Apache Petroleum Corporation (APA, Financial) stock has surged by 26% since my recommendation in past six months. I believe, the company still has considerable upside potential based on its strategy to focus in North America. There have been several events such as the discovery of oil in Western Australia and divestiture of its assets in Wheatstone and Kitimat projects which indicates a transformation to a North American company.
In this article I will discuss reasons that make me believe the company still has upside potential and the reason and impact of its recent strategic moves.
Valuations
In spite of a 26% increase in price in a span of six months, the company still has attractive valuations as compared to peers. Apache is trading at an estimated 2015 EV/EBITDA of 4.4 as compared to Anadarko Petroleum’s (APC, Financial) 5.8 and Spectra Energy’s (SE, Financial) 13.4. This suggests the company is trading at a highly discounted value. Moreover, based on the company’s more focussed approach towards North America operations and a search for multiple strategic opportunities for LNG and international assets, I believe the company can still be considered a good BUY.
Apache’s repositioning
Apache has been transforming its business to a more focussed operation in North America. And as I have already mentioned in my previous article, Permian basin and Central basin are the prime growth prospects for the company. If we look at the company’s production growth, there has been a growth of 22% from Permian basin in a span of six months. This is supported by growth in Wolfcamp and Bone Springs.
Hence, to capitalize on untapped rich resources in North America, the company has been gradually shifting its production from international markets to North America. Since 2009, North American Onshore total production has increased by 15% CAGR with liquid production increasing by a CAGR of 29%. Both Permian and Central basins are the prime growth drivers for future production growth of the company. It is estimated to increase its production by 5% to 8% percent in 2014.
Source:Company Website
In the past five years Permian region has delivered 21% compounded equivalent barrel and liquid growth and Central region has delivered 31% respectively. The figures also show that both the regions combined have managed to increase the liquid production by 54% CAGR in five years and 35% total production in the same time period. On the contrary the production in International market and Gulf of Mexico has declined; the shift is also evident by some of the company’s recent divestiture and investment plans.
Apache’s 13% stake in Wheatstone project in Australia and 50% stake in Kitimat project in Canada are potential spinout target of the company’s international assets as this would generate cash that can be utilized in projects in North America. Also, in order to cater to the demands of investors like JANA partners, the company has announced the exit from these two projects.
I believe a more strategic expansion and utilization of resources will help the company to generate high cash flows that can be utilized to create shareholder value. The executed plan in 2013 has already treated investors with 18% dividend growth and is expected to further increase the dividend by 25% in 2014. Shares repurchase plans are also extensive with 26.1 MM shares repurchased by 2Q14 with further 40 MM shares repurchase authorization.
Conclusion
Apache has been smart in its move to gradually shift its operations in North America so far. I believe if the company is successful in divesting its poor performing assets in international markets and utilizing the cash in assets with high growth potential in North America. The company therefore has considerable growth and shareholder value crea
