According to Robin West of PFC Energy, Apache Corp (NYSE:APA), Anadarko Petroleum (NYSE:APC) and Occidental Petroleum (NYSE:OXY) are three energy firms who are on track to join the "million barrel club" - i.e. their daily production would touch at least one million barrels of oil equivalents (boepd), by 2018.
These relatively smaller exploration and production companies have typically attracted investors with their impressive growth numbers, unlike the oil majors such as ExxonMobil or Chevron who generate enormous cash flows keep their shareholders satisfied.
As the three companies become bigger, maintaining the same levels of growth and profitability will become increasingly difficult. But that doesn't mean that it would be the end for the three energy firms. Instead, I believe that we would start witnessing improvements in cash flows, particularly for Apache and Occidental that have been generating negative free cash flows.
Occidental: The Split
Occidental is now looking better following the conclusion of the boardroom battle in which Steve Chazen emerged victorious, who is now planning to restructure the organization. The company is considering splitting its US and international operations, which, I believe, could unlock significant value for the shareholders. With Chazen at the helm, it is highly likely that a split will eventually happen. If it does, then that could be followed by a share buyback program of up to $20 billion. Therefore, I believe that there are enough reasons to be bullish on Occidental.
Anadarko: Strength in International Operation
Meanwhile Anadarko, which has reported double digit growth in its onshore U.S assets, also had enormous success in its international operations at Mozambique. In this African nation, Anadarko is responsible for one of the most important gas discoveries of the decade of 30 to more than 65 trillion cubic feet of recoverable natural gas. Anadarko is currently developing a massive LNG project which could yield considerable long term benefits for Anadarko's shareholders as well as for Mozambique.
Apache: Strategic Change
Meanwhile, by the end of its previous fiscal year, Apache touched daily production of 800,000 boepd, showing a threefold increase in its output in around 12 years. The company's business was built around buying and then developing mature assets of its bigger rivals. It then went on a shopping spree, the most recent purchase being the 12 blocks located in the U.S Gulf of Mexico which it bought in April. But this was followed by an earnings miss in its quarterly results announced in May.
However, Apache has now changed its strategy by focusing on selling assets, cutting down debt and returning money to the shareholders. It plans to raise $4 billion through divestment. Of this, $2 billion will be used to reduce debt while $2 billion will be used to buy back 30 million shares. All the while, Apache has stuck to its target of achieving around 4% growth in production.
While it is true that the company had problems in Egypt and due to divestment, its growth is going to slow down but I believe that this is not a significant challenge because its core operation lies in onshore activities in North America and it has posted impressive results here. In its last quarterly results, Apache witnessed a 45% year-over-year increase in its North American onshore liquids output. The company is essentially using its international assets to finance North American exploration and production where its long term future lies. The business is betting billions on the American oil boom and I believe that it is a safe bet.
With improving performance and the expected increase in production levels, the three firms in general and Apache in particular could be a healthy addition to your portfolio at their current price levels. Apache looks more lucrative because it is relatively cheaper as it is trading 10 times its full year's earnings estimates while Occidental and Anadarko are trading 12.6 and 20 times their full year's profit estimates. Apache is also trading at a lower multiple of its revenues than Occidental and Anadarko.
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.