"With Apache Corp. missing expectations for the fourth time in a row and the downsizing of 2013 expectations, I would play a wait and see on this stock. The reactionary move may or may not be done, but I am uncomfortable investing in too many unknowns at this point."
Two months have passed since I made that observation and it appears that J.P. Morgan analyst Joseph Allman would still agree with me as he has downgraded the company giving it a "neutral" rating. What is his reasoning behind this? The company has a good track record of returns and strong balance sheet with a nice diversification on its asset sheet, but in this present environment, the company is expecting low growth and there are no meaningful catalysts in the near future expected to help the stock. In fact, it does have some burdening assets that could cause it to even underperform its own group this year. Mr. Allman also dropped the price target from $89.50 to $76.50.
This slowdown in growth started last year when production growth came in at only 5.5% even though the company expected a 6% to 9% growth for the year. And in 2013 the company expects growth only 3% to 5% which is really disappointing investors.
Pro's for Buying
One thing Apache Corp. has going for it is that most of its revenue come from its liquid assets, namely oil and liquefied natural gas. In 2012 natural gas sales for the company only accounted for 11% of its revenue and this makes its exposure to the low natural gas prices less than that of companies in the same industry. Not only is the company more into oil and liquefied natural gas, but it also has nice reserves in the Permian basin and Gulf of Mexico. Since both these regions are known to have high oil reserves, this works in Apache's favor and all we need is a change in the economy for prices to start going up and Apache to start benefiting. So the low price of the stock could be an appealing price point the buy into.
It is no secret that the price of oil and the growth of the economy go hand-in-hand. In fact, I would say that oil prices tend to follow the market as a whole. It should not come as a surprise that as the economy has recently pulled back so oil has also dropped in price due to this weakness in the US economy and a slowdown in the Chinese growth rate. The price of oil will remain tied to economic performance as economic growth is so intertwined in its dependence upon oil to generate energy. One thing we need to keep our eyes on is US and global economic reports because this will help us understand where the price of oil is going.
One concern I would have as an investor right now would be the "Geo risk" that I see in Apache's present holdings. The company has close to 20% of its production in Egypt and this particular region is very risky at the present and could have an adverse effect on the company's production without warning. This political uncertainty and growing adversity to the United States (from a political standpoint) does not inspire me.
Since mid April the stock has dropped dramatically, almost 10%, but found a base at the $68 price range. Can the stock drop further? There is not a lot of strength according to the RSI indicator to interpret the move of the stock beyond bearish territory. The MACD indicator confirms this weakness and the trend continues to stay in bearish territory. For this reason I would not make any observations that would point to the stock rebounding at this point. Nor do I find any news that's going to tell me that the stock is going to change direction either.
With J.P. Morgan's price point set at $76.50, that shows me that they expect the stock to barely move and trade in a channel. With the price of oil presently struggling and no catalyst seen in the near future to see oil prices go up, it does not look like Apache is a good long-term investment right now. But that does not mean that the company's forecasts for the year could not be low. All it will take is a turn in our economic indicators pointing to the fact that the economy is still growing and oil prices could start going up and this will help the company's revenue stream. Presently it looks like things are slowing down but in the big picture this could just be a bump in the road to long-term economic growth. If an investor looks at it from this standpoint then it could mean that Apache may be priced pretty well. But this is pure speculation and I tend stick with more concrete evidence when I invest. So I am still of the conclusion that investors should wait before jumping into the stock.