Oil drillers: You might believe that once you've seen one, you've seen 'em all.
While that may be true in terms of their business models -- find it, extract it cheap, and sell it for more -- and their recent performance (not good), there are still some unlikely finds in the oil patch these days. In particular, Apache (APA +1.14%) has some unique features among oil exploration and production companies that could make it a good buy.
Here are three things you might not know about Apache, and why they may help the company outperform its industry peers.
Apache's recent "Alpine High" oil find is in a sleepy part of West Texas that hasn't seen much drilling... until now. Image source: Getty Images.
It's ditched LNG
With oil prices in a prolonged slump, many energy production companies are turning to liquefied natural gas (LNG) as an investment in their futures. Royal Dutch Shell (NYSE: RDS-A) (NYSE: RDS-B), for example, recently acquired rival BG, which increased its stake in liquefied natural gas. In fact, Shell CEO Ben van Beurden recently said on a conference call: "We certainly believe in the potential of LNG supply and LNG demand to grow. We still think that gas demand will grow twice as fast as oil demand, and LNG will grow twice as fast as gas on average."
BP (BP +1.38%) is even more bullish on natural gas, predicting that LNG will grow fully seven times faster than pipeline gas. By 2035, BP projects that LNG will account for about half of all globally traded gas, up from its current 32%.
But that growth won't affect Apache, which sold off its LNG assets in 2014 as a response to the global oil downturn. Under pressure from activist investor Jana Partners, the company made the strategic decision to ditch its Australian LNG assets and "circle the wagons" to focus on easier and more-profitable North American shale production.
While LNG may be a fast-growing commodity, the costs of extraction were fast growing, as well, and Apache is now out of the business altogether. That's good for the company in the short term, but the long-term impact of this decision remains to be seen.
Its dividend is up
There's not much going on in the dividend space of oil production and exploration companies like Apache these days. But Apache is a rare company among them in that its dividend has actually increased since 2014.
That's simply not true of many -- if not most -- dividend-paying oil and gas drillers. Apache's rivals ConocoPhillips, Marathon Oil, Devon Energy, and Anadarko have all slashed their dividends in recent years to cope with the downturn in oil prices. Other drillers, like Pioneer Natural Resources, don't pay enough of a dividend to slash, but haven't increased it, either, while some, like Parsley Energy, don't pay a dividend, at all.
Apache, on the other hand, raised its quarterly dividend to $0.25/share in 2014. It hasn't gone up since, but with its major "Alpine High" find and some stabilization in oil prices, it seems unlikely to be cut. That currently amounts to a 1.9% yield, just a hair below ConocoPhillips' best-in-class 2.1%.
Of course, that's nothing compared to what some of the integrated majors are paying. BP and Shell are both yielding about 6.8% at the moment, so investors looking for big yields from the oil patch should look elsewhere. But Apache's relatively high yield and excellent dividend stability are signs of a shareholder-friendly company.
It's been a rough year
It's hard to overstate the importance of Apache's Alpine High find in West Texas. Not only is it huge -- the company estimates it holds more than 3 billion barrels of oil and 75 trillion cubic feet of natural gas -- but it was also dirt cheap. Apache paid an average of just $1,300 per acre for the land. Compare that to nearby purchases made in March by Marathon Oil for nearly $20,000 per acre, or in August 2016 by Parsley Energy for more than $43,000 per acre.
Now, if you account for the fact that Apache is going to have to spend significant time and resources upgrading -- and in many cases, building -- infrastructure to support its find, the cost per acre of the project rises a bit. But it's still an impressive coup for the company.
That's why it's odd that Apache's share price has fallen so far in 2017. Take a look at this chart, which shows the company's share price starting on September 6, 2016, the day before it announced its Alpine High find:
For much of March, the stock was trading for less than it was before it announced its Alpine High find! Even today, it's trading at a significant discount to its post-announcement price.
In this case, the market is probably looking at the company's short-term prospects and not liking what it sees. Apache reported quarterly and annual net losses for 2016 in late February. Oil prices slumped in March. And it will be quite some time before the company can build out the regional infrastructure to capitalize on its Alpine High find, which will eat up 65% of its projected 2017 capital spend.
Investor takeaway
The market is probably being shortsighted here. Very little has changed for Apache since it announced the Alpine High find. True, the company's fortunes are probably not going to improve until Alpine High comes online, and the company predicts production will decline through mid-2017 before beginning to grow again in earnest.
Still, with the company's LNG assets sold, Apache has the resources to devote to Alpine High, and its strong dividend relative to its peers will give investors an incentive to wait. After all, mid-2017 is just a few short months away. If you've been looking to invest in an oil exploration and production company at a bargain price, this could be your perfect opportunity.
