Apache Oil (APA) maintains a careful balance of its assets, with a successful mix of revenue lines in both foreign and domestic holdings. Apache has approximately a 50-50 split in its production between gas and liquids, with oil making up over 40% of the liquid production. This adds a high-priced revenue source to its income statement, with oil currently selling at over $100 per barrel. This type of careful balance in assets and revenue lines is an excellent approach to staying solvent, and weathering changing economic conditions in the gas and oil exploration industry.
Apache operates in six countries, spreading each geographic and geopolitical risk factor among different continental zones. Currently, Apache has operations in North America (the U.S., including the Gulf of Mexico, and Canada), Europe (the North Sea off the coast of the UK), the Middle East (Egypt), South America (Argentina), and Australia. With revenues at around $17 billion, Houston-based Apache Oil is one of the larger mid-cap oil exploration companies operating in the world market.
In addition to spreading risk among its assets, Apache also maintains a very attractive debt-to-equity ratio. At 0.25, it's lower than the 0.34 debt to equity ratio median among its peers. Apache ensures it has the cash reserves to withstand wild fluctuations in the market for the price of energy, as well as the inherent risks in oil exploration and the unsure political climate in some regions where it operates.
One of the economic conditions Apache has had to withstand is the current price point for natural gas on the domestic market. Hovering in the $2 to $3 per 1,000 cubic feet range, it is languishing at a 10-year low. Apache's balanced portfolio allows the liquid oil revenue to help cover any revenue gap experienced by its domestic gas operations. In addition, Apache has a market edge over domestic producers in its liquid natural gas sales because it can sell to foreign markets.
Natural Gas: Domestic Vs. the International Marketplace
The unusually high supply of natural gas in the U.S. has caused the price to drop in the domestic market. However, the price for natural gas in energy-hungry Asia and Europe sits closer to the $11 to $13 range per 1,000 cubic feet. If the cost to extract the resource is comparable in foreign countries as on home ground, then it's primarily the cost of shipping that is the main add-on for selling in foreign markets. Shipping methods can vary, from pipelines for gas to having to convert the gas to liquid form for specialized, refrigerated container ships. But, still, the added cost is worth a 450% increase in price. The exports laws in the U.S. allow companies to sell natural and liquid gas to most foreign countries under two conditions. First, the importing country has to have a free trade agreement with the U.S. (not a big barrier), and second, the Energy Department has to give its approval to the company to export the product and the FERC must issue a permit for the export terminal. To date, only one such export application has been approved by the Energy Department, and it wasn't to Apache Oil or any of its oil field competitors. If the supply can't be exported, then the supply will stay high, and the domestic price will be low.
By having drilling rights in foreign fields, Apache Oil can export under the more generous export laws of those countries, and has a market edge over its purely domestic competitors, as it can sell its gas at the much higher price commanded in the international marketplace. That "edge" can be subject, though, to the politics of the region. Argentina has had a history of nationalizing industries, which is a big risk and threat to foreign companies. Moody's mentioned the unrest in the Middle East as a concern in the recent ratings assessment for senior notes that Apache issued, specifically referring to its operations in Egypt. In addition, deep-sea exploration, such as those in the North Sea and the Gulf of Mexico, simply carry a heavier, overall risk because of the geography of miles of uncertain, ocean water that has to be operated through.
However, Apache is tapping into that foreign market by increasing its interest in the newly discovered fields of Australia. As far as shipping costs are concerned, Australia is about 4,700 nautical miles from China, which is closer than the West Coast of the U.S. is to China. Apache is free to export gas to Asia from Australia. In order to take advantage of its proximity to the Asian market, Apache has a substantial interest in the Wheatstone project in Australia.
Apache's Competition
Devon Energy (DVN) is one of Apache Oil's competitors. Devon has decided to concentrate its efforts solely on land-based, North American operations. However, it does maintain a good presence in Canada, which gives it a gateway to the foreign markets. Like Apache, Devon is a well run company, with diversification into oil as well as gas, but comes off a smaller revenue base than Apache Oil. Selling at $ 71 per share, with a debt-to-equity ratio of 0.46, Devon is a good buy, but with a price-to-earnings ratio of 13.88, it's not quite as undervalued at the moment as Apache Oil.
At $14 billion annual revenue, Anadarko Petroleum (APC) is close to Apache in sales, and also has a diversified portfolio and large interest in a foreign drill site in Mozambique. However, despite its wealth of natural resources, Mozambique has a hugely inequitable distribution of wealth in its population, which does not lend itself to a stable situation. With Mozambique's risk of disruption to its business, Andarko is operating in is very different geopolitical climate than Apache's operation in Australia. Anadarko did have a favorable financial report for the first quarter of fiscal year 2012, beating both estimates for revenue ($3.45 billion actual against $3.34 estimate), and earnings per share ($.92 per share actual against $.82 per share estimate). Still, it does carry a high amount of debt, with a debt-to-equity ratio at 0.80 against a peer group median of 0.34, giving it much less flexibility to withstand dramatic price changes and unforeseen events (politics, weather, drilling accidents, etc.). Chesapeake Oil (CHK), which is the second largest natural gas producer in the country, has the same debt issue (0.6 debt-to-equity ratio) as Anadarko, with serious management issues thrown into the mix. Its current price-to-earnings ratio is 7.6.
Cheniere Energy (LNG), has the most interesting arrangement of the competitors. Along with its subsidiary, Cheniere Energy Partners, it acquires natural gas on the low-priced, domestic market, converts it to 1/600th of its volume to ship overseas, and sells it on the much higher-priced foreign market. It also has (at the moment) an exclusive license to export natural gas out of the U.S. While it does not have the exploration and drilling arm of Apache, it certainly competes with Apache's marketing arm, and currently has future contracts worth $2.5 billion after acquisition, shipping and processing costs.
Looking over the competition, it appears to me that Apache is a good buy. It has diversified its business risk, keeps adequate cash reserves as an indication of good management in a volatile industry, and has a price-to-earnings ratio of 8.57. It's reported that the S&P has a $145 per share price target on Apache, which is well above the current selling price of $89 per share.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
