Revaluation of international growth is just beginning - Goldman Sachs - October 29, 2007
What's changed
Further analysis of Apache’s growth opportunities in Australia and Egypt indicates that the Street continues to heavily discount international assets. Most discounted are international natural gas assets, and we believe that the Street has not focused on regional gas demand growth that is pushing up prices in Australia, Egypt, and Argentina (a $10 per share opportunity).
Implications
We do not believe that the step change in Apache’s production growth visibility led by international assets has been fully appreciated. Since 1995, Apache has not had three straight years of greater than 7% production growth per share. However, we see 8%-11% production growth per share through 2011. We believe that Apache deserves to trade at a higher multiple relative to other E&Ps. In the near term, we see four positive catalysts for the stock:
(1) potential exploration success in Australia;
(2) new gas contracts in Australia at 2X-4X current price realizations;
(3) Egypt exploration results from oil and gas wells, as well as potential gas price increases; and
(4) slight secular growth in US production.
Valuation
Apache trades at 5.1X 2008 EV/debt-adjusted cash flow versus 6.0X for large-cap E&Ps. After trading in line to above peers until mid-2004, Apache has traded at a discount since then. Relative valuation is off of its bottom, but we believe that the increasingly global natural gas market and greater credit for Australia oil discoveries argues for further multiple expansion. We are raising our 12-month discounted cash flow-based target price to $119 (27% upside) due to the assumption of a higher Australia gas price. We rate Apache Conviction List Buy and our coverage view is Attractive.
Key risks
Commodity price volatility, drilling results, cost pressures, and government pronouncements are key risks. |
