Apache Corp (NYSE:APA) currently has operations in the US, Canada, the UK, Australia, and Egypt. In its second quarter of 2014 the results for both the top and bottom lines and oil production decreased compared to the results reported last year. This was mainly due to the sale of some assets from its international operations but on a whole the market expects APA to report good prospects. The market is welcoming APA's strategic move to decrease the scale of its operations in locations outside of North America and increasing its operations in North America. The market expects that as APA increases its investments in North American oil production through cash generated from international divestments, its returns will rise. The growth in the production in North America is discussed below. The chart given above shows that APA's shares produced a healthy price return and increased by 27.22% in one year.
The Less than Impressive Financial Performance Led to a Strategic Shift
In the past APA struggled to report stable and consistent financial performance. The top line grew at a healthy CAGR of 15% during 2004 to 2012 but this growth slowed down in recent years. The gross margins remained stable and moved within a narrow range. The operating margin exhibited a significant fall in one decade and decreased from 52.1% in 2004 to 23.7% in 2013-14. The operating income remained volatile and failed to show meaningful growth. Owing to weak financial performance APA failed to grow dividends by a significant growth rate. The following table shows the company's financial performance over the past 10 years.
The unstable financial performance led to an increase in pressure from the market and investors who wanted APA to shift its strategy. Recently APA decided to divest operations outside of North America that failed to yield the expected returns and has started to concentrate on its North American operations that delivered healthy, consistent, and reliable growth in the past years.
Future Growth Lies in the North America
APA is working on a strategy to produce consistent and reliable growth in its production. APA considers North America as the region from where it will derive its future growth. Presently North America region generates 60% of APA's total global production.
The Permian and Central region in North America are two of the key areas that possess potential for growth. The Permian and Central regions have delivered consistent and predictable production in rates the past five years. The Permian region has delivered 21% compounded equivalent barrel and liquids growth in the past five years and the Central region has produced 31% compounded equivalent barrel and liquids growth in the past five years. The figure above shows the liquid track record which reveals the fact that APA managed to increase its liquid oil production at a CAGR of 54% in five years. The figure above also shows that the total production in both regions experienced growth at a CAGR of 35% in the past five years. This region is expected to continue to report healthy growth in the coming years that will fuel APA's top and bottom lines.
Capitalizing on Growth in Liquid Production
The company's second quarter results for 2014 shows that it managed to grow its North American onshore liquids production by 18% compared to the figure reported last year and by 3% compared to the figure reported last quarter. Out of its total global liquid production the company's share of North American liquid production grew from the previous quarter's 58% to 59%.
Going forward as APA increases its operations in North America and divests more assets outside of North America it expects liquid production from North America to grow at a CAGR of 12% to 16% in the coming years. This would help APA to report a stable financial performance.
Changing Its Portfolio's Composition
During the nineties, APA started its international operations outside of North America and focused on international expansion. APA continued with this strategy until 2009-2010 but then decided to focus on its North American operations.
The figure above shows that APA has repositioned its portfolio of oil producing assets in different regions of the world. In 2009, 34% of the total production came from North America but up until 2013 its North American share of its total production increased to 60%. This repositioning is expected to help the company increase its production and achieve a higher level of efficiency to help the company grow its top and bottom lines and expand its margins.
Target Price Estimate
The consensus target price polled from 31 brokers covering APA reveal upside potential at its current price of $101.43. The mean target price is $110.69 with an upside of 9% and the median target price is $110 which presents an upside of 8%. The most optimistic analyst expects an upside of 43% at the current price and the most conservative analyst estimate has a downside of 6% at the current price.
Apache struggled to produce stable and consistent financial results in the past ten years. This has caused APA to divest its poor performing assets outside of North America. It is expected that APA will report a better financial performance as the company reallocates its investments from poor performing assets outside of North America to assets in North America that possess healthy growth potential. The consensus target price reveals an upside of 8% to 9%. Investors should consider investing in APA at its current price.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.