Apache Corporation (APA) is a mid-sized oil and gas exploration and production (E&P) company that is divesting underperforming assets overseas and focusing on its fast-growing and profitable operations in North America. It is also increasing its involvement in the production of crude oil and natural gas liquids (NGL). The company reported revenues of $16 billion for fiscal 2013 (FY13), a 5.1% decline over 2012, after exiting its Argentinian operations and selling a third of its operations in Egypt to China Petroleum & Chemical Corp (ADR) (SNP).
Apache's shift in focus to North America is expected to lower the geopolitical risks the Houston-based company is exposed to. This is a plus in the aftermath of the Arab Spring in Egypt, which had impacted its operations in the country. These geopolitical risks were a major reason why its stock price plummeted from $130 mark to $80 around two years ago. It has not recovered since then, and has hovered around the $80 mark.
The Apache management has recently resurrected its long-term growth strategies and is optimistic about the company's outlook. It recently increased Apache's authorized share repurchase program by 10 million shares to 40 million. Sell-side analysts are currently inclined to give the stock Buy or Hold ratings, and here we have taken a look at three key factors that should convince you into investing in this stock.
Restructuring of Asset Portfolio
The company has been shifting its strategic focus to drive revenue growth. Correspondingly, it is concentrating more on exploration and production of crude oil and NGL. At the end of FY10, the company generated 76.5% of its revenues from liquid production, and the contribution of this segment had increased 6.4 percentage points (ppts) to 82.9% by the end of FY13. Higher liquid production has granted the company to get consistent prices for its products, which is a strong plus at a time natural gas prices have been highly volatile.
Apache is also moving to mitigate the geopolitical risks it experienced in Egypt in July 2011. At the end of FY10, the oil producer generated 44.1% of its revenues from its North American operations, which constitute operations in the US and Canada. Since then, the company has been shifting its focus toward shale plays, especially in the Eagle Ford Shale formation and the Permian Basin. As a result, at the end of FY13, Apache was able to see revenue contribution from the North American region increase by 5.4ppts to 49.5%.
Going forward, the company plans to continue taking advantage of the shale boom in the US, which will propel Apache to record double-digit growth in volumes in the North American region. It plans to achieve this by doubling the number of its rigs in the Eagle Ford Shale formation.
Furthermore, even though Apache has shifted its focus to North America, some new projects in Australia and the North Sea are coming online as well. The Wheatstone LNG project in Australia is expected to start production in 2016 and provide 8.9 million tonnes per annum (MTPA) of LNG to Asian consumers. Apache has a 13% stake in the project.
Share Repurchases and Dividends
In May 2013, Apache had announced plans to repurchase 30 million shares. Since then, it has bought back 24.3 million shares by spending $2.1 billion. Earlier this month, Apache announced it was increasing its share repurchase program by 10 million shares to 40 million. In the past year, the company has repurchased nearly 6% of total shares outstanding, and the remaining portion of its share repurchase program gives Apache the opportunity to buy back 4% of its shares outstanding.
The company has also increased its quarterly dividends by 25% to 25 cents during the first quarter of its 2014 fiscal year. Its stock currently offers a forward dividend yield of 1.11%. Apache has paid out dividends since 1965, and it has increased its quarterly dividend by 67% since the start of FY12.
41 analysts cover Apache, of whom 40 have given Buy or Hold ratings for the stock. The average 12-month target price given by these analysts is $97.67, which represents an upside of 8.3% from Apache's May 23, 2014 closing price of $90.18.
Among notable sell-side institutions, Barclays (ADR) (BCS) has given the stock an Overweight rating with a price target of $113. JPMorgan (JPM), Credit Suisse (ADR) (CS), and Goldman Sachs. (GS) have all given a Neutral rating to the stock, with respective price targets of $94, $99, and $100.
The Bottom Line
Apache's outlook is positive because of its renewed focus on profitable operations and new projects coming online, and we recommend it as a buy.
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