margin of 13.61% compares favorably to the industry average.
  • APA, with its decline in revenue, slightly underperformed the industry average of 2.6%. Since the same quarter one year prior, revenues slightly dropped by 7.3%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
  • 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. The stock's price rise over the last year has driven it to a level which is somewhat expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.

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