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Here's Why You Should Consider Buying Apache (APA) Right Now

Zacks Equity Research
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A successful investor understands the importance of adding well-performing stocks in the portfolio at the right time. Notably, indicators of a stock’s bullish run include a rise in share price and strong fundamentals. Apache Corporation APA is one such promising stock in the Oil/Energy sector that has been on a healthy growth trajectory. The stock has had an impressive run on the bourses year to date and possesses significant potential to continue the momentum. Apache’s shares have returned 35.5% so far in 2019, outperforming 13.7% gain of the industry it belongs to.

If you have not taken advantage of the share price appreciation yet, it’s time you add this upstream energy player to your portfolio. Let’s delve deeper to check out why Apache is an attractive pick right now.

Solid Portfolio With Permian Focus

Apache’s large and geographically-diversified reserve base bodes well. Importantly, as part of its plan to streamline portfolio, Apache has divested high-cost Canadian assets, thereby freeing up capital to concentrate on longer-term high-grade prospects, especially in the Permian basin, that now constitute more than half of the total output. The company has been focused on ramping up its portfolio and strategically redeploying capital to highest-value opportunities.

While the company has deepened its focus on Permian play, Apache certainly did not put all eggs in one basket. The company has considerable acreage in Egypt and North Sea, and expects robust cash flow from these assets in the coming years. Late last year, the firm commenced production from Garten development in the North Sea, which is likely to contribute significantly to its cash flow this year. 

Apache’s Alpine High is a Game Changer

We consider Apache's Alpine High discovery in West Texas to be a needle-mover for the company. Estimated to hold massive oil and natural gas reserves, the wells are expected to lead to strong economics and top-tier returns.The company has excellent growth prospects as it continues to exploit its massive Alpine High find in the red-hot Permian Basin.

Apache’s Midstream Efforts Bode Well

Since the discovery of Alpine High, Apache has been spending heavily in the play.Midstream infrastructure development is very crucial for the company to remain on growth trajectory in the region. In a bid to advance infrastructural development in its Alpine High play, the company completed the Altus Midstream transaction in November 2018. This Permian basin midstream infrastructural development project holds much significance for Apache, providing it a competitive edge. 

Upbeat 2019 Guidance

While the company plans to trim 2019 capex by 22.6%, it does not expect output to be impacted by the reduced capital outlay. Driven by improved Permian well productivity, the company forecasts 2019 output in the band of 425-440 thousand barrels of oil equivalent per day (Mboe/d), reflecting an increase from 421 Mboe/d in 2018. Apache projects 6-10% worldwide production exit growth rate in 2019, with 12-16% improvement in the United States and 5% in the Permian Basin.

Impressive Reserve Replacement Ratio

Apache’s multi-year trends in reserve replacement are appreciable. In this context, 2018 reserve replacement ratio (RRR) of 135% is indicative of the company’s ability to add proved reserves to its reserve base in excess of the amount of oil and gas produced. The company announced a 5% increase in proved reserves at year-end 2018 to 1.23 billion oil-equivalent barrels, driven by extensions.

Investor-Friendly Moves Instill Confidence

Apache has paid out more than $1.5 billion in dividends since 2015. In second-half 2018, the company initiated a share buyback program, which enabled it to repurchase 7.8 million shares through Dec 31, at average price of around $39 per share. The firmis committed to returning value to its shareholders via dividends and buybacks, and plans to return 50% or more of the FCFs generated in 2019 to investors.

In terms of EV/EBITDA ratio — which is one of the best multiples for valuing oil and gas companies — Apache seems undervalued. The company currently has average trailing 12-month EV/EBITDA ratio of 15, which is above the industry’s 13.1.

An Undervalued Stock

On the basis of enterprise-value-to-EBITDA (EV/EBITDA) ratio — which is one of the best multiples for valuing oil and gas companies — Apache seems undervalued. The stock is currently trading at 5.5X, lower than one-year high mark of 14.26X and the industry’s 6.17X. This depicts the stock’s upside potential.

Favorable Rank, VGM Score, Earnings Estimate Revisions

Apache currently carries a Zacks Rank #2 (Buy) and a Growth Score of B. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

It displays an impressive earnings surprise history. The company outpaced the Zacks Consensus Estimate in each of the trailing four quarters, delivering average positive earnings surprise of 34.11%.

In the past 30 days, the Zacks Consensus Estimate for Apache’s 2019 earnings has witnessed an upward revision from $0.55 per share to $0.77 over the past 30 days, showcasing analysts’ confidence in the company.

Further, it has a long-term expected EPS growth rate of 7%.

Looking at these positives, we believe that Apache is an energy stock that deserves a place in investors’ portfolio.

Other Stocks to Consider

Investors interested in the energy space can also consider buying stocks like Shell RDS.A, Braskem S.A. BAK and YPF Sociedad Anonima YPF, each carrying a Zacks Rank #2.

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