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