In an environment of high volatility in the price of oil, and historically low prices for natural gas, traditional energy companies are faced with the difficulty of providing growth and added value to shareholders.
Apache (NYSE:APA) has managed to adapt its strategy to move away from a company that was focused on growth through acquisition to growth through the exploitation of its oil and natural gas assets throughout the world.
Apache's common shares trade around $87. The 52 week price range is from $73.02 and $129.26. Apache's price earnings ratio is 8.29. The earnings per share are $10.60 and the dividend yield is 0.80%. The company has total cash of $245.06 million and debt of $7.87 billion. The book value per share is $74.09. The company has a float of 389 million and 1.3% of the float is short as of the 15th of June.
Apache has managed to explore in regions where it can produce oil efficiently in the North Sea and in Africa and has made some discoveries of massive natural gas reserves in North America and Australia. 55% of Apache's production comes from North America, the Gulf coast, Gulf of Mexico, East Texas, the Permian and Anadarko Basins, and the Liard Basin in Canada. At the end of 2011 Apache had proven reserve base of 3.0 billion oil equivalent up 1% from the same period in 2010. Production averaged 748,000 BOE per day in 2011.
Apache's properties in the Mississippian in Kansas and Nebraska may contain up to two billion BOE. Its Montana properties may yield up to one billion BOE. Its holdings in Montana may yield up to one billion BOE. The Western Oklahoma and Texas panhandle properties have a probable yield of 54 billion BOE and the Permian Basin may yield up to 34 billion BOE. Cook Inlet could add 1.3 billion barrels of oil. Kenya's offshore assets could produce up to 1.4 billion barrels.
Apache has had tremendous success with its exploration programs. It joins other majors Chevron (NYSE:CVX) and BP (NYSE:BP) in the Canadian Laird Basin where it recently announced that it will produce in excess of 66 billion cubic feet (NYSE:BCF) of natural gas from its own reserves in that area. It will transport production using TransCanada Pipelines (NYSE:TRP) and Spectra Energy (NYSE:SE) facilities. Because the price of natural gas is so low right now, it will develop the area slowly through 2012 and 2013. It expects that the property will generate an internal rate of return of 12% at natural gas prices of $2.57.
The beginning of the June 25 week had Germany refusing to share any of the European crisis burden and oil prices reflected the anticipation of diminished demand from that continent. The looming threat of bad weather and possible evacuations of drilling platforms in the Gulf of Mexico was a non-event as the expected bad weather veered away and it remained business as usual. The price of oil had a boost at the end of the week as news came out of the there is some cooperation among the European Union to resolve the debt crisis and work out bailout provisions to shore up national banks and stimulate economic growth. It is expected that higher oil prices will be on the way with European Union sanctions against Iranian oil exports and the continuing process to rescue the European economy.
In the beginning of June, Zacks Research maintained a neutral recommendation on Apache because of its strong asset base and production outlook. Zacks cited the global asset base and its efforts to expand operations to support growing production volume as positives for the company. Apache has macro factors and production delays and cost overruns to deal with on the negative side. At the time the recommendation was made the shares were trading around $79 and set a target of $83. Even with oil dropping below $80 per barrel, Apache has achieved a price well above the target price.
Apache has executed an exploration program that has yielded great results. Apache has weighed is production toward natural gas as a consistent source of revenue. The shale gas business will provide job growth in the U.S. to nearly 1.5 million new jobs by 2015 according to IHS Global Insight study summarized here. The industry could provide as many as 2.4 million jobs by 2035. The study goes on the say that while the supply of natural gas far outpaces demand at the present time, there is a strong outlook for continued investment by producers.
Apache sees increased demand for natural gas coming from China. It has wisely chosen to maximize the potential of assets in its portfolio and to target markets that will use natural gas. Particularly, it is looking to Asia to absorb the excess supply of natural gas particularly from its operations in Australia. Its North Sea operations have plenty of room for expansion. Apache has tried to mitigate the effects of volatile oil prices by securing long term leasing contracts for the North Sea wells.
There are some obstacles for Apache the most prevalent being macro factors that will always affect the demand for oil and gas. It has also entered into fixed price long term natural gas contracts in Australia which could have the effect of squeezing margins. Climate factors, particularly those that affect the Gulf of Mexico present risk of damage, down time and service cost increases.
Where it was once a company focused on growth through acquisition, it is now looking to grow production by drilling on its existing properties worldwide.
Apache's geographic diversification, its increased production and a capital expenditure program that can be covered by operational cash flow have seen the performance of the company's stock build a base at this levels after being oversold in May. It has adjusted its focus and is achieving positive results in focusing on its existing properties worldwide. The company's asset base is strong and it is being well managed through a tricky period in oil and gas commodity prices. I think the stock has found a level here. I think the value of the company is secure even with low commodity prices. Apache is a solid company for investors in the energy market.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.