Report
Jeffrey Stafford
EUR 850.00 For Business Accounts Only

Morningstar | Initiating Coverage of Apache; Shares Fairly Valued. See Updated Analyst Note from 17 May 2019

We are initiating coverage of Apache Corp. with a fair value estimate of $27 per share and a no-moat rating. Shares currently trade above our fair value, but given a very high uncertainty rating, we think shares are essentially fairly valued. Apache has exposure to both U.S. shale and international markets in Egypt and the North Sea, with U.S. and international each accounting for roughly half of production.

Like many of its peers, Apache’s U.S. focus is in the Permian Basin, the lowest-cost source of oil in North America. But Apache is somewhat unique in its Permian plans, as the company is developing an area of the basin called Alpine High, with those wells producing a higher natural gas liquids content then the typical Permian oil-focused well. For 2019, Apache will roughly split drilling evenly between Alpine High and other Permian wells. Apache has identified 5,000 Alpine High drilling locations, which should be good for multiple decades at current rig counts. But based on our analysis, Alpine High wells are unlikely to generate returns that stack up favorably against the best oil-focused Permian acreage of peers.

Growth prospects are less compelling in Apache’s international business, but assets in Egypt and the North Sea are likely to generate significant free cash flow due to compelling operating cost structures and relatively low maintenance capital requirements. Apache’s management plans to use cash-generated by international assets to help fund Permian growth, returning much of leftover free cash to shareholders.

Despite compelling international assets and strong U.S. shale growth prospects, Apache is unlikely to generate returns on capital that would exceed costs of capital at our midcycle oil and gas prices of $55/barrel WTI and $3/mcf Henry Hub, respectively. Like many of its peers, we believe Apache invested too much capital under the assumption that oil and gas prices would considerably exceed our midcycle forecasts.
Underlying
APA Corp.

Apache is an independent energy company that explores for, develops, and produces natural gas, crude oil, and natural gas liquids. The company had exploration and production operations in United States, Egypt, and offshore United Kingdom in the North Sea. The company also has exploration interests in Suriname. The company markets its United States crude oil production to main oil companies, marketing, and transportation companies, and refiners based on a West Texas Intermediate price or other regional pricing indices. The company has two international regions: The Egypt includes onshore conventional assets in Egypt's Western Desert. The North Sea region includes offshore assets based in United Kingdom.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Jeffrey Stafford

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