Likely higher 3Q 2007 deferred taxes represents noise; retain Buy - Goldman Sachs - October 08, 2007
What's changed
We believe 3Q 2007 results could be impacted by greater deferred taxes resulting principally from Canadian dollar appreciation. We have raised our estimate for the effective tax rate to 47% from an average of 40% the past four quarters, though there is essentially no change to our cash flow estimate. We have revised our 3Q EPS estimate to $1.87 fro m $2.04, vs. consensus of $1.94. Our full-year 2007 estimate is $7.45 ($7.62 previously).
Analysis
We believe any volatility on this issue represents a strong buying opportunity as we consider it quarterly noise that does not affect Apache’s fundamental outlook. Between now and earnings, we expect to hear more details on the Maitland and potentially Rosella gas wells in Australia, where we believe little value is being assumed in the stock. The Maitland well is currently testing. Success from one or both of these prospects would further increase production estimates for 2011 and beyond and would add further visibility to the company’s growth profile. It would also give management more flexibility to sign a gas sales contract that is likely to be at higher prices than is being factored in by the Street, a positive for the stock.
Implications
In recent conversations, we believe some investors with positive views have pulled back following the strong run the stock had in September. We continue to like the risk/reward, however, and Apache remains on our Conviction List. We still see 23% upside for Apache shares to our 12-month $110 discounted cash flow based target price (commodity price volatility, drilling results, cost pressures and government pronouncements are key risks). Our estimates for 2008 are 35% above First Call consensus. Apache trades at 4.8X 2008 EV/debt-adjusted cash flow versus 5.7X for large-cap E&Ps. We believe higher oil prices, a step change in Apache’s production visibility, exploration upside and potential in Australia and Egypt is not being priced in. |
