Buy, Sell or Hold: Strong Oil Prices Make Apache Corp. a Good Bet

Apache Corporation (NYSE: APA) is not your average oil company. Even with oil prices still comfortably in the $90.00 range, Apache shares recently fell below their 52-week lows.

In fact, since April 2011 Apache shares are down by 44%. Compared to its peers, that makes Apache what's known as a "laggard."

But there is more here than meets the eye, since it is very hard to find anything to nit-pick when it comes to their financials.

Fundamentally speaking, the company seems on solid ground, which is why I'm willing to buy Apache shares.

In fact, even after an $18 billion flurry of acquisitions over the last couple of years, Apache's balance sheet still remains strong while adding new layers of growth potential.

And as one of the world's largest independent energy companies, Apache continues to report healthy cash flows, strong profit margins, and has a forecasted sales growth of 8.1% for 2013.

So why haven't investors been willing to buy, even when the company appears to be doing all the right things?

The answer is two-fold: Oil prices and the skittish political situation hovering over their oil rigs in Egypt.

Apache's Correlation to Oil Prices

First there's the price of oil and the ability to hedge it.

Larger oil companies such as Chevron Corp. (NYSE: CVX) and Exxon Mobil Corp. (NYSE: XOM) are able to smooth out the price they receive for oil by hedging future oil prices. This, theoretically, allows them to give investors more stable -- but lower --returns.

Apache, on the other hand, doesn't hedge much at all. In fact, for 2013, Apache's oil production is only about 15% hedged -- with hardly any hedging at all in future years.

Considering 81% of Apache's revenues are generated from oil and natural gas liquids, it is plain to see why the performance of the stock is very much tied to the price of oil.

So the million dollar question becomes: Where are oil prices going?

Since oil prices are closely linked to economic expansion, some investors are worried that if global growth slows, the price of oil will decline right along with it.

However, this notion may not be true because no matter what happens with the global economy, oil demand is actually escalating -- and fully 60-80% of new demand is expected to come from Asia and specifically China.

Even now, China's thirst for oil hasn't abated as the supposed "hard landing" for its economy still delivered GDP growth of 7.9% in the fourth quarter of 2012.

In fact, China's net oil imports have surged to 6.12m barrels a day, according to Chinese customs, making China the world's top oil importer.

Apache is actually attempting to quell some of this Chinese demand by recently acquiring, in a 50-50 partnership with Chevron, two shale-gas fields in Western Canada and a facility to export oil to Asia.

And as Dr. Kent Moors recently noted in Oil & Energy Investor, "an absolute majority of the forward economic indicators are energy intensive, and they are pointing up. That's one of the reasons why energy prices are rising."

The International Energy Agency (IEA) also recently announced it is raising its forecast for 2013 global oil demand by 240,000 barrels per day. The new total of 90.8 million barrels per day is 930,000 barrels (or 1%) higher than in 2012.

"The bottom line," Moors said, "is we have to stop looking at Western Europe and North America when we talk about oil demand because oil demand is being driven essentially worldwide by completely different regions."

For his part, Moors is predicating oil to reach $105 a barrel in New York (WTI benchmark) and $127 in London (Brent) sometime this spring.

The bottom line is that the oil price bears are likely wrong.

Political Turmoil in Egypt

Then there's Apache's problems in Egypt.

Egypt is Apache's largest overseas operational area. Apache entered into Egypt in 1994 and controls nearly 10 million gross acres in the country that accounts for well over 20% of Apache's production.

Apache is projected to invest nearly $1 billion per year over the next few years toward further exploration and development of existing and new oil prospects.

The problem is that in Egypt, the oil and gas sector represents 25% of the government's fiscal revenues.

With Egyptian protests, the Muslim Brotherhood, or any potential flare up in the Middle East in the news on a daily basis, it's no wonder that the price of Apache's stock has been dropping.

From the day former Egyptian President Hosni Mubarak resigned, Apache's share price has tumbled from the $110 level to where it currently trades -- in the low $70 range.

Is a slashing of one-third of the company's share price an overreaction or is the next shoe about to drop in the Middle East?

Tough call.

Egypt splits revenues with Apache which is considered a cash cow for the Egyptian government. Apache's history in the area and its vast expertise and success in drilling seems to benefit both the company and the country.

However, the danger still looms that the Egyptian government may tear up the contracts, nationalize the wells, and start contracting out to (oh, I don't know) perhaps China.

Striking it Rich with Apache

Taking all these weighty items into consideration, I believe making Apache part of your energy portfolio makes sense here. The potential for significant upside is too great to pass up.

 apa chart
Source: Yahoo Finance

However, the threat of more downside in the short term is real, and I would not be a buyer unless I see a couple of changes in the daily chart above.

For instance, notice the steep sell-off after Apache's earnings report in February.

Usually volume tapers off after an earnings release and returns to normal volume levels. So far that hasn't been the case here since the volume has actually edged higher as the price continues to languish.

In this case, only when I see both the price and volume start to stabilize over a period of around 10 trading sessions would I be a BUYER of Apache.

And even after purchasing I would keep Apache on a short leash and keep my stops relatively tight. If there's any sign of trouble coming out of the Middle East, or if something new creeps up on the global stage that can affect oil prices, I would look carefully at how Apache's stock price reacts and take action accordingly.

About the Author: David Mamos brings nearly 15 years of analytical experience to the table with a background ranging from big-picture fundamental analysis to highly technical trading decisions. He began his career working as a financial advisor with Royal Alliance in 2001 and helped clients with portfolio management as well as buy-sell decisions before transitioning to the development, implementation and execution of trading strategies for aggressive investors.

Related Articles and News: