I would not recommend you invest in Apache (NYSE:APA) at the present time. There are a number of reasons for this.
First of all, its P/E ratio is 7.82. This puts it behind most of its significant competitors. In fact, the only competitor that has a worse P/E ratio is Exxon Mobil (NYSE:XOM), which stands at 9.91.
The dividend per yield is .68 or .8% of the stock price. This makes it one of the lowest dividend paying oil companies out there. However, this is excusable, due to the company's recent investment in 20 more oil rigs to expand its reach in America.
The firm does have an incredible 24.59% profit margin, which is by far the best in the industry. As a comparison, BP (NYSE:BP) is at 6.33%, Total (NYSE:TOT) at 6.98%, Chevron (NYSE:CVX) at 11.45%, and ConocoPhillips (NYSE:COP) at 5.25%. As you can see, it is more than twice as high as its nearest competitor.
The company's operating margin is an incredible 49.36%. This is more than three times its nearest competitor Chevron, which stands at 16.60%.
The company's net income has gone up over the last three years. It actually lost $285 million in 2009, but the net income rose to $3.03 billion in 2010 and $4.58 billion in 2011. Therefore, the company is certainly heading in the right direction.
The debt to equity ratio is 26.50. This puts it somewhere in the middle of its competitors. For example, BP is at 38.98, whereas Exxon Mobil is at 9.54. Overall, its debt levels are not a major concern.
As you can see, the company is in decent shape financially. There is no reason to expect that to change in the near future. In fact, many analysts think the stock will rise above $100 shortly.
So why don't I recommend the firm? Part of the reason is that the stock price is already reflecting most of the company's value.
For instance, the market capitalization is only at 32.40 billion, while the enterprise value is 40.02 billion. Therefore, the market capitalization is roughly 80% of the firm's overall value.
Another reason is that the company has not proven it can be profitable consistently. It was only two years ago that it lost $285 million. Therefore, it is a risky company, to say the least.
There is some room for growth in the future, and the price could in fact rise to $100-plus in the near future due to Apache's excellent first quarter. However, I don't expect the price to continue rising significantly.
The company recently said that it was selling some of the liquefied natural gas from the Wheatstone Project in Australia to Tohoku Electric Power Company. The two companies signed an agreement to supply as much as 1,000,000 metric tons of LNG for up to 20 years.
Apache currently owns a 13% share in Wheatstone. Therefore, it is using its share in this oil field to take advantage of the growing demand for LNG in Asia. This could bode well for the company's future, because it is getting in on the action early. It could see profits from this for a long time down the road.
Apache also announced that it was seeing better production from an extension well it just put in the Beryl Field in the U.K. North Sea. According to the vice president of the project, it has discovered new reservoir pressure in two zones which have over 300 feet of vertical pay.
Therefore, there is definitely opportunity for expansion in the future. Since the firm owns half of the Beryl Field, the opportunities look good for the future of this project, as well as other projects in the area.
Also, the company recently reported higher than ever production around the world in the first three months of 2012. This allowed the firm to take advantage of the high oil costs. The result was that the daily production went up 7% over what it was in 2011.
The company produced 769,000 barrels of oil daily, compared with the 732,000 it produced in 2011. Also, in the U.S. it produced 148,000 oils daily. This is 11% higher than what it produced in 2011.
One of the reasons for this is the company's more aggressive drilling. In America, it increased the amount of drill rigs from 36 to 56. Because of this, there is no reason to expect production to dip anytime soon.
The truth is that Apache has some good projects going on. There is no reason to expect the recent rise in production in America or the Beryl Field to drop anytime soon. Also, its expansion into the natural gas sector in Asia could help the firm down the road.
Of course, a lot of the first quarter profits in 2012 were due to the rise in natural gas prices. These are temporary, and when prices dip the company's profits will also drop some.
Overall, the company is in good shape financially. The profit margins are excellent, and the debt levels are reasonable as well, despite the company's recent investment in the new oil rigs in America.
This company is a decent investment, and it might even rise significantly in the near future to reflect the company's excellent first quarter. However, long term I don't see the price rising substantially.
This is simply because most of the company's value is already being reflected in the stock price. This is evidenced by the fact that the market capitalization is 80% of the enterprise value.
If you want a stock that goes up perhaps 5% to 10% per year, this is a good investment. However, I don't see the rise being substantially more than that long term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.