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

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  3. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  4. Stock Analysis

    What Exactly Does Warren Buffett Own?

    Learn about large changes to Berkshire Hathaway's portfolio. See why Warren Buffett has invested in a commodity company even though he does not usually do so.
  5. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  6. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  7. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  8. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  9. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  10. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  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 >>

You May Also Like

Trading Center