There's nothing more frustrating than a stock that ought to be skyrocketing, but instead just sits like a wet sponge in your portfolio, doing nothing. And it seems like there's one in every portfolio. For years, that stock for me was Activision Blizzard, which from 2009 to 2013, despite a huge string of hit games, basically went nowhere (eventually, my patience was rewarded). 

But Activision has found a worthy successor in independent oil and gas exploration and production company Apache Corporation (NASDAQ:APA). The Houston-based energy company has operations in the Permian Basin, the North Sea, and Egypt. And over the past five years, it's down 45.4%.

I'll be honest: I'd just about given up on Apache. But after taking a long, hard look at the company, I'm (still) convinced that it's one of the best buys in the oil patch. Here's why.

A smiling man stands next to an oil barrel emitting a cloud of paper money

Oil producer Apache Corporation may finally be getting some love from the stock market. Image source: Getty Images.

Production is growing

In 2017, Apache's quarterly production numbers had been shrinking. That's bad news, particularly for an independent oil and gas production company. An integrated major like ExxonMobil -- which has been experiencing production declines, too -- at least has a lucrative refining and marketing operation to fall back on. 

But even though Apache's production declines were anticipated and announced months in advance, the markets still reacted poorly. Apache had projected production to decline through Q2 2017, and then to tick back upward again. For a number of reasons, that rebound didn't happen as quickly as the company had anticipated.

One of those reasons was actually a good thing. Apache sold all of its underperforming Canadian assets -- which were generating the company's lowest margins -- and plowed the cash into its high-margin Permian Basin operations, particularly into its monster West Texas "Alpine High" play. Overall, this was a smart move, but the loss of those assets naturally caused production to take a hit.

We'll look more deeply into Alpine High later, but the projected production gains from the play were delayed by Hurricane Harvey-related damage. That pushed the ramp-up of Alpine High production from Q3 2017 into Q1 2018. Also, a third-party pipeline issue in the North Sea in Q4 2017 caused production to take a hit in that quarter as well. All the while, Apache's share price was slowly sinking. 

However, in Q1 2018, investors finally got the long-awaited production boost they'd been promised. Companywide production for the quarter was 367,000 barrels of oil equivalent per day (BOE/d), which was 6% higher year over year, and up 1.4% over the prior quarter. Better yet, quarterly production came in above the company's guidance, causing it to update its full-year guidance as well. And the announcement of a significant new find in the North Sea had management hinting that international production numbers for 2019 and 2020 might be revised upward later in the year as well.

The return to production growth is a big deal for Apache. But the big question is whether that growth can continue.

Eggs in one basket

Apache is staking its hopes for the future on the Permian Basin, a red-hot zone for oil and gas production right now. Central to its Permian Basin strategy is the Alpine High play I mentioned earlier. 

Thanks to industry misconceptions about its hydrocarbon potential, Apache was able to purchase the Alpine High acreage for a song. The flip side was that there was no existing energy infrastructure in the region, which meant Apache had to build it before it could start pumping oil and gas in earnest from the play. That's been a time-consuming and capital-intensive process. Luckily, it seems like it's paying off. Meanwhile, in a testament to how much potential Alpine High holds, other drillers (represented by blue and green icons in the chart below) have descended on the region in force since the Alpine High play was announced in 2016:

A chart showing increased industry activity near Alpine High after Apache announced the find.

The announcement of Alpine High radically increased industry activity in the region. Image source: Apache June Marketing Presentation.

It's small wonder competitors are moving into the region, considering Apache's projections for Alpine High. The company anticipates a better-than-150% compounded annual production growth rate from the play, from just 9,000 BOE/d in 2017 to 160,000-180,000 BOE/d in 2020. Remember, in Q1, the entire company was producing 367,000 BOE/d, which would mean that Alpine High production alone would represent nearly one-third of the company's overall production.

Overall production and earnings are similarly expected to grow, albeit at more modest rates. And there haven't been any signs that Alpine High is underperforming its lofty expectations. Things look like they're finally on track for Apache.

A value price

Of course, if Apache's share price had gone up in response to its growth potential, it might not be a value. But its share price is currently lower than it was when it announced its Alpine High find. In other words, by buying the company today, you're essentially getting its Alpine High upside for the same price as before the discovery. 

Apache's valuation metrics are also very favorable compared to those of peers like Marathon Oil and ConocoPhillips... and even to integrated majors like ExxonMobil or BP. Also, Apache is earning much higher returns on capital employed -- a measure of management's effectiveness -- than its peers, with return metrics similar to those of the integrated majors. And while its dividend yield may not be as high as the majors', it trounces those of its peers: 

Company P/E Ratio  EV to EBITDA Return on Capital Employed Return on Equity Dividend Yield
Apache Corporation 14.5 7.6 6% 17.6% 2.1%
Marathon Oil 14.7 8.2 1% (1.8%) 1%
ConocoPhillips 21.2 13.6 0.5% (3.6%) 1.6%
ExxonMobil 17.4 9.6 7.1% 11.1% 3.8%
BP 34.6 7.4 5% 4.5% 5.3%

Data source: YCharts. All figures on a trailing-12-month (TTM) basis.

All of this indicates that Apache is undervalued at its current share price, particularly when its growth prospects are factored into the equation.

A big thumbs up

If I were Jim Cramer, I'd probably be screaming, "Buy! Buy! Buy!" right about now. And, while I'm not going to scream, I am going to say that Apache looks like a bargain at today's price. While there are certain risks to buying oil stocks -- especially the potential for oil prices to drop suddenly, leaving the company in the lurch -- Apache is looking good.

But the market is catching on... and quickly! Over the past month, Apache's shares have jumped by nearly 20%, and the share price is rapidly approaching $50 per share. If you're going to buy into this compelling growth story, you may want to do it sooner rather than later.