We are maintaining our long-term Neutral recommendation on Apache Corporation (APA), reflecting its large geographically diversified reserve base, successful drilling works and strong production growth outlook, partially offset by unstable gas/oil prices and international business risks.
Houston, Texas-based Apache is a leading independent energy company engaged in the exploration, development and production of natural gas, crude oil and natural gas liquids. As of year-end 2011, Apache had a proved reserve base of 3.0 billion oil-equivalent barrels (BBOE), up 1% from the previous-year level.
Apache is noted for expansion through the acquisition and development of existing reserves. In early January, Apache closed the acquisition of Mobil North Sea Limited assets for $1.25 billion from the U.S. oil giant ExxonMobil Corporation (XOM).
With the upcoming acquisition of Cordillera Energy Partners, Apache will gain access to the estimated proved reserves of 71.5 million barrels of oil equivalent of the former. We expect this transaction to further supplement Apache’s holdings in the fertile Anadarko Basin and provide a lucrative ground for a long-term development program in one of the most cost-effective, oil- and liquids-rich gas targets onshore.
Recently, Apache raised its quarterly cash dividend to 17 cents per share (68 cents per share annualized), representing an increase of approximately 13% over the previous payout. This move highlights the company’s strong cash flow position. Apache aims to sustain a steady dividend growth over the next few months that would enhance long-term shareholder value.
However, as a company operating in the energy sector, 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.
We also remain worried about the near-term risk to Apache’s production in Egypt due to continued political and civil unrest. We believe any operational disruption will significantly dent Apache’s outlook and valuation considering that Egypt makes up around a third of the company’s oil and gas output.
Additionally, operations in the Gulf of Mexico remain prone to various natural calamities such as hurricanes and also face risks of pipeline damage and oilfield service cost inflation. Lower-than-expected production from the region will likely impact Apache’s overall performance.
Hence, we believe that Apache exhibits a balanced risk-reward portfolio at current levels and expect the stock to perform in line with the broader market. Apache currently retains a Zacks #3 Rank, which translates into Hold rating for a period of one to three months.
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