Apache Corp. $60 – New York symbol APA

APACHE CORP. $60 (New York symbol APA; Aggressive Growth Portfolio, Resources sector; Shares outstanding: 334.7 million; Market cap: $20.1 billion; Price-to-sales ratio: 1.7; WSSF Rating: Average) explores for and produces oil and natural gas, mostly in North America. Apache prefers to sell its oil at the current spot price, instead of locking in prices through hedging contracts. This strategy let it take full advantage of rising oil and natural-gas prices in the first half of 2008. Thanks to a 27.5% rise in its average oil prices, and a 25.5% jump in gas prices, Apache’s 2008 earnings rose 30.5%, to $3.8 billion from $2.9 billion in the prior year. Earnings per share climbed 29.6%, to $11.22 from $8.66. The 2008 earnings exclude a $3.6-billion writedown of Apache’s properties that was caused by falling energy prices in the second half of 2008. This is a non-cash accounting adjustment, and had no impact on the company’s cash balances. Apache’s revenue rose 23.9%, to $12.4 billion from $10 billion. Higher oil and gas prices helped Apache offset a 5% drop in its daily production, which was the result of an explosion at its offshore project near Australia and hurricanes in the Gulf of Mexico. Excluding these events, production would have grown by 2%. New projects should increase Apache’s production by 6% to 14% in 2009. These include offshore wells in the Gulf of Mexico and near Australia, and an expansion of its natural-gas operations in Egypt. As well, Apache will probably take advantage of low oil prices to replace its reserves by buying competing companies. It holds $2 billion, or $5.90 a share, in cash, and its $4.8-billion long-term debt is just 24% of its market cap. Apache also has $2.3 billion in available loans. Apache now trades at 16.1 times its likely 2009 earnings of $3.73 a share. This p/e ratio is higher than those of Chevron and EnCana, but still reasonable in light of Apache’s strong balance sheet and growing production. The $0.60 dividend yields 1.0%. Apache is a buy.

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