Why Apache’s valuations have been lagging its peers

Overview: JANA's activist position in Apache Corp. (Part 6 of 6)

(Continued from Part 5)

Apache’s valuations

Last month, activist investors’ hedge fund JANA Partners LLC disclosed a stake worth $1 billion in Apache Corp. (APA). It’s pushing the oil and gas producer to divest its international holdings. Besides pushing for a sale of the company’s international interests and a focus on domestic shale opportunities, the fund wants Apache to exit its liquefied natural gas (or LNG) investments, and provide clarity on its operations in the Permian Basin in west Texas.

A comparison of Apache with some of its peers in the Permian Basin such as Pioneer Natural Resources (PXD), EOG Resources (EOG), Anadarko Petroleum (APC), Occidental Petroleum (OXY), and Concho Resources (CXO) shows that its enterprise value (or EV) to earnings before interest, taxes, depreciation, and amortization (or EBITDA) ratio is below that of its peers.

JANA said in its 2Q14 letter that without the capital expenditure on LNG projects and the dilution from the company’s international portfolio, Apache could see growth from the Permian Basin and generate free cash flow. The fund said it compared Apache to peers with similar characteristics and estimated a price target of $130 per share. A Barclays’ analyst said earlier in July that Apache’s focus on its North American operations and sale of the LNG stakes could be a potential catalyst for the stock.

Apache’s management said on the second quarter earnings call it estimates 15%–18% growth in North America onshore liquids production in 2014, and also reiterated a 5%–8% increase in overall production guidance. Apache said on its investor day that it plans to invest $8.5 billion in exploration and production activities in 2014, approximately equal to its expected operating cash flow. CEO Steven Farris added that “After significantly rebalancing the Apache portfolio in 2013, Apache is repositioned for its next growth phase, which will be driven by repeatable, predictable oil-levered growth from onshore North America and major free cash flow-generating assets operating internationally.”

Browse this series on Market Realist:

• Part 1 - Why Apache Corp. faces activist pressure from JANA Partners

• Part 2 - Overview: Apache’s domestic and international operations

• Part 3 - Apache’s liquefied natural gas projects in Canada and Australia