I recently proposed a coming "super spike" in oil prices, implying a super opportunity continued to exist in the exploration-and-production oil companies, particularly because they've been underperformers on the back of weak oil prices.
I proposed a lack of production growth in the traditional oil areas of the Middle East as the primary cause of spiking prices, again implying that U.S.-focused E&Ps were likely to benefit the most. In the end, only an individual assessment of E&P stocks will benefit the investor, and in this column I'll revisit an old favorite, Apache Corp. (APA).
The company earned its favored status with me for having a disciplined leadership team, as seen by their sector-leading debt-to-total-equity ratio of 0.27%. But good debt control is only one aspect of a "great" E&P and not enough to deliver returns on its own. Most important in the past few years has been the execution of production growth. Consistently rising growth numbers and the way they are generated translates most often into rising stock prices. In this regard, Apache has been a mixed bag, to be sure.
Before the rise of shale production of oil and gas here in the U.S., Apache made strong moves to increase its production in international arenas. The most important of these areas for Apache has been Egypt, where it owns the rights to 9.4 million acres. It was the disruptions caused by the Arab Spring revolution and subsequent government changes in Egypt that helped crater Apache stock through 2012 and into 2013, becoming by far the least-favored, large-cap U.S. E&P, even though less than 25% of Apache's assets are Egyptian. It was because of that overdone shellacking that I last recommended Apache in 2012. But that was a long time ago.
Since then, Apache has taken on a very extensive restructuring program, shedding Egyptian assets as best it can, divesting Canadian assets and trying (as so many U.S. E&Ps) in concentrating on U.S. onshore assets. Apache boasts significant acreage in the Permian and Anadarko basins as well as offshore in the Gulf of Mexico. This relatively timely restructuring effort has allowed Apache stock to gain more than 23% since April 2014, now trading above $100 per share. But is it still a buy, especially compared to other large-cap U.S. E&Ps?
Normally, when I haven't recognized and recommended a value in E&Ps, which Apache so clearly was at below $80 per share, I'm hard pressed to jump onto a rising stock after such a large move. But with Apache, I'm ready to bring it back into "most-favored stock" status.
It's not the new Apache Canning Basin Australian find that was heralded recently that has again piqued my interest in this old friend either -- total projected reserves there of 120 million barrels will hardly move the needle. But the conference call also reiterated Apache's desire to sell off the proposed Kitimat liquid natural gas project in Canada, continue to lower exposure to Egypt and, tellingly, commit $2.6 billion in planned capex to North America -- more than 40% of the total budget. With every motion toward U.S.-focused production targets, Apache moves closer to being priced like other U.S.-focused E&Ps in its class, such as Noble (NBL), Anadarko (APC), Hess (HES) and Marathon (MRO).
And that's the key.
Even with a recent run of almost 30%, Apache is still nowhere close to where these others are being similarly priced on a price-to-earnings basis. Apache currently sports a 14.3 P/E while Anadarko and Noble, two of my other favorites in the space, are carrying a much loftier 19.4 and 19.2, respectively.
What Apache ultimately needs is the market's respect -- it is the Rodney Dangerfield of large-cap U.S. E&Ps. It has recently gained some of that back with its current run-up but still hasn't fully shed Rodney's trademark, ill-fitting grey suit and red tie. But I predict it will.
I recommend Apache at $101.