Apache Corp. $75 - New York symbol APA

APACHE CORP. $75 (New York symbol APA; Aggressive Growth Portfolio, Resources sector; Shares outstanding: 332.0 million; Market cap; $24.9 billion; WSSF Rating: Average) explores for and produces oil and gas, mostly in North America. It also has operations in the UK, Argentina, Australia and Egypt. The company reserves are roughly half oil and half natural gas. Apache spends heavily on exploration and acquisitions to replenish its reserves. For example, it recently paid $1 billion for 28 oil and gas fields in Texas. This purchase increased Apache’s oil reserves by 8%, and its gas reserves by 5%. Thanks to this acquisition and increased production at its other properties, Apache’s revenue in the three months ended June 30, 2007 rose 19.1%, to $2.5 billion from $2.1 billion. Still, despite high oil prices and rising production, Apache’s profits are suffering due to higher operating expenses and taxes. Earnings in the second quarter fell 12.9%, to $1.89 a share (total $633.5 million) from $2.17 a share ($723.6 million) a year earlier. Apache also has a large presence in the Gulf of Mexico, which accounts for roughly 20% of its production. That makes it vulnerable to hurricane damage and shutdowns. Insurance helps offset these costs, including losses in 2005 due to Hurricanes Katrina and Rita. But Apache’s insurance costs are rising steadily. The company will probably spend $12.10 a share on exploration and capital upgrades in 2007, up 3.4% from $11.77 in 2006. That’s roughly 90% of its forecast cash flow of $13.60 a share. But Apache should have enough left over to increase its $0.60 dividend (0.8% yield). It also prefers to use excess cash to pay down long-term debt (0.3 times equity) instead of buying back shares. Apache soared to $89 in July, and now trades at just 10.0 times the $7.50 a share it should earn in 2007. But high operating costs will probably hurt profit growth for the next year or two. Apache is a hold.