On Tuesday, May 28, it was announced that Apache Corp. (NYSE:APA) is exploring the possible sale of a minority stake in its shallow water assets located in the Gulf of Mexico. The potential sale of these shallow water assets has attracted interest from a number of private equity firms such as TPG Capital, Apollo Global (NYSE:APO) and Kohlberg, Kravis, Roberts & Company (NYSE:KKR).
According to Apache's Chairman and CEO, G. Steven Farris, "Apache has developed a robust list of potential assets sales and believes it can generate about $4 billion of proceeds in 2013 from the initial phase of its divestiture program. The company would use the money to first pay down $2 billion of debt and then subsequently institute a share buyback program". Anytime a company has the intention to initiate a share buyback program, shareholders tend to tend benefit as shareholder value has the potential to increase once such a program is implemented.
Why are these private equity firms so attracted to an asset sale of this nature? What if I told you that by going after a shallow water asset versus a deep water asset your end result would yield better production? That's exactly the case in this instance, since the shallow water assets produce more oil and gas and are easier and less risky to exploit than their deep water counterparts.
Performance & Trend Status: On Tuesday shares of APA, which currently possess a market cap of $32.29 billion, a P/E ratio of 17.99, a forward P/E ratio of 8.64, and a forward yield of 0.97% ($0.80), settled at $82.39. Based on Tuesday's closing price, shares of APA are trading 3.60% above their 20-day simple moving average, 8.30% above their 50-day simple moving average, and 2.58% above their 200-day simple moving average. These numbers indicate a short-term, mid-term and long-term uptrend for the stock, which generally translates into a buying mode for traders.
Recent Earnings Performance: After taking a closer look at the company's soft quarter I think both near-term and long-term investors need to look beyond the numbers and consider the company's potential asset sale as a viable catalyst for future earnings growth. On Thursday May 9, Apache reported Q1 EPS results of $2.02/share which missed street estimates by a $0.19/share margin and quarterly revenues of $4.076 billion which missed street estimates by a margin of $0.214 billion. Analysts had been expecting EPS results of $2.21/share and quarterly revenue results of $4.290 billion.
Although both EPS and revenue performance missed the mark, I think there were a number of key variables investors should have taken away from the company's quarter. First, and from a production perspective, a year-over-year increase in onshore liquids output of 45% helped increased overall production to an average of 781,800 boe/day. Second, and from a guidance standpoint, the company has reiterated that it is on-track to demonstrate 3%-5% increase in overall production growth for FY 2013. Lastly and most importantly, is the fact the company intends on selling nearly $4 billion in assets of which $2 billion will used exclusively to pay down its debt while the other $2 billion will be used to repurchase an estimated 30 million shares.
Recent Dividend Behavior: Since October 19th 2011, Apache has increased its quarterly dividend a total of two times by an average of $0.025 each time. From an income perspective, the company's forward yield of 0.97% coupled with its payout ratio (currently 15.00%) and its continued annual increases could equate into a very viable income option for the conservative dividend investor. The company's most recent dividend increase occurred on Tuesday February 12th, when APA announced a quarterly dividend increase of $0.03/share to bring its upcoming dividend payout to $0.20/share. That increase represented an 18% rise from its prior dividend of $0.17/share, which was paid on November 19.
APA Dividend data by YCharts
Conclusion: When it comes to those who may be looking to establish a position in Apache Corp., I'd continue keep a watchful eye on not only the company's dividend growth over the next 12-24 months, but the continued interest by private equity firms to purchase the near $4 billion in assets Apache is looking to shed over the next 6-12 months. These asset sales carry with them the ability to not only allow Apache to shed unwanted assets and pay off debt but subsequently boost shareholder equity as a portion of the proceeds will be applied to the company's share repurchase program.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in APA over the next 72 hours. 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.