Our Oil & Gas Exploration & Production team, led by Arun
Jayaram, rates Apache Corp. (
) an Outperform and ranks it as one of the most compelling
opportunities in their universe. Apache explores for, develops, and
produces natural gas, crude oil, and natural gas liquids. The
company trades at an attractive valuation relative both to its
peers and its own historical trading range.
Keen Ability To Extract Value: Over the years, APA has employed
an "acquire and exploit" strategy that has taken full advantage of
the perpetual reshuffling of industry assets. In the past, Apache's
seasoned management team has shown a propensity to extract hidden
value from capital-starved properties purchased from other
operators. After the recent acquisition of $16.7 billion worth of
assets in the Gulf of Mexico, North Sea, Canada, Egypt, Permian
Basin, and Granite Walsh, our E&P team argues that it is a very
attractive time to own Apache.
Growth At Attractive Returns: After reaching its deleveraging
target, APA plans to deploy over $10 billion of capex in 2012 to
exploit its new properties, well within cash flows excluding
acquisition spending. Our team forecasts that APA can generate 17%
returns on capital employed (ROCE) through 2014, significantly
above the 12% average of the peer group.
Concerns Over Egypt Provide Compelling Entry Point:
Approximately 22% of Q3-11 production came from Egypt. While the
country has been dealing with the post-Arab Spring realities, our
E&P team has concluded that there will be no significant
changes to the oil and gas fiscal regime, given the economic
importance of the sector. Their analysis includes discussions with
industry experts with intimate knowledge of the Egyptian political
and fiscal structure. Recent moves by Egypt to secure $3.2 billion
of IMF aid plus a $1.5 billion pledge from the U.S. gives us
confidence that the industry will not be the first source of
funding in this period of social and economic duress.