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
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.
Among the three, BP plc (ADR) (NYSE:BP) has the highest proven reserves of around 17.7 billion BOE, while Anadarko’s proven reserves are approximately 2.6 billion BOE. Apache Corporation (NYSE:APA) has a higher level ofproven reserves than Anadarko Petroleum Corporation (NYSE:APC) at 2.9 billion BOE.
Income investors might be excited about BP, as it pays the highest dividend yield at 5.2%. Anadarko pays the lowest dividend yield at only 0.4%, while Apache pays investors dividends with a yield of 1.1%. However, BP is paying more than 50% of its earnings in dividends.
BP’s investors will get much more total yield in the coming 12-to-18 months as BP plc (ADR) (NYSE:BP) intended to buyback as much as $8 billion worth of stock. The buyback has been recently announced by the company after BP completed a major restructuring in its Russian oil business with Rosneft. As part of the deal, BP will get $12.5 billion in cash and an 18.5% stake in Rosneft. An $8 billion buyback would represent a 6% yield. Thus, a total yield to shareholder will be quite juicy at 11.2%.
If Apache Corporation (NYSE:APA) pays 50% of its earnings in dividends (the same recent payout ratio with BP), the dividend yield should be around 4.4%. However, it’s the decision of Apache’s Board.
Anadarko Petroleum Corporation (NYSE:APC) is also conservative in its dividend policy, with a mere 7.6% payout ratio.
Apache might be worth $110 per share
With a strong balance sheet, strong cash flow generating capacity and low valuation, Apache is quite cheap at its current trading price. If Apache is valued comparably to BP plc (ADR) (NYSE:BP) at around 5 times EV/EBITDA, Apache Corporation (NYSE:APA) should be worth around $110 per share.
Anh HOANG has no position in any stocks mentioned. The Motley Fool owns shares of Apache.
