Recently, Apache (NYSE:APA) reported its earnings for the 1st quarter of 2012. This however came as a flop compared with last year's earnings, the 1st quarter of 2011. For this year's 1st quarter Apache managed to report $778 million, which would be an approximate $2 per diluted share. For the same quarter last year the company made a whopping $1.1 billion, approximating to about $2.9 per diluted share. But one thing that is for sure is that Apache has laid out plans to ensure it raises its earnings by the time it releases its next report. I share the same view that it just might attain that target. Since the start of 2012 it has been expanding its acreage by making acquisitions.
Making acquisitions is one sure way to ensure growth in a company, especially an oil and gas company like Apache. The company increased its production in the Anadarko basin up to 53% early this year in January. This doubles its acreage in the region by purchasing the privately owned Cordillera Energy for about $2.9 billion. Geographically, Apache has its geographical risk factor scattered in several continents. It has its operations in six countries currently, which include: Australia, Egypt, Argentina, Europe (off the coast of UK), North America (in Canada) and in the Mexican gulf. The company is based in Houston and is among the large companies dealing in oil exploration around the world.
As I have mentioned above, Apache has been on an acquisition spree since the start of this year. In addition to the Cordillera Energy purchase, it also acquired Tap Oil limited's production interest in west Australia, in the Harriet joint venture. This increases Apache's ability to increase its revenues. With this purchase, it also got exposed to an ongoing court case that relate to the explosions at the Varnus Island natural gas processing plant in June 2008 because Apache now holds 81% stake in the venture. Luckily, just after the purchase, before it was even finalized, the western Australian government dropped its charges against Apache because of what was termed as a technicality. However civil lawsuits can proceed and Alcao (NYSE:AA) of Australia is following such a lawsuit for damages incurred during the incident.
Apache has also increased its capital allocation in Argentina pursuing the demarcation of 650,000acres in Varca Muerta shale.
Apache, through its chairman and C.E.O G. Steven Farris announced that it expects to more than triple the pace of its activities in 2012 with the increased acreage while commenting on Apache's recent acquisition of Cordillera Energy. Apache still wants more and is not planning to stop its acquisitions there, not with the recent discovery of oil in Kenya. Since the country's first ever oil discovery was announced by Tullow Oil firm (a UK firm) in Turkana this March. A number of firms from the London and New York stock exchanges popped out with an interest to venture in Kenya's oil exploration. Apache is one of the firms interested in exploring the unexplored sites. Other companies include: Exxon Mobil (NYSE:XOM), Royal Dutch Shell (NYSE:RDS.A), Statoil (NYSE:STO) of Norway and its U.S based competitor Anadarko Petroleum (NYSE:APC). If Apache somehow manages to clinch the untapped sites in Kenya, I am certain it will have acquired a good source where it can easily increase its returns for years to come.
While Apache is doing great in some countries, this is not the case in Egypt. With the political unrest APA shareholders in Egypt surely have a reason to worry. Despite the political unrest Apaches president and CEO Rodney Eichler gave shareholders and investors an assurance, saying Apache is optimistic for its future in Egypt and is supported by its government partners. If Apache was to lose its assets in Egypt due to civil unrest, it would affect it negatively since Egypt accounts for 365,418 mfc per day of its natural gas production. Rather than retracting, Apache plans on taking the bull by the horns, by increasing efforts in Egypt in areas it believes have high potential similar to Anadarko basins.
BP (NYSE:BP) has already had its worst share this year. With the Macondo well leak, BP paid a penalty of $18 billion in violations and penalties associated with the Clean Water Act. In addition to this it also paid lawsuits amounting to $8 billion related to property loss, medical cost and economic damages. BP managed to come to a consensus with other companies on the Macondo well, like Weatherford International (NYSE:WFT) that agreed to pay $75 million, Anadarko Petroleum which agreed to pay $4 billion and Cameron International (NYSE:CAM) that agreed to pay $250 million.
Currently BP has just bounced back on its feet and is now aiming for profits. Apache must have gained advantage of the financial dent implicated by the penalties and lawsuits to extend its gap with BP in the oil market. This also puts into consideration the fact that BP has been shrinking down and selling assets to raise money.
Currently Cheniere Energy (NYSEMKT:LNG), is the sole company with an exclusive license that allows it to export natural gas out of the U.S. While Apache might not have such a license, it has a great marketing arm and now has contracts in the future worth $2.5 billion subsequent to acquisition, processing and shipping costs. Another of its competitors is Chesapeake Energy (NYSE:CHK) which is also a natural gas producer in US. It comes as second largest in the country and has a 0.6 debt to equity ratio and a price to earnings ratio of 7.6. To worsen things up for this stock, it has major issues in its management which are not so healthy for Chesapeake.
Anadarko petroleum follows Apache closely in sales with annual revenue of about $14 billion. It also has a foreign drill site in Mozambique, though Mozambique is highly at risk of disruption to its business unlike Apache in Australia. Despite a good financial report this first quarter, Anadarko still has a high debt amount with a debt-to-equity ratio at 0.80. This makes it vulnerable to unexpected events like; drilling accidents, weather, politics etc and price changes. I thus would rule out Anadarko Petroleum on those grounds.
To summarize, comparing Apache with its peers at the moment, I would say it is worth investing in. With the efforts in place, its recent acquisitions, and its continued wide diversification of risks. The strategies laid out cannot fail to materialize, also not forgetting that it has a price-to-earnings ratio of about 8.6. At $87 per share, Apache is under priced and a buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.