On March 25, Randolph Ferlic, a director of Apache Corporation (NYSE:APA), spent nearly $745,000 to buy 10,000 shares in the company at nearly $74.50 per share. Several days later, George Lawrence, another director, acquired 3,000 shares at around $76 per share, for a total transaction value of nearly $230,000.
Interestingly, Apache is trading at around its 52-week low. Is the company cheap at its current trading price? Should investors follow the company’s insiders into the stock?
Most active player in Permian Basin
Apache Corporation (NYSE:APA), founded nearly 60 years ago, is an oil-and-gas exploration and production company operating in several countries, including the U.S., Australia, Canada, Egypt, the UK’s North Sea, and Argentina.
The company has around 2.9 billion barrels of oil equivalent, or BOE, in its total proven reserves, with 28% of that in the U.S. Permian Basin.
Apache is considered to be the most active Permian player on the market, with 38 operating rigs. Some 46% of its total 2012 revenue was generated from international liquids. Its North American liquids segment ranked second, representing around 35% of total revenue, while global gas revenue accounted for 19% of total sales.
Growing performance with a solid financial position
Since 2002, the company has managed to deliver around 5% annualized growth in its reserves per share, while the cash flow per share has grown at an annualized rate of 17% during the same period.
What I like about Apache Corporation (NYSE:APA) from an income-investor standpoint is that the company has consistently increased its dividends over the past 10 years from $0.21 per share in 2003 to $0.66 per share in 2012. It could have even paid out higher dividends because the current payout ratio has been quite low. In 2012, it paid out only 13.4% of its earnings in dividends.
In the beginning of February, the company announced that it would increase its quarterly cash dividend by 18% to $0.20 cents per share due to its strong cash flow generating capability and its strong financial position.
Further, the company has quite a strong balance sheet with a reasonable amount of debt. As of December 2012, it booked more than $31 billion in total shareholders’ equity, $160 million in cash and only more than $11.3 billion in long-term debt.
Recently, the company has received an unsolicited “mini-tender” offer by TRC Capital to buy up to 1.5 million shares of the company at around $72 per share. Indeed, the offer price is quite cheap, below the stock’s 52-week low. Apache has recommended that shareholders reject this offer and not to tender their shares below the stock’s current market price.
Good proven reserves and the lowest valuation
At around $74 per share, Apache Corporation (NYSE:APA) is worth about $29 billion based on market capitalization. The market values Apache quite cheaply at 3.3 times EV/EBITDA. The current valuation is quite cheap compared to the valuations of its bigger peers, including Anadarko Petroleum Corporation (NYSE:APC) and BP plc (ADR) (NYSE:BP).
Anadarko is trading at around $85 per share, with a total market cap of around $42.4 billion. It is valued around 7.1 times EV/EBITDA. In the middle of March, Anadarko Petroleum Corporation (NYSE:APC) announced that the company’s Shenandoah-2 well in the Gulf of Mexico ran into more than 1,000 net-feet of oil pay. This well is located about 1,700 feet structurally down-dip from the Shennandoah-1 discovery. The news of Shenandoah-2 is quite positive for the company in terms of improving its total proven reserves in the near future.
In addition, as the Shenandoah basin seems to have the potential to become one of the most prolific new areas in the Gulf of Mexico, there might be great potential oil reserves coming to the company.
BP plc (ADR) (NYSE:BP) is the largest company among the three, with $131 billion in total market cap. At $41 per share, BP also has a higher valuation than Apache, at 5.6 times EV/EBITDA.