Apache's New Focus Is Encouraging

 | Sep 03, 2013 | 12:00 PM EDT
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I have booked nice gains over the last year with a couple of large energy concerns, Hess Corporation (HES) and ConocoPhillips (COP). In contrast to oil giants Chevron (CVX) and ExxonMobil (XOM), whose stocks have underperformed the market in 2013, these two smaller energy companies have made numerous shareholder-friendly moves.

Hess, prodded by activists, has sold overseas properties and non-core operating assets to pay down debt and to become a more focused North American producer. The stock is up approximately 50% since late last year as a result. ConocoPhillips has sold overseas assets and spun out its retail as well as its refinery assets. Its refinery spinoff Phillips66 (PSX) is up some 75% since becoming its own separate entity.

I bring this up as it appears Apache (APA) has begun to copy the successful game plans of Hess and Conoco. The company has recently sold off non-core assets such as its Gulf of Mexico shelf properties, which was announced in July. It will use these proceeds to pay down debt, to buy back stock and to grow output from its North American assets. Production from North America has grown to 60% of its overall total from less than 55% at this time last year.

More importantly, it just sold a third of its Egyptian operations to Sinopec (SHI) for $3.1 billion. This transaction not only significantly reduced a major overhang on the stock, but Apache received much more for these operations than most analysts were expecting.

Apache's production profile is solid. It generates over 80% of its revenue from oil & liquids which gives it manageable exposure to low natural gas prices. The company has also provided guidance indicated overall production growth this year in the 3% to 5% range from its remaining assets, driven by the almost 20% increase it expects from its North American operations. It has significantly shifted its capital budget to grow this production such as from the Permian and Anadarko basins.

Although Apache shares moved up some 7% on back of the Egyptian sale, APA has still underperformed the overall market this year. The stock is not expensive at less than ten times trailing earnings and less than 10% above book value. The company's balance sheet picture is improving as some of the proceeds from asset sales are targeted to reducing debt. Apache also has an open stock repurchase program that would retire some 7% of its overall float at current prices. I would look for the company to increase its meager 1% dividend in future years as it pares debt and grows production from North America and its other remaining assets.

I have upped my stake in Apache after its recent moves as I think it could provide similar gains to Hess over the longer term, based on its new focus. I am also keeping an eye on Anadarko Petroleum (APC), which recently received over $2.5 billion for selling 10% of a stake in a huge new field in Mozambique. The company might be the subject of a future column.

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