Apache (APA - IL/A): Sticking to its knitting, which should not be a surprise - Goldman Sachs - September 22, 2005
There is no change to our favorable fundamental view of Apache following its New York analyst meeting, where the company essentially declared it was sticking to its tried and true strategy that has served the company well for over 50 years now. Our In-Line rating on the shares merely reflects our view that other E&P-oriented companies have even greater upside at this time. Our Attractive coverage view indicates our overall bullish outlook for the sector including Apache. We were not looking for major new strategies or initiatives at the meeting and not surprisingly none were offered. Apache's shares are not expensive, trading at 4.3X 2006E EV/DACF versus the 5.2X large-cap E&P average. The shares, however, trade in-line with other diversified, conventional E&P companies like Talisman (4.3X), Newfield (4.4X), and Noble (3.9X). Of that group, we favor Newfield (OP/A) at this time.
APACHE SHARES HAVE LAGGED PEERS IN 2005 AS MARKET HAS PREFERRED UNCONVENTIONAL NORTH AMERICA GAS-FOCUSED COMPANIES AND SHARE BUYBACKS
We sense some restlessness in the investment community that Apache is not doing something more or different in light of the fact that other large-cap E&Ps like EOG Resources (OP/A), EnCana (OP/A), Burlington Resources (IL/A), and Devon Energy (IL/A) have had better stock price performance this year. Year-to-date EOG is up 108%, EnCana +96%, Burlington +81%, and Devon +73%, all sharply beating Apache's 53% total return (quite remarkable that a 53% gain qualifies as relative underperformance). In the case of EOG and EnCana, we note both companies have strong unconventional North America gas-focused growth programs, which the Street currently strongly prefers. Burlington we think is being rewarded for its steady, long-lived North American gas-focused asset base and strong commitment to returning excess cash to investors. Similar situation with Devon, which had previously appeared quite inexpensive versus its peers and is now buying back quite a bit of stock.
SHOULD APACHE DO SOMETHING DIFFERENT? WE DON'T THINK SO
Apache would seem to have some mix of three choices:
(1) sell short-lived Gulf of Mexico production that is currently out of favor on the Street;
(2) start buying back more stock; and
(3) stick to its long-term, tried and true strategy that looks beyond inevitable Street cyclicality in terms of which assets and financial strategies it favors in the short term. Given Apache's strong long-term track record of creating shareholder value, we do not think radical changes to its asset or financial strategy are in order. Over longer periods of time, we believe the market will at some point again reward it for its diversified asset base and balanced approach to the business.
Over the course of our career, we have observed numerous periods when the Gulf of Mexico has been in and out of favor. For a company like Apache with a strong track record of shareholder value creation in the Gulf of Mexico, we do not see the rationale for an abrupt exit. As for share repurchase, this is an area where we would be more in favor of Apache being a bit more aggressive, though we are sympathetic to what may be the company's view to not buy-in shares in high commodity price environments.
APACHE NOT ALONE IN LOOKING INEXPENSIVE AMONG THE NON-UNCONVENTIONAL GAS FOCUSED E&Ps
We note that Apache is not the only E&P with a more diversified approach vis-a-vis the unconventional, onshore North America gas-focused companies whose shares look inexpensive on cash flow-based valuation metrics. Newfield Exploration (OP/A), Noble Energy (IL/A), and Talisman Energy (IL/A) are all trading at valuations similar to Apache's. We think it is a very close call between the four companies but presently favor Newfield owing to a combination of what we view as greater Street skepticism towards its more recent diversification strategy as well as potential catalysts that could drive its shares higher. With that said, for investors looking for an inexpensive larger-cap E&P that is well run and takes a long-term approach to the business, Apache would certainly be a very suitable choice.
I, Arjun Murti, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. |
