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Why Apache Corporation Shares Could Pull Back

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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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 06, 2014, at 12:27 PM, Leighjam wrote:

    Not the best call I have seen as it vaults up another 2%. How do we ever justify the analysis given by brokers. they are more often quite incorrect. here's yet another case. When APA is USD 100 they will all upgrade their price targets.

  • Report this Comment On June 10, 2014, at 3:28 PM, Ventureshadow wrote:

    Why not write "why you could win the lottery and be struck by lightning"? Could this, could that. If you have convictions, courage and clear data write "will probably" rather than could.

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Brian Pacampara

I take a look at big 10% moves, as well as stock-shaking analyst calls, on a daily basis for The Fool. While I don't believe in active trading, closely monitoring Mr. Market's mood swings can help identify long-term opportunities.

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8/28/2015 4:02 PM
APA $44.86 Up +2.07 +4.84%
Apache Corp CAPS Rating: ****