In the last article I wrote about Apache (APA), I took the position that the stock would be a good long-term investment, but I was not keen on investing at that point. This is how I concluded my article:
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. 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.
The stock appears to have found a bottom at about $74.85 as it flirted with moving down but held strong. It has gained strength, especially in the RSI indicator as it climbs into bullish territory on its recent move up. I am not sure if I would say the stock is done moving down, but it sure looks like we may have a bottom here. Even the MACD MA's are flirting with positive territory. The Bollinger bands are moving sideways so we have a foundation being built.
JPMorgan & Co. reiterated its Overweight rating on Apache Corporation, but lowered its price target from $103.00 to $90.50.
APA's relatively strong balance sheet, strong cash margins, and diversified asset base mean that the company generally has lower risk relative to the group. The name also has comparatively limited exposure to U.S. natural gas. However, APA faces country risk where it operates internationally, especially Egypt, Argentina, the U.K., and Australia. In fact, we think the stock underperformed last year largely due to the market's concern about turmoil in Egypt.
In an article earlier this month on Seeking Alpha, ValueMax wrote about Apache and mentioned the transition from natural gas to 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. 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.
Oil Forecast for 2013
With this transition it seems the only thing that would be holding Apache back would be the price of oil. So where is oil going in 2013? Forecasters like Goldman Sachs are looking at a price of $110 while a few others are thinking the $115 range. On the low end, some believe oil will drop to $70 a barrel but this is a little unrealistic. At that level it would become unprofitable and possibly halt production. The year 2013 should bring slight to moderate demand with a weak global economy so oil may be around $105/barrel and WTI from $90-$95.
The problem with this scenario is that oil is presently $110.48 and WTI is trading at $90.62. Not much wiggle room here for Apache if it is relying on price increases, according to forecasters.
Apache (APA) was downgraded by Deutsche Bank (DB) from buy to hold with a price target of $80, as operating trends have not been positive in recent months. Its P/E ratio is much lower than the industry average right now; (12.5 to 19.0). Its debt equity is a bit better than the industry average, coming in at 0.38 to 0.55, so that's healthy. Operating margins seem to be good when one looks at margins, the company comes way ahead when comparing industry averages.
Gross Margin: (Apache 81.32) Industry (62.37)
Net Margin: (Apache 14.85) Industry (7.88)
Investing in Apache Long Term
Signals are mixed on the health of the company as an investment at this point. Even the ROI does not look appealing to investors, coming in at 8.71 compared to an industry average of 13.5. With a PEG ratio of 1.36, investors prefer companies under 1.00. I am not sure I could recommend Apache right now. On the one hand, the lower price looks inviting and the stock does have a lot a room to move up in 2013 if it can lift its earnings. But, if the company is relying on oil prices to increase its bottom line and one takes certain analysts seriously, I am not sure the company will be a good investment in 2013 for growth. Investing in Apache depends on one's outlook of the company. Investing for income, dividends look good. Investing for growth, this could be questionable.