Apache Cheapest as $16 Billion in Deals Numbs Investors: Energy
The more Apache Corp. tries to grow, the more it shrinks.
Ranked the largest U.S. energy company focused solely on oil and gas exploration in 2010, Houston-based Apache has become the least-valued explorer among peers. At 8.8 times estimated profit, the stock trades at less than a third of the average ratio of the Standard & Poor’s 500 Oil & Gas Exploration & Production Index members.
Apache’s market value has fallen below the $36 billion it tallied three years ago before Chief Executive Officer Steve Farris bought more than $16 billion of drilling prospects across the world. Competitors Anadarko Petroleum Corp. and EOG Resources Inc. passed it up. Apache promised to expand output 29 percent by the end of 2016 compared with last year’s second quarter, yet well disruptions, earnings misses and Egyptian unrest cast doubt on its acquisitions becoming a growth engine.
“I think they have the capability and the wherewithal to turn that around, but they need to begin to demonstrate that fact,” said Ted Harper, a fund manager at Frost Investment Advisors in Houston with shares in Apache.
Farris, 64, is trying to retain investors like Harper as Apache shares have dropped 19 percent since the end of 2009, while the S&P oil and gas index has climbed 11 percent. Shares fell 1 percent to $83.81 at the close in New York, valuing Apache at about $33 billion.
In November, Farris told analysts his focus was on producing a string of successful quarters rather than trying to boost shares with moves such as buybacks. Apache is scheduled to report earnings on Feb. 14, with adjusted profit in the fourth quarter projected to rise about 6 percent from the third quarter, according to analysts’ estimates compiled by Bloomberg. Still, that would be a drop of about 22 percent from the fourth quarter of 2011.
Earnings missed analysts’ estimates in the first three quarters of 2012, in part because of maintenance and weather downtime that cut production.
“They’ve got some good potential, but I need to see a little bit more delivery before I’m willing to get more positive on Apache,” said Philip Weiss, an analyst at Argus Research who has a hold rating on Apache shares and owns none.
While analyst buy ratings on Apache outnumber holds by about 2-to-1, the ratios are about 3-to-1 and 7-to-1 for EOG and Anadarko, respectively, according to data compiled by Bloomberg.
Apache said its strategy is set to bear fruit.
“We have spent a lot on acquisitions and we’re now in a position where we’re going to be harvesting, if you will, those acquisitions,” said Robert Dye, senior vice president of global communications at the company. “We’re stepping up our drilling programs in North America, in particular in the Permian Basin and in western Oklahoma.”
The company will need to “balance that with some long-term projects that are going to add some meaningful production to us over the next several years,” including in Australia and Canada, he said.
The company is framing 2013 as a step toward demonstrating the power of its expanded oil and gas portfolio.
Apache began its three-year buying spree on Jan. 13, 2010, saying it agreed to acquire a stake in the planned Kitimat liquefied natural gas export project in Canada. Terms weren’t disclosed, though Kitimat will cost billions of dollars if it’s developed.
A flurry of deals followed in 2010, starting in April as Apache announced plans to purchase assets in the Gulf of Mexico from Devon Energy Corp. and all of Mariner Energy Inc., which had properties in the deep waters of the Gulf.
The pace didn’t slow in July, when Apache said it would pay about $7 billion to BP Plc for properties in the U.S., Canada and Egypt. BP was looking for cash in the aftermath of its Macondo oil spill in the Gulf, and Apache was eager to jump at the buying opportunity. Transactions continued in 2011, including agreements to buy North Sea assets from Exxon Mobil Corp. and a stake in a fertilizer plant in Australia.
Finally, in January of last year, Apache said it would buy Cordillera Energy Partners III LLC, a closely held company with holdings in Oklahoma and Texas that had acreage in the Granite Wash formation. The deal included $2.5 billion in cash and 6.3 million shares of Apache common stock.
Apache’s portfolio didn’t look the same after the purchases, and neither did the company’s balance sheet. Long- term debt more than doubled to about $10.7 billion at the end of last September from $4.95 billion on Dec. 31, 2009. The number of outstanding common shares rose to 391.3 million on Oct. 31, from 336.6 million on Jan. 31, 2010, regulatory filings show.
Apache spent much of a June investor day last year touting the depth of its portfolio, from established areas such as the Permian Basin in Texas and New Mexico to oil prospects in Kansas, Nebraska, Montana, Alaska and Kenya. Farris told analysts and investors it was time to drill more wells.
“We don’t have to make acquisitions anymore,” Farris said at the meeting. Smaller “bolt-on” purchases are possible, he said, though the focus is on drilling.
The company’s latest step came Jan. 24, when it announced promotions of several executives as it seeks to get the most out of its larger portfolio, which now includes an alliance with Chevron Corp. at the proposed Kitimat LNG export project in Canada.
Apache pegged its past success on acquiring mature fields from other companies, and then breathing new life into them through investment and use of technology. That includes a track record of success in the Permian Basin and the North Sea, where Apache has now expanded.
Egypt is another source of possible growth, as the company bought four development leases and an exploration concession across almost 400,000 acres from BP in 2010. The country is the top source of oil production for Apache outside of North America, and concerns about interruptions have followed since that country’s former president, Hosni Mubarak, was forced from power in 2011. The country is the site of continued unrest and demonstrations.
Farris has met with Egyptian officials, and “they’re certainly saying all the right things in terms of encouraging us to continue to invest,” Dye said.
“We haven’t seen any change in the way that we operate or the way that we’re treated,” Dye said. “Our contracts are still the same. We continue to be able to produce, and so we’re going to continue the course.”
That doesn’t mean investors have forgotten about the situation.
“As long as Egypt continues to have turmoil, it will be a drag despite the company’s operations not really being impacted,” said Brian Youngberg, an analyst at Edward Jones in St. Louis who has a buy rating on the company’s shares and doesn’t own any.
Going forward, the company plans to boost the percentage of output that comes from North America. The share of production from Egypt is projected to fall to 15 percent in 2016 from 22 percent in 2011, according to an Apache presentation last June. U.S. onshore output, meanwhile, is set to climb to a 41 percent share from 21 percent in that period.
Some analysts have questioned the Cordillera purchase given its price tag and gas component, with natural gas liquids prices tumbling last year.
Alembic Global Advisors this year said it was lowering its rating on Apache shares to neutral from overweight, citing factors such as commodity prices in the U.S. and turmoil in Egypt. Some big projects, including in Australia, aren’t projected to begin producing until after this year.
There’s a fear that Apache may look back to acquisitions if it can’t find the growth internally that it needs, said Edward Jones’s Youngberg.
“If the company can deliver on its guidance of organic growth, I think that’s really the best path to the stock moving higher over time,” he said.
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