To become attractive to investors, Apache (NYSE:APA) has taken a few initiatives to improve its financials. One parameter to consider when investing in a stock is debt-to-EBITDA ratio and whether it is increasing or decreasing. Apache fits the bill in this regard, evident from its declining debt-to-EBITDA ratio. Here's a look at its debt-to-EBITDA ratio over the previous four quarters.
Fourth Quarter 2012
First Quarter 2013
Third Quarter 2013
Apache has reduced its debt-to-EBITDA ratio consistently. An increase in debt in the first and second quarter of 2013 was offset by an increase in the corresponding EBITDA value. Additionally, Apache reduced its debt in the third quarter, which helped the company lower its debt-to-EBITDA ratio further.
One reason for the improvement in EBITDA is that Apache keeps operating expenses in check through innovative measures. For example, it has eliminated its reliance on freshwater for fracking wells at an oilfield in Texas. This has helped the company lessen its dependence on freshwater from local suppliers as well as reduce the cost of fracking. Safe disposal of water costs $2.50 per barrel but only $0.29 per barrel to treat the waste water and re-use it for fracking wells. Thus, Apache saves $2.21 per barrel of water used. It has a target of drilling 70 waterless wells in the Texas oilfield in 2013. For 5 million gallons of water typically used per well, Apache's cost-saving initiatives could save about $350,800 per fracking well. This could help Apache save around $25 million at the Texas oilfield.
Moreover, Apache's capital discipline has been aided by streamlining brought about through asset sales. Apache had a target of selling $4 billion of assets and use the proceeds from the asset sales to reduce debt and buy back shares. The company has exceeded its target and sold assets worth $7 billion in 2013. Through the asset sales, Apache has reduced its debt from $12.3 billion in the second quarter to $10.9 billion in the third quarter. Thus it has already achieved more than 70% of its targeted debt reduction of $2 billion by the end of 2013. On the strength of its asset sales in 2013, Apache remains on track to meet its target of debt reduction in the fourth quarter of 2013. The company also may sell some of its assets in 25 oil fields in Argentina. Funds from these asset sales will further help Apache reduce the debt on its balance sheet.
Another company I am bullish on because of asset sales is ConocoPhillips (NYSE:COP). The company recently sold $5.4 billion in assets in Kazakhstan. It also expects proceeds of close to $9 billion from the sale of its interests in Kazakhstan, Algeria and Nigeria. ConocoPhillips has thus clearly indicated its intention to shift its focus from high-risk assets to domestic growth. The company has acreage of about 227,000 acres in the Eagle Ford shale and an estimated resource potential of approximately 1.8 billion barrels of oil equivalent. ConocoPhillips is focused on developing its Eagle Ford potential further, because of its tight oil potential. The company has allocated a capital spend of $8 billion over the next five years in various Eagle Ford counties. These asset sales can help ConocoPhillips fund its future capital expenditure.
Declining days to cover
Before investing in a stock, looking at how much confidence investors show in the stock is advisable. One way of doing that is to look at the short interest rate of the stock and also its days-to-cover metric. The short-interest data on stocks is released by NASDAQ every fortnight. Recent short-interest data for Apache for the Dec. 13 settlement date shows that the short interest (number of shares short) has dropped by almost 5% from its erstwhile figure of 8,170,720. Simultaneously, there is also a change in the corresponding days-to-cover value, which has dropped from 3.43 on the Nov. 29 settlement date to 2.99 on the Dec. 13 settlement date. This is a reduction of nearly 13%.
A reduction in days to cover may indicate that short sellers, who were once expecting a high decline in the stock prices, are no longer expecting the same decline. Also noteworthy is that the reduction in days to cover has been brought about by an increase in the average daily volume of Apache shares traded. This points to investor confidence in the stock's price growth.
Apache has benefited from cost-cutting through innovation. Moreover, reducing exposure where its operations are not profitable is also helping. Apache has registered a reducing debt-to-EBITDA level in the last four quarters - a healthy sign. Reducing assets in non-profitable areas will help Apache concentrate on core assets, thereby aiding organic growth. I suggest investors add this stock to their portfolio.