We are maintaining our long-term Neutral recommendation on Apache Corporation (APA) based on its balanced exposure to natural gas and crude oil, coupled with multi-year growth trends in reserve replacement and production.
These factors are, however, partially offset by gas/oil price volatility, geo-political risks and project timing delays.
In the recently completed second quarter 2011, Apache performed well with earnings per share, excluding one-time items, of $3.22, comfortably surpassing the Zacks Consensus Estimate of $3.09 and way above the year-ago adjusted profit of $2.46.
Revenues of $4,338.0 million in the reported quarter were up 46.0% from the second quarter 2010 and marginally beat our projection of $4,316.0 million.
Additionally, we believe that Apache’s large geographically-diversified reserve base allows efficient allocation of capital and resources to high-return projects. We also remain bullish on the company’s international operations. In particular, Apache has been steadily building its asset base in Australia and Egypt over the last few years. We see meaningful growth in free cash flow in the coming years, stemming from project start-ups in these countries.
Apache’s financial flexibility and strong balance sheet are real assets in this highly uncertain economic period. The company’s leverage is low with a debt-to-capitalization ratio of 21.7% as of June 30, 2011, while its single-A debt ratings provide a competitive advantage in accessing capital at a reasonable cost. With an available committed borrowing capacity of $2.7 billion, the company can pursue accretive acquisitions.
However, as inherent to energy sector players, 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’s overseas activity remains vulnerable to risks such as embargoes and/or expropriation of assets, exchange rate risks, terrorism and political/civil sentiment. Moreover, the company’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.
Hence, we expect Apache to perform in line with its peers Anadarko Petroleum Corp. (APC) and Devon Energy Corp. (DVN).
