Why Apache Corporation Shares Could Pull Back

Does this analyst make a good case? Or is it just more noise from Wall Street?

Jun 6, 2014 at 12:09PM

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Apache (NYSE:APA) slipped slightly in pre-market trading Friday after Wells Fargo downgraded the natural-gas and oil producer from outperform to market perform.

So what: Along with the downgrade, analyst David Tamero lowered his valuation range to $95-$105 (from $116-$120), representing as little as 2% worth of upside to yesterday's close. So while momentum traders might be attracted to Apache's price strength in recent months, Tamero's call could reflect a sense on Wall Street that the company's production growth prospects are now largely baked into the valuation. 

Now what: According to Wells, Apache's risk/reward trade-off is pretty balanced at this point. "In our opinion, from a share price perspective, Apache has taken the right steps in cleaning up its portfolio, reallocating capital, and buying back shares," said Tamero. "However, while the stated absolute growth percentages are similar to its peers, Apache debt adjusted cash flow (2015E: 10% vs. 12%) and production per debt-adjusted share metrics (2015E: 1% vs.9%) lag the rest of our large cap universe." When you couple those seemingly stretched metrics with Apache's exposure to highly volatile energy prices, it's tough to disagree with Wells' cautiousness. 

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Brian Pacampara has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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