Apache Shows Noteworthy Insider Buying

 | Sep 09, 2013 | 5:00 PM EDT  | Comments
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Since the beginning of September, two members of Apache's (APA) board of directors have bought the stock at around $85 to $86 per share, including a purchase of 10,000 shares by board member Chansoo Joung.

Insider purchases, particularly when more than one insider is buying, are generally seen as bullish signals, because they suggest that these insiders are confident enough to overcome the fact that buying the stock increases company-specific risk. Blindly following insider purchases often isn't wise, but investors can keep an eye out for these consensus insider purchases and then do further research on the companies involved.

Apache is engaged in exploration-and-production activities worldwide. In the second quarter of 2013, 45% of its production by volume was oil, as opposed to natural gas and natural gas liquids. However, the sharp price differential between oil and gas continued, and so oil was responsible for more than three-quarters of revenue. In terms of production mix, natural gas production declined by 6% from a year earlier, but this was offset by large growth rates of natural gas liquids (from a small base) and a modest increase in oil production. Total revenue was up 4% from the prior-year period. We would note that a little over 20% of Apache's revenue last quarter came from its Egyptian operations; production in that geography was down slightly during the last year.

Reported net income was considerably higher in percentage terms than a year ago, though this can be attributed to special items such as additional depreciation from the second quarter of 2012. Apache's cash flow from operations (CFFO) has increased nicely so far this year, though essentially all of CFFO has gone right back into capital expenditures. Apache trades at 14x its trailing earnings, which is a small premium to the oil supermajors but is roughly even to slightly below where we find large pure-play E&P companies.

Wall Street analysts are forecasting earnings per share of slightly more than $8 both this year and in 2014, and as a result, the forward P/E is 11. This would seem to be in line with the fact that oil prices have been up since the second quarter of the year on supply concerns, and therefore, as long as Egyptian operations are able to continue at present levels Apache's bottom line should benefit from these conditions.

One peer for Apache is Marathon Oil (MRO), which spun out its downstream operations a little over two years ago to become more focused on E&P activities. Marathon's earnings multiples are fairly similar to Apache's, with trailing and forward P/Es of 16 and 12 respectively. Marathon's most recent 10-Q shows rising oil production in North America, while other production levels are about flat from a year ago. The company's North American E&P segment contributed 38% of revenue, and another 10% came from the separate oil-sands mining business. Both Apache and Marathon feature betas in the 1.7-1.8 range, reflecting their sensitivity to oil prices and therefore to the macroeconomy more generally.

We wouldn't place too much weight on the recent spike in oil prices. It is of course a positive factor for Apache, but it is possible that it will prove temporary and that prices will come back down after the U.S. either responds or chooses not to respond to the situation in Syria. Still, even at the prices we were seeing in the second quarter, the stock was trading at a decent valuation, and there is additional upside potential if natural gas sales prices rise in North America after the buildout of export infrastructure. Although larger oil and gas companies are cheaper and may be worth a closer look, the multiple insiders buying Apache could make this an interesting prospect in the energy sector.

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