Despite a long-term record that should place it among the best-run energy companies, Apache (NYSE:APA) is more often criticized for whatever it isn't than what it is has always been. Apache is never the company to play when oil is hot, nor is it the company to play when natural gas is the place to be. Apache is never the name to consider when a particular play or geology is in the news.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

What Apache is, though, is a company with an enviable record of cash generation and per-barrel margins and a company with a record of producing excellent economic returns in place where others fear to tread. Apache's balance and diversification means it will never be the hottest name in the sector, but the value here is such that investors who want a dependable play on oil and gas should take a serious look.

Spending Money in a World of Declining Returns
One of the apparent realities of the energy world is that the future isn't going to be quite like the past. In particular, finding and exploiting reserves is harder and more expensive and it's not likely to get any easier. What that means, then, is that the industry is likely going to have to work harder and harder to make incrementally less.

That said, Apache may not follow that trend in lock-step. The company spent nearly $14 billion on acquisitions in 2010 and 2011, and just recently added Cordillera Energy Partners III for nearly $3 billion. Given Apache's record for wresting better margins from acquired assets (and the relatively positive comparables for Chesapeake Energy (NYSE:CHK) when looking at Cordillera), it doesn't look like returns on investment are doomed here. (For related reading, see Key Players In Mergers And Acquisitions.)

A Diversified Base in Generally Friendly Places
Apache offers investors a fairly balanced portfolio of assets. About 70% of the company's reserve base is in North America with another 11% or so in Australia, and 5% in the North Sea - all relatively stable and consistent operating areas from a legal and political standpoint. Yes, U.S. offshore drilling policy did change in the wake of the BP (NYSE:BP) Gulf spill and Australia did implement supplemental taxes on natural resources, but that's far better than the outright nationalization that has happened elsewhere.

Apache does have at least two vulnerabilities in its portfolio. Egypt represents about 10% of reserves and more than 20% of production in recent quarters, and is hardly a stable operating environment today. Apache also has significant exposure to offshore Gulf of Mexico assets with nearly 20% of reserves.

Although these areas concern investors, patience seems to be in order. Egypt's situation is not ideal, but it seems as though all parties realize that the country's oil assets are vital to its near-term economic future. As for the Gulf, Apache has been more than happy to buy assets from companies like BP, Exxon Mobil (NYSE:XOM), and Devon (NYSE:DVN) and the company's operating experience and expertise makes this a reasonable decision - there is oil there, Apache knows how to get it, and how to get it profitably.

The Bottom Line
With more than half of its reserves in natural gas, Apache is not going to be the go-to name in an environment where everyone seems to want oil-heavy assets. Still, investors who ignore Apache do so at their own risk, as this company has proven over and over again that its balanced model outperforms its peers over the long haul.

Using the company's historical forward EV/EBITDA multiple, Apache seems about 25% undervalued today. That's not a breathtaking degree of undervaluation, but oil is a little too hot right now to expect major energy companies with oil exposure to trade at dirt-cheap valuations. With undervaluation coupled to proven excellence in execution, Apache is still a name well worth serious consideration for investors looking to add energy exposure in early 2012. (For related reading, see What Determines Oil Prices?)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    The Top 5 Oil and Gas Penny Stocks for 2016 (XCO, CHK)

    Learn more about the oil and gas industry outlook, and discover the top five oil and gas penny stocks investors should consider for 2016.
  2. Stock Analysis

    Starbucks: Profiting One Cup at a Time (SBUX)

    Starbucks is everywhere. But is it a worthwhile business? Ask the shareholders who've made it one of the world's most successful companies.
  3. Stock Analysis

    How Medtronic Makes Money (MDT)

    Here's the story of an American medical device firm that covers almost every segment in medicine and recently moved to Ireland to pay less in taxes.
  4. Stock Analysis

    3 Volatile U.S. Industries to Exploit in 2016 (VRX, IBB)

    Read about volatile sectors in the stock market that may provide opportunities for investors in 2016, including energy, mining and biotechnology.
  5. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  6. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  7. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  8. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  9. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  10. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
RELATED FAQS
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  3. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  4. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  5. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center