The oil and gas market sector continues to remain highly volatile due to fluctuations in energy prices. With that said, there are still some good values to be found in the oil and gas sector. In this article, I will discuss why I feel that Apache Corporation (APA), primarily given its steady annualized production and balanced management style, could be a great contender for investors seeking portfolio growth.
Low Debt and Steady Growth for the Long Term
Apache has a long history of using a balanced management style, and in so doing, the company has taken on far less debt than many of its other constituents in this industry sector. Although the dividend of $0.17 per share equates to less than a 1% yield, investors have actually seen more profit due to the company's annualized production of roughly 13% for over twenty years.
The company announced a weak second quarter 2012, due in large part to disruptions in its production and lower natural gas and oil prices. Yet, its P/E ratio is still just under 11, with a market cap in the $35 billion range. Earnings per share are also still strong at $8.43.
For 2012, it is estimated that Apache will post profits in excess of $10 per share, and a 4.5% rise in sales growth. In addition, Apache recently completed the purchase of Exxon Mobil Corporation's Beryl Field, as well as some other properties in the U.K. North Sea in early 2012.
Given its second quarter numbers, I believe investors should view Apache as a real value play - especially since there were still a number of positives for the company during this same time period. One plus on the balance sheet side is that Apache has continued to reduce its fracking costs, due primarily to its goal of exploring new technologies - and particularly those that are considered "at the bit technology" that allows the company to access real time data from within the drill hole. Based on this, Apache will likely need fewer tool changes, possibly even resulting in fewer wells drilled in order to achieve the most recovery possible from a particular reservoir.
Competitor CenterPoint Energy, Inc. (CNP) may also prove to be a good value for growth seeking investors in the energy sector. With a market cap of approximately $8.75 billion and a 12-month income of more than $775 million, CenterPoint brought in second quarter 2012 revenue of $1.87 billion. This helped to beat the company's quarterly earnings estimates by $0.02, and it also was a factor in its annual earnings per share estimates being raised to between $1.13 and $1.23 from its previous targets of between $1.08 and $1.20.
With its second quarter profit of over $125 million, equating to $0.29 per share, and a dividend yield of roughly 4%, I feel that investors should also consider CenterPoint as another energy sector winner, as well as SandRidge Energy, Inc. (SD). This company, stating estimated reserves of 1,312.2 Bcfe, doesn't pay investors a dividend, but investors have so far been rewarded with share growth. Although the price of oil and natural gas has recently pulled back, SandRidge is still expected to maintain strong earnings per share of $0.13 for 2012, and $0.23 for 2013.
Another potential utility that could also be considered a strong value is American Electric Power Company Inc (AEP). Although the shares recently lagged behind several of its competitors, there is some potential good news for the company in that it recently received an order from the Ohio Public Utilities Commission regarding its modified Electric Security Plan (ESP).
This means that, based on an August 8, 2012 ruling, American Electric is allowed to transition to a fully competitive market based rate structure by June 1, 2015. Prior to that time, American Electric will auction 10% of its standard service offer load, beginning in 2013. Between now and the 2015, however, no customer rate increases over 12% will be allowed.
Due to the volatility in the sector, though, the news isn't so great for some other companies such as FirstEnergy Corp (FE), which, in the second quarter 2012, had an 8% drop in profits, due primarily to lower revenue at the company's regulated distribution segment. Because of this, along with higher expenses due to depreciation, FirstEnergy's fiscal earnings estimates for 2012 have been decreased from $3.60 per share to $3.30. In addition, quarterly per share earnings estimates have also been lowered from $0.69 per share to $0.59.
The Bottom Line
Given Apache's strong fundamentals, along with its long history of steady profit, I think this one could still be a winner - especially if shares can be picked up in the $85 to $87 range. The company has been adamant about keeping expenses down - far less than its incoming cash flow - which has resulted in a nice return for its investors.
Even though Apache showed weaker second quarter 2012 numbers - leading some analysts to adjust their ratings of the shares to "underperform," there are many positives that could offset even this, including the fact that the company has a large and geographically diversified reserve base. Plus, given the balanced exposure that Apache has to both crude oil and natural gas, as well as its multi-year trends in replacement of reserves and production growth factors, the company should still generate both short- and long-term share growth for its investors.