The weakness in Apache (APA) stock has gone far enough, I think.
After hitting $142 in 2008, these shares have declined steadily -- and, just last week, they dropped another 9% to some $77 because of an earnings miss. At that slimmed-down price, Apache is selling for 8x earnings, and just under stated book value. That, to me, is a bargain level, and I believe the stock is worth buying.
Apache's problems start with the pricing of its products. Oil accounts for about 76% of its revenue, natural gas chips in about 21% and natural gas liquids (such as propane, butane and ethane) add the final 3%.
The whole business world knows what has happened to natural gas prices in the past five years. In mid-2008, nat gas fetched more than $10 per 1,000 cubic feet. Today it goes for around $3.40. Big discoveries in U.S. shale formations, coupled with advances in horizontal drilling, created a gas glut -- one that's just beginning to ease a bit.
Oil prices have been no picnic, either. A barrel of West Texas Intermediate fetched more than $100 per barrel for eight consecutive months in 2008, from February through September. During the financial crisis and recession, the price took a tumble, falling to about $42 by January 2009. Since then oil has staged a gradual comeback, and now is around $96.
But Apache's problems go beyond pricing. When investors look at Apache, I believe they feel uncertain about its business strategy. Does the company want to be mainly a U.S. producer, or a worldwide one? Is natural gas a key part of its business, or a tangential one?
Originally known as a U.S. producer, Apache has gone international with a vengeance, buying interests in wells in Egypt, the North Sea and elsewhere. In 2011 the U.S. accounted for about 36% of revenue, Egypt 28%, the North Sea 12%, Australia and Canada 10% each and all other areas about 4%.
Four or five years ago, Apache was frequently mentioned in the same breath with natural gas producers such as Chesapeake (CHK) and Devon (DVN). Today, in an era of a gas glut, the emphasis is back on oil.
A couple of additional investor worries are political turmoil in Egypt, as well as an increase in Apache's debt acquisitions in the past three years. In my view, debt is still not excessive: It comprised 39% of stockholders' equity as of Dec. 31.
My response to all of these problems can be summed up in six words: It's all in the stock price. Apache's problems are now well-known, and the stock is priced accordingly. In my view there is ample room for positive surprises over the next two years.
John Dorfman is chairman of Thunderstorm Capital LLC, a money-management firm in Boston. He can be reached via email here.