Presentation Transcript

1. Apache Corporation (APA) Pitch

   By Dave Pusar, Eric Landau, Matthew Hirsch and BradleePesce
2. Company Description One of the largest independent exploration and production (E&P) companies in the U.S., Apache Corp. (APA) explores for, develops and produces natural gas, crude oil and natural gas liquids (NGLs). APA has E&P operations in seven countries, the U.S., Canada, Egypt, the U.K., Australia, Argentina and Chile. Acquisitions in 2010 substantially added to its asset base in the U.S., Canada, and Egypt.
3. Quick Stats Current Stock Price: 83.13 (as of 10/23/12) Market Cap: 33.46B Enterprise Value: 43.96B P/E: 10.31 EPS: 8.3 Total Debt: 10.24B EV/EBITDA: 3.46 LINK
4. Investment Thesis We believe an acquisition binge over the last two years will add significant future opportunity in core regions and promote organic growth. APA has a proven track record of unlocking value from acquired assets, and it has focused on integrating and exploiting mature reserves and directing capital to large projects. Highly diversified geographically, leaving it sheltered from the underperformance of individual assets and resulting in a lower beta in relation to peers. Attractive valuation: Shares remain at compelling levels relative to both historical multiples and the peer group. Tortoise vs. hare: Apache's stock return has recently been outperformed by industry peers, despite picking up a number of valuable assets while competitors were entering more unconventional plays or fearful of large acquisitions. Apache is due to outperform.
5. Acquisitions On June 10, 2010, APA completed the acquisition of Devon Energy Corporation's assets in the shallow waters of the Gulf of Mexico Shelf. In late 2010, APA acquired BP's operations, acreage and infrastructure in the Permian Basin and Egypt's Western Desert, and substantially all of BP's upstream natural gas business in western Alberta and British Columbia. At 2011 year end, APA acquired Exxon Mobil's North Sea assets, for $1.75 billion. Most recently on January 23, 2012, APA agreed to acquire Cordillera Energy Partners III LLC, a privately held company with substantial operations
6. The Big Picture “Apache has assembled an inventory of 67,000 drillable locations in liquids-rich onshore U.S. plays, and now is the time to drill wells," said G. Steven Farris, chairman and chief executive officer. "Rigs are running — 36 in the Permian Basin, up from 26 at the end of 2011, and 24 in the Anadarko Basin, up from seven at year-end. The impact of our accelerated drilling program is beginning to take hold." APA 10K
7. Revenue Breakdown Bloomberg Research
8. 4Q 2011 & 1H2012 Apache Corp has historically focused on an acquire and exploit strategy to deliver value-add for it shareholders but suffered from high costs of capital expenditures and acquisitions that were dilutive in 2011. APA reported production in the second quarter was reduced by 16 which is the difference between a hit and a miss on our production growth. Charges to write down the value of Canadian natural gas properties because of lower North American natural gas prices significantly effected 1H2012 earnings. Hampered by external pressures and high costs, Apache underperformed in late 2011, largely due to increased regulations, geopolitical events and cyclical pressures, which in turn led to a slowed capital cycle and reduced realized return on investments. While North American gas prices languish, APA continued to benefit from rising international gas prices – up 27 percent over 2010 levels. APA expects this trend to continue for the foreseeable future.* *APA 10K
9. Key Catalyst US onshore still at the heart of revenue growth: The go-forward growth engine remains focused on the Permian and Central US. Following June's analyst day, Baird and investors are increasingly looking toward US onshore operations as key to delivering organic growth. Near-term, Baird got the sense there remain some headwinds to the ramp, particularly in the Permian. Yet, management reported that “in the Permian Basin, production was up quarter-over-quarter by 5 percent, putting Apache on track to deliver its long-term Permian production growth target of 13 percent per year” (*) More broadly however, the US onshore growth ramp is progressing on schedule, with the rig counts still running high and easing frac costs (Permian completion costs down ~15-20% from the peak) providing some nice tailwinds in 2H12. Robert Baird Research *Apache 2Q Earnings Report
10. Future Projects Exploration catalysts coming in 1Q13: New ventures program remains on schedule, with Williston Basin, Mississippian Lime, VacaMuerte, and Cook Inlet tests all on the docket for 4Q12. As a result, 1Q13 shaping up to be rich with exploratory catalysts, with Apache planning to hold results until the YE call. Notably, management taking a conservative approach to exploratory activity, not betting the house but still seeking to drive value creation.
11. Production Increases Since early 2010, APA has ramped up activity as it moved into development stages. at Horn River, increased drilling in the Granite Wash formation, and doubled oil drilling activity in the Permian Basin. With capital expenditures at $8 billion in 2011, up from $5.3 billion in 2010, excluding acquisitions, production was up 14%. APA expects a 6%-9% ramp-up in 2012 on a 104-rig global program and increased activity at U.S. onshore liquids-rich plays In 2012, APA plans additional drilling at newly acquired North Sea assets.
12. Financial Trends With large increases in production, Baird research expects 7% and 11% growth in 2012 and 2013, respectively. APA is planning to divest $1.0 billion of properties, likely legacy conventional properties in Canada. APA'sproject development inventory and strong balance sheet should provide built-in production growth and acquisition opportunities going forward. At March 31, 2012, APA's debt-to-capitalization ratio was 20%. APA'sstrong balance sheet and cash flow generation provide it with flexibility with respect to acquisitions and asset development that many peers do not have. Year to date to September 21, the S&P Oil & Gas Exploration & Production Index was up 2.9%, versus a 15.9% gain in the S&P 1500 Composite Index. We think the underperformance reflected volatile oil and gas prices and demand fears and in particular, APA has lagged YTD, down over 11%.
13. Revenue/EBITDA Growth Bloomberg Research
14. Valuation Value stock, dead set on driving multiple expansion. APA shares continue to trade at a meaningful discount to the historical multiple While truly premium growth may be out of Apache's reach given its large base of production, more or less equal (or modestly better) growth vs. similarly sized peers should at least support an expansion back to Apache's historical norm, and perhaps more fairly, a multiple more consistent with its peers.
15. Valuation On out-year cash flow, Apache trades at a 12% discount vs. the last twelve months and a 30%+ discount vs. the past six years, while our covered large-cap peers are at 6% and 19% discounts, respectively. On out year EV/EBITDAX Apache trades at an 8% and 12% discount vs. the last twelve months and past six years, respectively, while its covered peers are at 5% and 11% discounts, respectively. Robert Baird Research
16. Relative Valuation Bloomberg Research
17. Sub Industry Outlook S&P’s fundamental outlook for the oil & gas exploration & production (E&P) sub-industry for the next 12 months is positive. Despite the volatility of crude oil prices, they think the group is generating strong production growth, especially onshore U.S.,driving cash flow growth over the next several years. After 27% EPS growth in 2011, we see a 25% decline in 2012 on lower oil and gas prices, with a strong rebound in 2013. Oil is hovering on its lowest close in three months as the oil price slide is linked to the broad-based drop in equities, following poor earnings releases from industrial companies like DuPont and Caterpillar.
18. Street Price Targets S&P 12month target: $116 (35.6% upside) Robert Baird target: $108 (26.3%) Citi target: $120 (40.3%) Goldman target: $103 (20.4%) Barclays target: $116 (35.6%) UBS target: $115 (34.4%) JP Morgan: $109.5 (28.0%) AVERAGE: $112.5 (31.53%) Thompson Analytics
19. MS 3Q 2012 Earnings Expectations Bottom Line Results – Morgan Stanley incorporated actual third quarter prices for crude oil and natural gas and made other minor adjustments to their models. They now expect APA to report Q3’12 EPS/CFPS of $2.09/$5.98 vs. Street consensus of $2.25/$6.05 (a significant MISS). Total production is expected to average 775 MBOE/d in the quarter vs. Street consensus of 791 MBOE/d.* Expected Highlights – From the company’s Q3’12 earnings release/call, we will be awaiting an update on: 1) Revised production guidance; 2) Central region production update post Cordillera acquisition; 3) Kenya exploration update 4) Production outlook in the North Sea; 5) Status of Mississippi Lime and Bakken exploration program. Morgan Stanley Research
20. Risks Apache, despite recent increased exposure in the Permian and Anadarko Basins, has historically not been a key player in advancing shale plays in the lower 48 as compared with peers, a move which likely limits relative growth and capital efficiency. Capital efficiency concerns: Like most large-cap companies, Apache suffers the negatives of the law of large numbers and thus reduced capital efficiency. Low capital efficiency likely limits the multiple markets are willing to pay for Apache’s profitability stream. Commodity price risk: As with all E&P companies, Apache is meaningfully exposed to changes in oil and gas prices. Regulatory risk: We believe the E&P industry is entering a period where increased regulatory oversight is increasingly likely. Mandates to comply with regulations focused on air quality, water use, and surface impacts could significantly impact profitability. Geopolitical risk: Apache has ~25% of cash flow coming from Egypt. While an increase in oil prices provides a hedge, production disruptions, nationalization of assets and acts of terrorism all still provide meaningful risk. Egypt risk still present, but dissipating.