Apache Corp. has become the oil and gas stock investors love to hate.
The company generates negative free cash flow. It has relatively high debt. And there have been doubts about its Alpine High discovery, which has been slammed for having too much low-priced natural gas and not enough higher-priced oil. Its stock has fallen 18.4% so far this year, 28% over the last 12 months.
Raymond James analyst John Freeman, for one, is a believer in the company. Last week he reiterated his outperform rating on the stock with a price target of $55 per share, which is 52% higher than its recent close of $36.14 (its 52-week low hit $33.60 earlier this month).
Why the bullish sentiment? With 70% of the company's capital targeting West Texas' and New Mexico's Permian Basin this year, "The stage is set for Apache to return to a growth profile after purposefully reducing production internationally over the past few years," he said in a note.
Freeman makes a few points to back up his view. First, he said don't forget Apache's other assets in the Permian besides Alpine High. While the market remains singularly focused on the prospect's progress and results, Apache’s 2018 capital plan doesn't exclusively rely on its development to drive growth "lest we forget about the company’s other growth prospects in the Midland and Delaware Basins," he relayed.
With around 31% of the plan allocated to non-Alpine High projects in the Permian, roughly half of drilling rig activity will occur in Midland/Delaware, Freeman noted. In the Midland, for example, four to five drilling rigs will run throughout the year and Apache expects more than 80% of those wells to have 1.5 to 2 mile lateral lengths, thereby driving greater returns in the region, he said.
Second, Freeman said Alpine's liquidity profile allows for manageable "outspend" in the near term. He noted that Apache reduced its international exposure significantly over the past few years, culminating with the divestiture of its Canadian operations last year for more than $700 million. That strategy allowed the company to reposition its portfolio and boost its liquidity, thus providing the runway to ramp up activity in Alpine High, he said.
"With its growth projects now centered in the Permian, Apache looks to the international assets as cash flow generators to support U.S. development activity, thereby allowing a near-term outspend without jeopardizing its balance sheet or dividend payout," he said.
Lastly, Freeman thinks the market is focused too narrowly on the oil mix in Alpine High, with limited oil test results fueling investor fears.
However, Apache has said recently that Alpine High offers solid "wet gas" economics in the face of expected demand growth for natural gas liquids in the Gulf Coast and global petrochemicals industry. He said the company believes the current economic environment along with high-quality well characteristics will drive strong full cycle returns in the play going forward, which the market overlooks.
