Apache Corporation
/ (APA-NYSE)/ Equity Research / APA | Page 6
Current Recommendation / UNDERPERFORM
Prior Recommendation / Neutral
Date of Last Change / 01/22/2015
Current Price (01/21/15) / $62.32
Target Price / $57.00
SUMMARY
We are downgrading Apache Corporation to Underperform from Neutral with a target price of $57. Being a firm in the exploration and production industry, Apache’s profitability is expected to take a beating in this weakly-priced oil and gas market. Moreover, as the company derives the bulk of its production from crude oil, it is likely to suffer in the upcoming quarters as the commodity is not expected to see any drastic improvement in the next few months. Moreover, though asset sales help the company in improving financials, it could lower production volumes. As such, we do not see any significant upside for the company in the near term./ Equity Research / APA | Page 6
SUMMARY DATA
52-Week High / $103.4852-Week Low / $55.20
One-Year Return (%) / -24.63
Beta / 1.43
Average Daily Volume (sh) / 3,266,228
Shares Outstanding (mil) / 376
Market Capitalization ($mil) / $23,462
Short Interest Ratio (days) / 1.45
Institutional Ownership (%) / 86
Insider Ownership (%) / 1
Annual Cash Dividend / $1.00
Dividend Yield (%) / 1.60
5-Yr. Historical Growth Rates
Sales (%) / 11.0
Earnings Per Share (%) / -0.8
Dividend (%) / 12.3
P/E using TTM EPS / 9.7
P/E using 2015 Estimate / 47.9
P/E using 2016 Estimate / 20.4
Zacks Rank *: Short Term
1 – 3 months outlook / 5 - Strong Sell
* Definition / Disclosure on last page
Risk Level * / Above Avg.,
Type of Stock / Large-Value
Industry / Oil-Us Exp Prod
Zacks Industry Rank * / 222 out of 267
OVERVIEW
Founded in 1954, Houston, TX-based Apache Corporation (APA) is one of the world's leading independent energy companies engaged in the exploration, development and production of natural gas, crude oil and natural gas liquids. Approximately 68% of the company’s proved reserves and 58% of its production comes from North America, where its operations are focused in the Gulf of Mexico (GoM), the Gulf Coast, East Texas, the Permian basin, the Anadarko basin and the Western Sedimentary basin of Canada. Apache divides its North American exploration and production activities into two U.S. operating regions (Central and Gulf Coast) and a Canadian region. Internationally, Apache has core operations in onshore Egypt, offshore U.K. North Sea, onshore Argentina and offshore Western Australia. Additionally, Apache holds exploration interests on the Chilean side of the island of Tierra del Fuego.
As of year-end 2013, Apache had a proved reserve base of 2.65 billion oil-equivalent barrels (BBOE). About 69% of the proved reserve was developed. Approximately 51% of the company’s proved reserves as of 2013 were located in the U.S., 17% were located in Canada, while 32% came from international regions. Production averaged 760,775 oil-equivalent barrels per day (BOE/d) during 2013, comprising 46% gas and 54% crude oil/ liquid hydrocarbons.
REASONS TO SELL
Ø Crude prices have fallen over 50% since June last year when it was trading around the $100 per barrel mark. Apache, being engaged in exploration and development activities, is directly exposed to the commodity. Reduced prices are expected to significantly impact the company’s revenues, earnings and cash flow.
Ø Apache recently announced the sale of its stake in Wheatstone LNG and Kitimat LNG projects. The move was to tackle the pricing woes through cost containment measures. Though it would help the company’s financials in the near term, it may result in an opportunity loss for Apache in the long term as LNG demand is likely to see a boost in the coming years.
Ø The company’s long-term production and reserve growth primarily depends on its acquire-and-exploit model. Apache may find it difficult to complete accretive transactions in the future, which could negatively impact its growth rate.
Ø Apache sells natural gas in Western Australia under long-term, fixed-price contracts, many of which contain price escalation clauses based on the Australian consumer price index. This exposes the company to greater-than-average margin compression.
Ø Additionally, operations in the Gulf of Mexico remain prone to various natural calamities such as hurricanes and also face the risks of pipeline damages and oilfield service cost inflation. Lower than expected production from the region will likely impact Apache’s overall performance.
RISKS
Ø As is the case with other independent exploration and production companies, Apache’s results are directly exposed to oil and gas prices, which are inherently volatile and subject to complex market forces. Any upside from the current weakness should reflect positively on the company’s revenues and earnings, thus affecting our price targets.
Ø Apache is noted for growing through the acquisition and development of existing reserves. Long-term production growth visibility has significantly improved following the BP asset acquisition, the purchase of a portion of Devon Energy’s GoM assets and the deal to acquire Mariner Energy. These new acreage positions complement the company’s diversified asset base. Success at these new ventures could improve the company's financials.
Ø During 2014, Apache added over 300,000 acres of leasehold in important plays and increased its drilling activities in the Eagle Ford and Canyon Lime plays. The company projects North American onshore production growth of 8–12% in 2015, which includes liquids growth of 12–16%. Growth above expectations poses a risk to our recommendation.
RECENT NEWS
Apache to Exit 2 International LNG Projects for $2.75 Billion
On Dec 15, 2014, Apache Corp. announced that it has entered into an agreement with the Australian oil and gas producer, Woodside Petroleum Limited, to sell its stake in two liquefied natural gas (LNG) projects – Australia’s Wheatstone LNG and Canada’s Kitimat LNG.
Apache announced that the deal is valued at $2.75 billion. Apache would receive another $1 billion for its investments in these projects between the effective date of the deal (Jun 30, 2014) and the closing date (likely to be in the first quarter of 2015) of the transaction. The company is likely to receive net proceeds of about $3.7 billion from the deal.
Apache added that the transaction would result in cash tax liabilities of about $650 million, most of which are associated with its Overall Foreign Loss account balance. This should result in minimal U.S. tax impact when dealing with cash associated with foreign operations.
Apache will sell its equity interest in Apache Julimar Pty Ltd. The Australian subsidiary of the company holds a 13% stake in the Wheatstone LNG project. It also owns about 65% interest in the WA-49-L block, which is houses the Julimar/Brunello offshore gas fields and the Balnaves oil development.
The transaction also involves the sale of Apache’s 50% stake in the Kitimat LNG project and associated upstream properties in the Horn River and Liard natural gas basins in British Columbia, Canada. The Kitimat LNG project is a joint venture between Apache and the Canadian arm of the U.S. energy giant, Chevron Corp.
Post closure of this agreement, Apache will still hold upstream properties off the coast of Western Australia, in the Carnarvon, Exmouth, and Canning basins. The company would also continue to hold a 49% stake in Yara Holdings Nitrates Pty Ltd and a 10% stake in the ammonium nitrate plant.
Apache mentioned that the sale of these LNG projects is a strategic move and it intends to use the proceeds from these transactions to repay debt, repurchase shares and to invest in other promising assets to facilitate growth.
VALUATION
Being engaged in upstream activities, Apache’s operations are directly exposed to crude prices, which have seen a significant plunge in the past few months. Lower realizations are likely to result in reduced revenues and earnings for the company. Moreover, Apache’s decision to sell its stake in the LNG projects could result in missed revenues for the company in the long-term.
These factors are reflected in our new Underperform recommendation on shares of Apache Corporation.
Apache’s trailing 12-month P/CF multiple is 2.4x, compared to the 9.4x average for the peer group and 15.9x for the S&P 500. The company’s trailing 12-month EV/EBITDA multiple is 3.0x, compared to the industry average of 4.9x. Our $57 price objective reflects a multiple of 2.2x the trailing twelve-month cash flow.
Key Indicators
Earnings Surprise and Estimate Revision History
DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of APA. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1114 companies covered: Outperform - 15.6%, Neutral - 78.1%, Underperform – 5.7%. Data is as of midnight on the business day immediately prior to this publication.
Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.
/ Equity Research / APA | Page 6