Is Apache Corporation An Energy Play To Buy Now?

Includes: APA, APC, CVX, XOM
by: Kevin Quon

Should investors be buying Apache Corporation (APA), a global independent energy company, at its current price levels? If one looks at the recent insider transactions, CEO Steven Farris certainly believes this to be the case. On May 20, Farris purchased on the open market 10,000 shares of the company's common stock at $83.69/share. The transaction was valued at $836,908. At last check on May 25, the company now trades at $81.66, representing a 2.5% discount to the senior officer's purchase.

Altogether, Farris now directly owns 380,499 shares of Apache Corporation according to the Form 4 filed here. Indirectly, he also roughly controls an additional 55,443 shares through several plans and trusts. A look at his previous transactions showed that he hasn't purchased shares for at least five years. In fact, in January 2012 and May 2011, the CEO was actively selling shares at prices of $96.33/share and $123.98/share respectively.

Apache Corporation is in the business of exploring and developing oil & gas properties around the world. The company's worldwide production is roughly 782,000 barrels of oil equivalent per day as of Q1 2013. It remains ranked as the second most active U.S. onshore driller, operating in a growing market expected to significantly increase in the coming years due to technological advances in drilling practices. The company recently reported its Q1 2013 earnings results, and the subsequent earnings call can be found here at Seeking Alpha. The following are a few highlighted points from that conference call:

  • The company raked in $800 million of adjusted earnings and $2.4 billion of cash flow from operations.
  • Onshore North American liquids production averaged 165,000 barrels of oil per day. This represents an increase of 6% quarter-over-quarter and an increase of 45% compared to Q1 2012.
  • The company has completed a 3-year effort of expanding its asset portfolio and is now contemplating which assets to keep and which may be of higher value to others.
  • Apache expects to generate $4 billion in proceeds, paying down $2 billion in debt and allocate $2 billion in share repurchases.
  • The board has also authorized the purchase of up to 30 million shares. This represents roughly 7.5% of the outstanding shares.
  • The company has also raised its quarterly dividend 18% to $0.20/share.

When comparing the company to some of its peers found below, it's clear that Apache remains a rapidly growing player in a well-established industry:

Name Mkt Cap. Fwd. P/E PEG Ratio Price/Sales Ratio Price/Book Ratio Fwd. Div%
Apache Corporation $32 Billion 8.56 1.91 1.96 1.04 1.00%
Chevron (CVX) $243 Billion 10.01 6.41 1.12 1.74 3.20%
Exxon Mobil Corporation (XOM) $407 Billion 11.11 6.30 0.99 2.44 2.70%
Anadarko Petroleum Corporation (APC) $45 Billion 16.67 0.99 3.30 2.13 0.40%

Based on the table above, we see that there remains a clear distinction in the valuation of oil & gas plays both large and small. Quickly growing companies such as Anadarko (NYSE:APC) and Apache maintain higher price-to-sales ratios. But even here, we see that Apache maintains a significantly lower price-to-book ratio than its peers. This too is reflected in the lower price-to-earnings ratio despite the significant earnings growth expected.

Analysts continue to expect that Apache's earnings will grow significantly as represented by the 8.56 forward P/E ratio. This ratio is based off of expectations of $9.54 in earnings for 2014. These figures represent a forecasted increase of 11% in earnings from 2013 to 2014. In contrast, analysts expect that Exxon's (NYSE:XOM) earnings will grow 2.3% over the same time period, Chevron's (NYSE:CVX) is expected to grow 1.1%, and Anadarko Petroleum's are expected to grow 26.7%.

Overall, Apache appears well-poised to perform well alongside its industry peers. Yet its share price appears to be a bit lower in light of its expected growth. The company's announced share buyback will not only have the effect of reducing the outstanding shares, but also increasing the company's earnings-per-share and reducing dividend outflows. As the second most active US onshore driller, the company remains positioned to capture a competitive portion of a growing market. Last of all, the CEO's confidence in the company's stock remains an encouraging indicator for investors looking for a long-term energy investment.

Disclosure: I am long APA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.