In the wake of disappointing production numbers and a mediocre earnings report, oil exploration firm Apache Corporation (NYSE:APA) has announced plans to sell up to $4 billion in assets during the second half of 2013. According to its release, the company plans to use the proceeds from these non-core asset sales to repair its sagging balance sheet and fund a major stock buyback program that could reverse months of poor share-price performance.
Most market-watchers and Apache Corporation (NYSE:APA) investors agree that the company needs to do something to show that it cares about its shareholders. While the firm is not in any existential danger, it has consistently under-performed its sector peers as well as the broader market. While this asset sale plan offers no assurances that Apache can turn itself into an attractive play on the oil and gas market, it does give interested investors a reason to take a closer look at the firm.
As one of the larger upstream players in the North American oil and gas business, Apache enjoys some rarefied company. Two of its closest competitors are the Woodlands, Texas-based Anadarko Petroleum Corporation (NYSE:APC) and London-based BP plc (NYSE:BP).
Of the three firms, Apache Corporation (NYSE:APA) is the smallest by a substantial margin. Its market capitalization of just over $32 billion looks small relative to Anadarko’s valuation of about $45 billion and positively tiny next to BP plc (NYSE:BP)’s $137 billion figure. However, it is more profitable than its competitors: Compared to its healthy profit margin of nearly 12%, Anadarko Petroleum Corporation (NYSE:APC)’s 5% margin and BP’s 6% buffer seem inadequate. Unfortunately, Apache has a bit of a cash flow problem. With just $250 million in the bank and debt of about $12.5 billion, it is clearly in worse shape than its competitors. For comparison, BP has a debt-to-cash ratio of less than two-to-one. Anadarko’s ratio is about four-to-one. What’s more, Apache has a levered free cash flow figure of minus $400 million. Comparable figures for BP and Anadarko Petroleum Corporation (NYSE:APC) are positive by a significant margin. All in all, Apache Corporation (NYSE:APA) definitely has some balance sheet issues.
Planned asset sales
Given its precarious financial position, it should be no surprise that Apache Corporation (NYSE:APA) is making aggressive moves to assuage investors’ concerns. Indeed, Apache’s stock shot up by more than 5% on the trading day that followed its initial announcement.
While the company has thus far been coy about exactly what it will sell to finance its $4 billion cash infusion, it has broadly outlined the ways in which it will use the cash. About half of the expected windfall will go towards balance sheet repair and debt reduction. The bulk of the rest will be used in a large share repurchase program that could result in the cancellation of over 7% of Apache Corporation (NYSE:APA)’s total float. Such a move could boost the firm’s shares by 10% or more.
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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