EPL Epl Oil & Gas

We reaffirmed our Neutral recommendation on U.S. energy firm Apache Corp. (APA) on May 23, 2013. Its drilling venture has been helping Apache to deliver higher liquids production. However, deteriorating oil and gas price realizations are concerns.

Why the Reiteration?

Apache is one of the world's leading independent energy companies engaged in the exploration, development and production of natural gas, crude oil and natural gas liquids. We like Apache’s large geographically-diversified reserve base, as well as its balanced exposure to natural gas and crude oil, and multi-year trends in reserve replacement and production growth. This allows management to allocate capital and resources to high-return projects.

Additionally, we are bullish on Apache’s international operations. The company has been steadily building its asset base in Australia over the last few years. We see meaningful growth in free cash flow in the coming years, stemming from project start-ups in that country.

The company’s financial flexibility and strong balance sheet are real assets in this highly uncertain economy. Leverage is low with a debt-to-capitalization ratio of 26.4% as of Mar 31, 2013, while its single-A debt ratings provide a competitive advantage in accessing capital at a reasonable cost. Furthermore, a steady dividend and the recently announced share buyback program highlight the company’s commitment to create value for shareholders.

However, Apache’s long-term production and reserve growth primarily depends on its acquire-and-exploit model. Apache may find it difficult to complete accretive transactions in the future, which could negatively impact its growth rate.

Moreover, as is the case with other independent exploration and production (E&P) companies, Apache’s results are directly exposed to oil and gas prices, which are inherently volatile and subject to complex market forces. Realized prices could differ significantly from our estimates, thereby affecting the company’s revenues, earnings and cash flow.

Apache currently holds a Zacks Rank #3 (Hold).

However, there are certain other E&P firms in the energy sector that are worth considering. Those include EPL Oil & Gas Inc. (EPL), Abraxas Petroleum Corporation (AXAS) and Sandridge Mississippian Trust II (SDR). All these stocks hold a Zacks Rank #1 (Strong Buy).
 

 
APACHE CORP (APA): Free Stock Analysis Report
 
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EPL OIL&GAS INC (EPL): Free Stock Analysis Report
 
SANDRDG MS T II (SDR): Free Stock Analysis Report
 
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