Wouldn't Dip Into Apache Just Yet

 | Mar 30, 2013 | 4:00 PM EDT  | Comments
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Stock quotes in this article:

apa

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apc

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eog

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cop

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cvx

An Apache (APA) board member has bought a swath of shares recently, so let's take a closer look. As a reminder, insider buying tends to correlate with outperformance, according to studies -- and this makes financial sense, since it's likely only high confidence in a stock would trigger an exec to expose themselves further to the company-specific risk. In his case, executive Randolph Ferlic picked up 10,000 shares of Apache through his IRA last week at an average price of $74.48. In early March, another insider was buying as well, making this a consensus insider purchase within a short time period -- a particularly bullish signal.

Oil-and-gas name Apache has $30 billion market in market capitalization, though it's more concentrated on oil than many other energy companies, to the tune of nearly 80% of its revenue last year. The company's total top line grew just 1% in 2012, and all the while operational expenses mushroomed -- and, even if we subtract out some abnormally high depreciation costs, pretax income sank 17%. As for valuation, the stock currently trades at 16x trailing earnings, though its forward price-to-earnings ratio is 8x. Wall Street analysts believe the causes of Apache's high costs will dissipate over the next several years, and that considerable earnings growth will result.

Our database of hedge fund disclosures, or 13F filings with the SEC, reveals that Ken Griffin's Citadel Investment Group padded its Apache holdings to a total of 2.6 million shares in the fourth quarter. Eagle Capital Management, managed by Boykin Curry, was also buying: That fund upped its stake by 34% and closed December with 4.6 million shares in its portfolio.

If we want to stack Apache against its peer group, we could pull numbers from Anadarko Petroleum (APC), EOG Resources (EOG), ConocoPhillips (COP) and Chevron (CVX). The first two trade at 16x to 17x forward earnings estimates, putting them at a premium to the Conoco, Chevon and Apache. In Anadarko's case, this is because the sell side expects essentially flat business -- which would actually represent an improvement over recent conditions, as revenue declined by 10% year over year in the last quarter. With EOG, this forward P/E ratio is due to the company's high earnings growth, with quite a lofty trailing-earnings multiple. EOG has been reporting rising sales, but we would be cautious here, given how much growth is already priced in.

ConocoPhillips and Chevron, large oil majors, have somewhat lower expectations in the eyes of the market: Each posts a trailing and forward P/E ratios of 9x and 10x, respectively, in line with the valuations of other large oil companies. Revenue has been fairly flat at these two, but they seem like better starting places for further research, considering the discount at which the shares are trading.

In all, given the current pricing of Apache stock, it might be better to wait for this particular company to stabilize its business and begin to see some earnings growth. Chevron, ConocoPhillips and other oil majors tend to sport considerably less expensive shares in terms of valuation. So, even with the inherent commodity risk -- which should, of course, also be a factor for potential Apache investors -- we think these stocks look like better buys.

-- Written by Matt Doiron

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