Thursday, 13 February 2014

Apache - sub book value energy sector opportunity

If you take a look at the summary statistical page for Apache, the US listed energy company, on Bloomberg you would note that it closed on Wednesday (yesterday) just below book value. 

I last talked about Apache in November mentioning their large US resource base and efforts to monetise their portfolio via deals with companies like Sinopec.   This continued yesterday with the announcement that it had sold its Argentine business, in full, to the state-owned YPF for US$800m.  Given the macro issues in Argentina recently, that sounds like a market pleasing deal.

Here's one interesting observation from the deal.  US$800m is about 2% of the company's EV.  Argentina accounts for 6% of the company's production but only about 2% of total proved reserves (including the Permian reserves).  My view is that it would have been viewed as a macro-volatile interest and it is better to get it off the book - and interestingly they managed to do it at the 'average' price their whole reserves are valued at (as per the Apache EV). 

Quarterly results are also out today.  The headlines did not look great, however:

'Apache Corp. (APA): Q4 EPS of $1.57 misses by $0.23.Revenue of $3.58B (-19% Y/Y) misses by $90M'
So what went wrong?  Well, back in January, the company mentioned that bad weather had impacted their production
The impact of this can be seen on the Q4 production levels of below 700k boe/d versus a 2013 full year average of 760k. 

Note some other important 'facts' above though.  The Permian and Central energy producing regions of the US are now 33% of total company production over the year (and 55% in Q4).  Growth here helped the company to have a 'near 4%' organic growth in proved reserves.

Now this evolution can be seen below.  The aforementioned sale of the Argentine interests just accentuates this further.

At the time of writing the shares are trading at US$79 following the earnings publication.  A sub book valuation for a company that is not only monetising its less appreciated international assets but is still growing production, aided by its strong US onshore position (where peers trade at well over x1 book).  Accordingly I have added to my position today.  Apache shares should return to the US$90+ share price zone on pure value alone.   



  1. I completely agree with you but apparently we are the only ones that share this contrarian position. Apache should try and sell the whole company to the Chinese and test the water once more for a large Chinese acquisition. I think there would be some domestic buyers too. By all valuation metrics it's extremely undervalued. I also bought more today, ouch

    1. Thanks for your comment. A few excerpts from the Q&A of the analyst call transcript were quite interesting + added my own thoughts:

      'with the Argentina sales which we have announced yesterday after the market close, we have largely accomplished what we have set out to do in 2010. To make our North American onshore regions a center piece of our growth strategy going forward' - fine but still plenty of opportunities to monetise investments with partners like Sinopec in my view

      'we are going to provide our 2014 capital and production guidance at our Investor Day on February 26th as well as provide a longer term view of what we believe our high graded portfolio is capable of achieving. I think you are going to be pleased with what you see' - all eyes on the 26th, I like the tone of the comment

      'Just as important we exited the year with a debt to capitalization ratio of 22%, no commercial paper outstanding and $1.9 billion in cash which adds flexibility to our balance sheet and is a nice position to have as we head into 2014' - no need to worry re the balance sheet so buy some more shares...

      'we view our stock as a good investment price now. I think our average price was probably around 85 bucks or little. I don’t have that in front of me' - they should have that piece of info! But view clear: at the current share price, the company should be buying more stock

      All eyes on the 26th!