We reaffirmed our Neutral recommendation on U.S. energy firm
) on May 23, 2013. Its drilling venture has been helping Apache
to deliver higher liquids production. However, deteriorating oil
and gas price realizations are concerns.
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Why the Reiteration?
Apache 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. We like Apache's large
geographically-diversified reserve base, as well as its balanced
exposure to natural gas and crude oil, and multi-year trends in
reserve replacement and production growth. This allows management
to allocate capital and resources to high-return projects.
Additionally, we are bullish on Apache's international
operations. The company has been steadily building its asset base
in Australia over the last few years. We see meaningful growth in
free cash flow in the coming years, stemming from project
start-ups in that country.
The company's financial flexibility and strong balance sheet are
real assets in this highly uncertain economy. Leverage is low
with a debt-to-capitalization ratio of 26.4% as of Mar 31, 2013,
while its single-A debt ratings provide a competitive advantage
in accessing capital at a reasonable cost. Furthermore, a steady
dividend and the recently announced share buyback program
highlight the company's commitment to create value for
However, Apache'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.
Moreover, as is the case with other independent exploration and
production (E&P) companies, Apache's results are directly
exposed to oil and gas prices, which are inherently volatile and
subject to complex market forces. Realized prices could differ
significantly from our estimates, thereby affecting the company's
revenues, earnings and cash flow.
Apache currently holds a Zacks Rank #3 (Hold).
However, there are certain other E&P firms in the energy
sector that are worth considering. Those include
EPL Oil & Gas Inc.
Abraxas Petroleum Corporation
Sandridge Mississippian Trust II
). All these stocks hold a Zacks Rank #1 (Strong Buy).