Although it is in worse shape than many of its peers, Apache is not operating in a vacuum. The overall oil and gas industry faces some important headwinds that have already interfered with Apache Corporation (NYSE:APA)’s plans and could create more problems down the road. For starters, the economic news out of Europe and Asia has not been great. In the absence of some unexpectedly strong economic reports out of these regions, it seems likely that prices for oil will continue to stagnate. Rising extraction costs in hard-to-access shale plays could hurt as well. Meanwhile, Apache’s infrastructure exposure to increasingly unstable Egypt has many market-watchers worried about the vulnerability of its supply lines.
On the positive side, the Energy Department recently approved the construction of a new U.S.-based LNG export terminal. If it is built, this facility could provide an important outlet for Apache Corporation (NYSE:APA)’s natural gas output. The release of a set of weaker-than-expected fracking regulations has also cheered the industry in general.
Where’s the profit?
It is important to note that Apache trades at a significant discount to some of its peers. Although its forward P/E ratio of 16 does not make it especially cheap, this figure is a far cry from Anadarko Petroleum Corporation (NYSE:APC)’s P/E of 80. In other words, Apache has a great deal of potential momentum in its now-depressed stock price. If the company is able to string together a couple of earnings beats and make meaningful progress on its balance sheet, its stock could mount an impressive rally that would reward early entrants.
In sum, investors who believe that Apache Corporation (NYSE:APA)’s asset sales will allow it to shore up its balance sheet would do well to look at the stock at these levels. This situation does not offer an arbitrage premium, but it does have many of the hallmarks of a good value play. If Apache can bring its current price-to-sales ratio of 3.3 in line with the industry-wide average of 5.4, its stock could appreciate by almost 40%. However, substantial headwinds continue to afflict the industry at large. Before betting on Apache’s ability to shore up its balance sheet, investors should examine other names in the business.
The article Will $4 Billion Asset Sale Turn This Company Into a Solid Investment? originally appeared on Fool.com.
Mike is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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