Apache: A Killer Deal At $92

May. 4.12 | About: Apache Corporation (APA)

By Mark Goldstein

Apache (NYSE:APA) will report first-quarter earnings on May 3, and as its report nears analysts are raising their earnings estimates, which currently stand at $3.10 a share according to Forbes. I agree with this estimate, as Apache's earnings increased by 50% in 2011, to $4.5 billion; this raised 2011 earnings per share by 36%, to $11.47 per share. As Apache brings its many 2011 acquisitions and partnerships into full operations, it is on track to grow by similar amounts in 2012.

News to Watch

A shareholder proposal to change the terms of Apache's board members from staggered terms to annual elections will be put to a shareholder vote at the next annual shareholder's meeting on May 24. The proposal was submitted by shareholder the Illinois State Board of Investments, and I think it is likely to receive support from the majority of stockholders. However, since it is a shareholder proposal it is non-binding, and Apache will not be forced to change its board's election process even if the proposal is passed. Since Apache has a history of disregarding shareholder suggestions, I think that Apache would be willing to displease its shareholders by disregarding the proposal even if it does pass, unless the proposal receives substantially greater than a 50% vote.

Actions to Hedge Gas Prices

Amid near-record low gas prices in the U.S., Apache is withdrawing resources from U.S. natural gas production, recently announcing the cancellation of a previously anticipated partnership with Energy Partners to explore for gas in the East Bay field in the Gulf of Mexico.

As Apache maintains interests on nearly every continent, the company is able to hedge falling gas prices in the U.S. by concentrating on selling gas in more favorably priced markets. As is Apache's habit, one way it does this is by acquisitions and partnerships, the most recent an agreement to sell liquid natural gas from its joint venture in the Australian Wheatstone Project to Chubu Electric Power (OTC:CHUEF).

The Wheatstone agreement comes on the heels of similar agreements to sell LNG to Tokyo Electric Power and Kyushu Electric Power. In a sense, Apache is benefiting from the devastating Tohoku earthquake and tsunami that hit Japan in March 2011. That country's continuing problems with meeting electricity demand has raised LNG price and demand, and since Apache has an interest in many of the (relatively) nearby Australian fields, it's enviably positioned to supply those needs.

As of the close of 2011, Apache was producing 185,079 mcf per day of natural gas and 38,228 barrels per day of liquid hydrocarbons from its 8.8 million gross acreage in Australia. It is fair to say that Apache's major competitor in Australia is Chevron (NYSE:CVX). Chevron made one of its largest single investments in company history, totaling $37 billion, to develop the Gorgon LNG project off the shores of Western Australia. Chevron expects to begin deliveries from this project in late 2014. Already the largest holder of natural gas resources in Australia, the Gorgon project will allow Chevron to eclipse Apache's production numbers.

BP is also expanding its presence on the Australian continent. It completed preliminary environmental impact studies on the Great Australian Bight in 2011, and stated in its 2011 annual report that Australia is one of the top areas of focus in its exploration and appraisal program. As BP completes its reorganization and narrows its focus on the most valuable plays, it may be able to throw more resources at Australia, and could be a growing threat to Apache's operations here.

Apache is also increasing its presence in the UK North Sea. Its 2011 acquisition of Exxon Mobil's (NYSE:XOM) North Sea position, North Sea Limited, gave Apache eight remarkable assets, including a gas pipeline and a gas plant. As UK gas prices rose 33% so far year over year, the timing for Apache is impeccable. Royal Dutch Shell (NYSE:RDS.A) followed Apache's expansion in the North Sea by expanding its own position there in the first quarter of 2012. BP also plans to invest heavily in North Sea exploration, earmarking a total of $14 billion to be paid for exploration and development by it and its partners. BP believes that this investment, in part, has the possibility of extending production on the Clair field to 2050. This shows that although 'only' a mid-major, Apache is thinking (and acting) like a super major. In my opinion, this bodes well for its future growth and for its stockholders.

Apache is edging in on competitor Devon Energy's (NYSE:DVN) territory in the Canadian oil sands. Apache's joint partnership with EOG Resources (NYSE:EOG) and Encana (NYSE:ECA), known as the Kitimat LNG project, marks Apache's first entry into oil sands exploration. The facility the partnership plans to build will be on the coast of British Columbia, and will be designed to export gas produced in the nearby Horn River basin gas shales to Asia at oil-indexed prices. Again, Apache is moving to take advantage of the weakened energy infrastructure in Japan, as well as looking ahead to China and India's increasing energy demand. I think this is a strong move for the company and will lead to increased revenue for at least the next five years, as Japan will take at least this long to recover its own capacity and it will be a decade or more before China and India develop the technology to serve their own energy needs.

Outlook

Apache is trading up ahead of its earnings report, currently trading around $96 with a forward price to earnings of 6.7 and a price to book of 1.3. Shell is trading around $72 with a forward price to earnings of 7.3 and a price to book of 1.3. Chevron is trading around $107 with a forward price to earnings of 7.8 and a price to book of 1.7. Devon is trading at $70, with a much higher price to earnings of 9.3 despite a similar price to book of 1.3. BP, still struggling under shareholder doubt over the final costs of the Macando blowout, is trading substantially lower at $43, giving it a forward price to earnings of 5.4 and a price to book of 1.2.

Apache's acquisitions strategy has given it a large resource base from which to grow, and its diverse strategy to include all resources, from deepwater in the UK North Sea to oil sands in Canada to LNG in Australia, do much to protect the company from wide swings in any one sector. As a result, Apache is weathering the current low dry gas prices in the U.S. better than many of its smaller U.S.-based competitors, like Cabot Oil & Gas (NYSE:COG). I think that Apache is undervalued given its earnings potential, and is an attractive buy at its current price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.