Fundamental and Technical Look at Apache Corp.

Report Originally Issued April 9, 2008

Over the next few weeks we will be issuing company reports on our favorite energy companies that subscribers should consider owning for the next up cycle in our economy and markets.

 The majority of our recommendations will be the exploration and production energy, E & P, companies because of their reserves. We believe that although oil prices will be volatile they will continue to head higher over time. E & P companies do not reflect the potential of higher prices and do not reflect the reality of today's prices.

 Most Wall Street analysts value E & P companies the traditional way with cash flow and earnings valuations. As we've been arguing for the past few years these companies are not earnings growth, cash flow stories but asset stories. The focus on earnings and cash flow of these companies has Wall Street mispricing these companies, and this creates opportunities for investors.

 The reports will include both fundamental and technical analysis.

 Apache Corp. (APA)

 Apache is an international independent exploration and production company in natural gas, crude oil and natural gas liquids.

 Apache has operations in North America, Egypt, Australia, North Sea, China and Argentina. 38% of their production is in the U.S.

 We recommend APA because of its significant access to reserves and its enterprise value versus the future potential price of its access to reserves.

 Below is an analysis of its reserves:

 The information is from APA's 2006 annual report. We will do another review of 2007's annual report once we've reviewed all the annual reports of the E & P companies we follow, probably mid-year.

 Let's review the table:

 - The first row states that APA has proved reserves of 2.4 billion barrels of oil equivalent (BOE, a combination of crude oil and natural gas.)

 The above reserves do not reflect probable or possible reserves.

 - The second row breaks out the amount of crude oil reserves APA has. We prefer companies that have a higher ratio of crude oil. Crude oil is less cyclical than natural gas and is critical to the industrialized world.

 - The third row lets us know that the oil to natural gas reserve ratio is 46%, but the company still has over 1 billion barrels of oil.

 - The fourth and fifth row when compared demonstrates how undervalued APA is. Its finding and developing, F & D, costs are $16.50 per barrel but the market value is only about $18. The market is not paying much per barrel for APA's reserves, barely above its F & D costs.

 When you compare its market value per the cash market of oil and natural gas the company looks even cheaper. Again, we believe energy prices will head higher over time and the stock looks even better.

 - The sixth column tells us that at current production APA's oil will last 12.6 years. The average life in years of the companies we follow is about 14 years. The next row leaves us less concerned about the life of its reserves.

 - The last column is the replacement ratio of the oil that was produced. APA had a very healthy 330%. Going forward Wall Street is expecting APA will be able to replace their production with new reserves by over 250%.

 Most of the mega oil companies (Exxon Mobil, British Petroleum, Shell) are having a very difficult time replacing their reserves. 

 Technical Analysis of APA

 We do recommend owning APA, but at what price? The technicals could help us answer this question.

 Below is a long-term chart of APA:

 Even though the stock is up substantially since the beginning of the energy bull market, almost 6 times, we believe the stock remains undervalued.

 We thought prices would pull back during this bear market, similar to what happened during the 2006 time frame (the circled area.) Instead prices have accelerated.

 Below is a shorter term chart of APA:

 Let's review the chart:

 - Prices have accelerated as evidenced by the accelerated trend line, broken line. This is normally a sign of speculation.

 The trend line will be very easy to break and prices could correct. Prices either consolidate after a move or they correct.

 Notice the corrections in January and March of this year. They were significant but quick.

 
 - Prices are significantly above the 50 and 200-day moving average. This is bullish.

 - The MACD is not confirming the new high as it has not surpassed the past MACD high.

 - The choppiness indicator indicates that the current trend is close to being exhausted. The exhaustion area is normally the low 30 area.

Conclusion

 In a Special Report we posted in 2005, we spelled out our fundamental sell discipline. In the report we mentioned that one of the sell signals we would consider would be a sustained move of oil prices from $70 to $100. We are adjusting this part of our sell signal to the $150 to the $200 area. Click here to read the report, When to Sell Oil Stocks Part 2 - Valuations

 We could see $150 to $200 during the next U.S. and Global economic up cycle. If there are any major supply disruptions during the next up cycle prices could spike to the $150 to $200 area.

 One of the other sell criteria we discussed in the valuation article is the market would price oil company reserves at close to $40 to $50 per barrel. APA is selling for about $18 a barrel, so we think the stock has more upside.

For specific entry prices for APA, Click here for a 30 day free trial and look for Update #490 issued 4/9/08.

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