Apache (APA) is down by 22% over the last 52 weeks, but I believe that it will soon begin to move higher. The company has a two big factors that are working in its favor and acting as stock growth catalysts.
First, the company has done an effective job of changing its focus from the low margin business of producing natural gas to the higher margin business of producing oil. The company has redeployed its resources to take advantage of recently acquired oil-rich properties in the Permian and Anadarko basins of the United States. The properties were purchased on the cheap from cash-starved companies BP (BP) and Devon (DVN). As a result of the redeployment, it is estimated that Apache's revenues will increase by 8% in 2013, after being flat in 2012. The move toward the production of oil has moved Apache's North American production to 55%, up from 46% in 2010.
The second reason why Apache's stock is set to move higher is because at $77 per share, its stock is undervalued. Below is a list of seven items that show the stock is undervalued:
- At eight times, the stock's forward price-to-earnings ratio is at a discount to its five-year average of 10.5.
- With a price to earnings ratio of 12.2 and a price-to-book ratio of 1, the stock's valuations are considerably lower than the industry averages.
- The stock is selling at the bottom of its five-year valuation based on P/E, P/B, P/S, and P/CF.
- The company has more than doubled its operating cash flow (OCF) over the past three years and is currently selling at under four times OCF, which is unusually cheap.
- As a result of the increased oil drilling in the Permian and Anadarko basins, Apache's liquids products now account for about 53% of production.
- Analysts are projecting a sales growth rate of 5.2% over the next five years, which is up from 4.6% over the last five years.
- At $76, Apache's stock is selling significantly under the median analyst's price target of $110 per share, which was arrived at by 25 analysts who cover the stock.
These wells were drilled in areas [that] have been producing for over 40 years, but which have the potential to be completely rejuvenated through the application of horizontal drilling and multi-stage hydraulic fracturing. These encouraging results have contributed to identifying more than 2,000 potential horizontal drilling locations across our 238,000-acre gross (179,000-acre net) leasehold.
On Nov. 29, Apache announced that it will be offering $2 billion worth of notes. The offering is divided into two parts -- $1.2 billion 2.625% notes due 2023 and $800 million 4.25% senior notes due 2044. The public offering will fetch approximately $1.97 billion after deducting underwriting discounts and offering expenses. The net proceeds from this offering will be utilized for the repayment of outstanding commercial paper borrowings and other corporate purposes.
On Nov. 28, Standard & Poor's Ratings Services assigned its A- rating to Apache's senior unsecured note offering. According to Standard & Poor's, "The ratings on Houston-based independent exploration and production firm Apache reflect our assessment of the company's 'strong' business risk and 'modest' financial risk profiles."
Also on Nov. 28, Fitch Ratings downgraded Apache's long-term issuer default rating (IDR) and senior unsecured ratings from A- to BBB+ following the company's announced issuance of senior unsecured notes.
Fitch's Apache ratings are as follows:
- Long-Term IDR to BBB+ from A-
- Senior unsecured credit facility to BBB+ from A-
The main driver for the downgrade is the trend of higher debt levels Apache is carrying.
Apache's stock price has traded in a 52-week range of between $74.50 and $112.09, and the stock is currently trading near its 52-week low. However, Apache's earnings should be increasing because the company has begun to make the adjustment from the production of natural gas to the production of oil. In addition, Apache will benefit from higher natural gas prices, which have risen by 60% from their lows of the year and are positioned to move even higher.
I like the outlook for stocks in the independent oil and gas sector, although with the exception of EOG Resources (EOG), most of the stocks in the sector (Devon Energy, for example) are at or near 52-week lows. Apache's stock price is very cheap, and I predict that it will move higher in the short term based on the reasons that I noted above.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.