Four Reasons to Like Apache Corporation (APA)

Highest operating margin but lowest valuation

Compared to its peers including Exxon Mobil Corporation (NYSE:XOM) and Anadarko Petroleum Corporation (NYSE:APC), Apache is the cheapest valued among the three. ExxonMobil is trading at $90.90 per share, with the total market cap of around $404.2 billion.

The market values ExxonMobil much more expensively at 5.7 times its trailing EBITDA and 11.06 times its forward earnings. ExxonMobil is the largest company among the three with the highest level of proved reserves of around 25.2 billion BOE in 2012, including 74 trillion cubic feet equivalent of natural gas.

ExxonMobil also seems to have tremendous potential resource base. In addition to the existing 25 billion BOE in its proved reserves, ExxonMobil estimated to have an additional of 62 billion BOE in the development stages and for future development. Moreover, the company’s long-term growth could be driven by 31 projects including Papa New Guinea LNG, Kearl Oil Sans and Angola Satellites Deepwater.

Anadarko is the most expensively valued company of the trio. At $87.80 per share, Anadarko is worth more than $44 billion on the market. The market values Anadarko at 7.14 times its trailing EBITDA and 16.3 times its forward earnings. Despite the higher market value, Anadarko had a lower total proved reserves than Apache Corporation (NYSE:APA) of around 2.56 billion BOE.

For the full year 2013, Anadarko seems to be quite optimistic about its future with 279 – 287 million BOE in sales volume. It also estimated that it would spend around $7.2 to $7.6 billion in capital expenditure to boost the company’s reserve replacement ratio to around 150%. At current prices, Anadarko believes that it could grow its annual production by 5%-7%.

Among the three, Apache Corporation (NYSE:APA) is considered the most profitable company with its highest operating margin at 38%. Anadarko ranked second with only 15% operating margin while the operating margin of ExxonMobil is the lowest at 13%.

My Foolish take

Personally, I think that Apache could be a good stock for energy investors to hold in a long run because of its high operating margin, conservative capital structure, low valuation and its huge potential resources. Moreover, with the potential divestment of $4 billion, Apache Corporation (NYSE:APA) could further reduce its debt level and increase its share buybacks to effectively drive the company’s EPS higher. If Apache has the same valuation to ExxonMobil, it should be worth more than $125 per share, a 50% premium to its current trading price.

The article Four Reasons to Like Apache originally appeared on Fool.com.

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