In FY12, Apache Corp. (NYSE:APA) further strengthened its position by taking some key strategic steps. A repositioning of the portfolio along with the expansion in the North Sea drilling inventory emerged as the major strategic stances for the year. During the year, the company posted a strong growth of 5.4% in terms of production. The company intends to project similar strength of growth in the coming future through onshore liquids growth and capital expenditures on project development. At the same time, the company is exposed to some major risk factors. Most of these risks are common to the industry but there are some company specific factors which tend to justify the evident undervaluation of the company with respect to its peers. Investigating along these key points, I shall evaluate the company as a prospective investment.
As mention in the previous section, the stock price of the company trades at a substantial discount as compared to its competitors. Analysts have been seen to interpret this undervaluation as an indication of substantial upside potential.
The above chart shows the stock performance of Apache Corp. as compared to Anadarko Petroleum (NYSE:APC), British Petroleum (NYSE:BP) and Exxon Mobil Corp. (NYSE:XOM) over a period of one year. The chart clearly reflects that the bigger players in the industry have shown a mature growth and Anadarko has shown a substantial improvement of 41.63% in this period. On the other hand, Apache's stock price has remained stagnated over this period.
Apache has a fairly diversified portfolio of both onshore and offshore properties. The company has been thoroughly involved in acquisitions and asset purchases from the other companies in the industry. These factors contribute towards the formation of a very interesting revenue profile.
Source: UBS Global Oil and Gas Conference
The above chart shows the revenue distribution of the company. The liquids segments which include oil and natural gas liquids form 82% of the company's total revenues whereas gas contributes towards 18% of the revenues. 52% of the company's total revenues come from international operations. This is where most of the concerns regarding the company are being placed. The company's international assets are located in Egypt, Australia, United Kingdom and Argentina. The company's exposure to a specific country is limited as the overall operations are majorly diversified; however, the Egyptian political and economic situation has the capacity to hinder the company's growth prospects, at least in the short run. Also, the assets in Egypt form a strong portion of the company's total assets and therefore, selling these assets cheap is not a valid solution as well.
In the past years, the company has posted strong growth in production. This growth in production can be traced back to a number growth strategies adapted by the company.
Source: UBS Global Oil and Gas Conference
The above chart shows the production of the company over the last two decades. The production figures have posted a CAGR of 12% over this period. This growth in production has occurred through asset purchases and acquisitions. The company has also done a decent job in discovering new reserves across the globe.
The above chart shows the revenue growth and EPS growth of Apache sine FY10. We can clearly see that despite the sizable boost in production, the company has been unable to convert the production to earnings. Over the years, the company's revenues have increased by 52.5% but the EPS has declined by 15.4%. Keeping this financial performance in consideration, the growth prospects of the company appear to be weak as it has been unable to grow earnings even with a marked improvement in production.
The comparative analysis of Apache Corp. will help in indicating the position of the company amongst its peers. The comparative analysis will use key valuation metrics in order to judge the company's current stock price.
Data Source: Morningstar & Yahoo! Finance
The above table shows a comparative analysis of the company as compared to Anadarko Petroleum, Continental Resource (OTC:CTLR) and the overall industry average. The company's valuation metrics indicate that the company is fairly undervalued as compared to its competitors across all indicators. However, the dividend yield of the company is less than the industry average. In my opinion, this low pricing of the stock can be traced back to the Egypt situation. Many analysts contend that even if we consider the threat to Egyptian operations, the stock still trades at a discount. Even if that is true, the situation also has the capacity to deteriorate further. Also, the company has pursued acquisition as a growth strategy but all of the acquisitions have not fully panned out in favor of the company.
The stagnation in the stock price of Apache Corp. is a reflection of investors' reluctance towards the company. The valuation appears to be attractive but keeping in view the strong risk factors, I recommend a hold stance for the long term investors. This is because in the short run, the company is facing strong risk factors which could further decline the stock price. I would suggest that the investors wait for either the situation in Egypt to improve or the company to reduce its stake in Egypt before considering a long position in the company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.