Apache's (APA) recent annual meeting reflected that overall, shareholders are pleased with the company's direction. Shareholders elected four nominated board directors by a large majority of votes, ratified Ernst & Young LLP as Apache's independent auditors, and approved Apache's compensation plan. One vote went against Apache's recommendation, as shareholders voted for annual election of Apache's board members. Though the vote is non-binding, I think Apache should consider the move, as the trend in the oil and gas industry moved perceptibly towards annual elections this past proxy season.
Kitimat JV Needs to Move Quickly to Profit Against Shell
Apache, as a member of the Kitimat LNG joint venture with partners Encana (ECA) and EOG Resources (EOG), is in a race against a joint venture led by Shell (RDS.A) to become the first LNG exporter to Asia from Canada's west shores. Shell recently pulled ahead by putting in place a builder for a $4 billion pipeline to carry gas to the Pacific coast where the plants will be located. Representatives from Encana recently indicated that to entice LNG buyers from Asia to sign long-term contracts, the partnership would consider selling stakes in the venture. John Roper, Public Affairs Manager for Apache, countered by stating "we'll make a decision when we have all our i's dotted and t's crossed."
In a race against Shell, long an LNG leader, Apache and its partners do not have much time to dot i's and cross t's. Though the Kitimat partnership is off to a strong start, Shell has a great deal more leverage with its experience and production capacity, and China National Petroleum Corporation, a huge potential buyer of LNG, is one of its partners here. I think that Apache needs to move very quickly in order to realize contracts that will help it fund the Kitimat construction.
Tentative Steps in New Zealand
Apache, with partner TAG Oil Ltd, is moving ahead with New Zealand exploration. The companies recently filed a resource consent application with the Gisborne District Council. If approved, Apache and TAG could move forward with establishing a well pad for conventional oil drilling on the identified property, located northwest of the city of Te Karaka. Further consent applications would be required for actual drilling activity. The reaction of citizens to the filing was immediately negative, with residents near the site claiming that neither of the companies consulted neighbors as was indicated in the resource application.
The government of New Zealand is actively encouraging international exploration and production companies to look at development both on and offshore. Anadarko Petroleum Corporation (NYSE: APC) is indicating it has interest in offshore drilling here, but is postponing activity citing a shortage of oil rigs. I think it is more likely Anadarko is taking a wait and see approach, since even as the New Zealand legislature invites development residents are largely taking the opposite tack, as Apache and TAG are discovering. Adding to the mix, few of New Zealand's offshore reserves are proved, meaning that the risk here is doubled for new entrants.
Campaigning for Positive Press
Apache is joining others in the industry in an increased focus on public awareness. It is pushing compressed natural gas (CNG) for vehicles as a "smart alternative to gasoline", and giving donations of trees to groups and causes through the Apache Tree Grant Program. Competitor Cabot Oil & Gas (COG) is following the trend with its commitment to match fundraising efforts from the Endless Mountains Health Systems new hospital project. Cabot agreed to match donations from the community up to $1 million for the new hospital, which needs a total of $5.6 million for completion.
Chesapeake is also getting in on donations, though as with almost everything else its CEO Aubrey McClendon attempted in the past year, Chesapeake's donation activities stand as an example of what not to do. McClendon donated $26 million to the Sierra Club, an anti-energy development activist group, to support a "Beyond Coal" campaign meant to attack coal producers. Presumably, McClendon thought that this would help turn natural gas prices and press back to the positive and help his company regain its footing. Instead, the Sierra Club started another campaign, "Beyond Natural Gas." Now shareholders and participants in both the coal industry and the natural gas industry are decrying McClendon's actions as harmful to domestic energy production on all fronts. It's reasonable to assume that Cabot and Apache will be vetting donations more thoroughly in the future.
Analysts at The Street Ratings recently downgraded Apache from buy to hold, noting that the firm finds Apache has "weaknesses including unimpressive growth in net income and a generally disappointing performance in the stock itself." I think another weakness is that its costs and expenses are beginning to rise against its revenue, which as The Street noted are not growing commensurate with the rest of the industry. Another problem for Apache is that it has not announced any new discoveries, or even high volume wells, in the past few weeks, something that its competitors are doing regularly. This means that Apache is out of the investor spotlight, and is also not making the types of finds needed for strong growth.
Apache is currently trading around $83, with a price to book of 1.1 and a forward price to earnings of 6.2. Its 0.8% dividend rate reflects a company at a point of stability. Despite its lack of growth, Apache is fundamentally strong and has the prospect of future growth as it works on integrating the acquisitions made over the past few quarters. I think that this could push its revenue growth, which currently stands at 10.9% on a three-year average, higher over the next two years. However, I do not expect Apache to make any huge leaps until 2014 or later.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.