Apache: This Oil And Gas Company Is Underpriced

May. 6.12 | About: Apache Corporation (APA)

By Renee O'Farrell

Acquisition is one of the fastest ways to grow a company and, in the case of the geographically diverse independent oil and gas company Apache Corp (NYSE:APA), it is extremely effective. Apache has been on an acquisition binge lately. In January, the company agreed to buy the privately-held Cordillera Energy for $2.85 billion. The purchase more than doubles its acreage in the Anadarko Basin and increases its production of the higher-margin liquids in that region to 53%. Apache has also been extending its holdings in Egypt as well as developing its North Sea assets. Apache has a strong track record of unlocking value from the assets it acquires and making strategic investment in large projects. Right now, the company's operations are divided 46 to 54, liquids to gas.

On May 3, Apache released its first quarter performance. The company reported earnings of $778 million, or $2.00 per diluted share, for the first quarter 2012, a sharp discount from the same period last year, when Apache reported earnings of $1.1 billion, or $2.86 per diluted share. According to the company's press release, its first quarter results reflect the impact of a $390 million non-cash, after-tax reduction in the carrying value of its oil and gas properties in Canada stemming from lower North American natural gas prices." It continued to explain, "Apache's adjusted earnings, which exclude the write-down and certain other items that impact the comparability of operating results, totaled $1.2 billion or $3.00 per diluted common share compared to adjusted earnings of $1.1 billion or $2.90 per share in the prior-year period."

Jean-Marie Eveillard's First Eagle Investment Management is a fan. The fund had $169.40 million invested in the company at the end of the fourth quarter. Boykin Curry's Eagle Capital Management and Ric Dillon's Diamond Hill Capital are also bullish on Apache. I have to agree, especially at its current share price.

Apache's share price fell from $95.54 at close on May 2 to reach a low of $91.46 a share - a difference of roughly 4%. The company earned $11.83 a share last year, falling short of analyst estimates by 3 cents. This year, consensus estimates put Apache's earnings at $12.59 a share, rising to $13.94 a share in 2013. At its current trade price, the company is priced at just 6.56 times its forward earnings, versus an average for its peers of 11.41.

This is exceptionally low, but even more so given the company's estimated earnings growth, especially when looking at some of the other smaller players in the oil and gas industry, specifically those with market caps less than $50 billion. EOG Resources (NYSE:EOG) is a good example. At $28.98 billion, its market cap is only modestly less than Apache's $35.34 billion market cap. Right now, it is trading at $107.71 a share, which is 15.86 times its forward earnings. Analysts are expecting EOG to earn $5.18 a share this year, moving to $6.79 a share next year, so it has solid estimated earnings growth - just as much as Apache, but it is priced comparatively higher.

Anadarko Petroleum (NYSE:APC) is in a similar boat. The company is trading at $71.44 a share. Analysts say the company's earnings will grow from $4.13 a share this year to $5.43 a share next year, which is solid growth, but it still leaves the company's forward price to earnings ratio relatively high at 13.16 times its future earnings. I do, however, like this company's expected growth and given its prospects. It recently settled a $4 billion agreement with BP (NYSE:BP) to settle all current and future claims stemming for the Deepwater Horizon disaster, which lays some worry to rest. Anadarko has also been enjoying growing cash flow from domestic, on-shore operations which will give it the capital to expand its geographic reach. The company has also enjoyed some significant success in Mozambique - its largest gas discovery in fact.

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