I wrote an article at the end of September thinking Apache (APA) would drop because of lower oil prices. My observations appeared to be correct as the stock dropped soon after the article came out. With that in mind I suggested a short term income play that turned out to collect a quick modest profit. This was my original suggestion:
The Options Play
Presently trading at 85.28, I am going to go with a longer bearish trade on this stock. Because of oil prices, I am apt at going against the weak bullish run right now.
- Buy an April 2013 put with a strike of '87.50' (priced at $8.80)
- Sell an April 2013 put with a strike of '85.00' (priced at $7.40)
- Net Debit to Start: $1.40
- Maximum Profit: $1.10
- Maximum Risk: net debit
- Maximum Length of Trade: 7 months
Reasoning behind the Trade
- Present upward move is weak and can easily turn neutral to bearish
- Oil prices are spiraling down and will influence the price of the stock.
- Lower income is never a value energizer.
- Sell the April 2013 '87.50' put for: $11.70
- Buy the April 2013 '85.00' put for: $10.05
- Gross Profit: $1.65
- Net Profit: (Gross Profit $1.65 - Net Debit $1.40) = $0.25
It is 6 weeks later and the lower price offers a nice possible entry point for the stock. Is it a good investment? If so, is it a good time to get into the stock? In terms of a good long-term investment, Jeff Williams recently wrote an article in Seeking Alpha and did a nice job analyzing the company's financial debt and risk. I would recommend everyone read it. In his summation, this is what he had to say:
"The analysis of Apache's debt and liabilities indicates a company with an increase in its debt and liabilities but an increase in assets to back it up. The WACC reveals that Apache has the ability to add future investments and assets at relatively low rates. Currently, Apache has the ability to pay for its debts and improve its debt ratios thus lowering its risk to shareholders."
He concluded that the company would be a strong long term investment potential for anyone who would like to become a shareholder. I tend to agree with Jeff's assessment.
Apache was an anomaly this quarter as it did an about face from the average company. The average continues to beat estimates but miss revenue while Apache did the complete opposite. Third quarter EPS for the company came in at $2.16, $0.10 worse than the estimates of $2.26. But revenue beat estimates coming in at $4.18 billion versus the consensus estimate of $4.06 billion. Because of the continued weakness in natural gas prices, it also wrote down its Canadian properties. When will the over supply and weak demand end? Most energy companies are militantly cutting gas volumes and trying to move into oil-rich production, but Apache increased its natural gas production. This sits well for the company as long as natural gas prices increase. I am not sure when that is going to happen.
After a 3 month move up, it looks like the stock has turned down now for about two weeks, and the turn has been steep. In that period of time the stock has lost 10% of its value and the entire gain it was building since the beginning of June. Will it find support at this important level? When the stock slides down the lower Bollinger band like it is doing, it usually speaks of a strong bearish move. I would expect the stock to move sideways at a point where the slide has to stop and when they are this steep, they do not last long. The RSI indicator and MACD follow the move down and offer no indication of a slowdown. Because of the steepness of the move, I would expect it to end soon.
My Observations about Investing in Apache
Although I believe the company is a good long term investment and has a fine dividend for an income investor, I believe there is a good chance the stock will continue to move down from where it sits presently at 78.10. Some believe the stock is getting to cheap to ignore, like Bret Jensen. But I am not ready to suggest one invest in the company just yet. I do believe at this point serious consideration should be placed on the stock and as an investor, watch for oil and gas prices to bottom out and stabilize. At this point, I believe the stock will be at a good point to invest in, as I believe it will also rise as the price of oil and gas also rises.