Apache, based in Houston, is one of the largest independent exploration and production companies in the world. Its asset base includes conventional and unconventional resource plays throughout North America, including shallow and deepwater developments in the Gulf of Mexico, as well as oil and gas projects in Egypt, Australia, Argentina, and the U.K. At year-end 2010, proven reserves totaled 3.0 billion boe, with net production of 658 Mboe/d. Natural gas made up 48% of production and 56% of proven reserves, 44% of which were in the U.S.
This is not a high flying, super growth story. Analyst across the board rank it as one of the most unvervalued company. The fair value estimate for Apache ranges from 129$ to 160$. Infact whatever route you take, be it firm’s discounted cash-flow valuation or relative valuation versus industry peers, this company is cheap. The estimated fair value of $130 per share represents a price-to-earnings (P/E) ratio of about 15 times last year’s earnings and an implied EV/EBITDA multiple of about 6.3 times last year’s EBITDA. Similarly the DCFs have been calculated with compound annual revenue growth rate of 10% for next 5 years considering that they maintain the current levels of margin. Morningstar have even considered year-five oil price increases to $100 from $80, while year-five gas price decreases from $7.50 to $6.70. Morningstar expects it to reach 150$. Long shot Huh!
But again this company has been generating stong free cash flow for a long time and had a $4 billion merger with Mariner Energy and $8 billion in combined asset purchases from BP and Devon. So it continues to grow.
Let’s look at the annual and quarterly numbers of APA.
So the company is now starting to exceed 2008 income levels. That’s darn good.
Finally the Chart. For a change I have both weekly and daily charts up.
I own APA and bought them last week.
But let’s be devil’s advocate and say that nautal gas prices will remain subdued for next few years. Or worse, let’s say the price tanks further to 1.5$/1000 cubic feet. Will these valuation still stand good? There are too many variables involved in value investing and some times they can be value trap.