It's horse racing season, which always reminds me of racetrack guru Andrew Beyer's concept of the "sucker horse." A sucker horse, according to Beyer, is a horse whose stats indicate it should win handily, but it never does. It might come in second or third, but it never actually comes in first, and it costs bettors a lot of money in the process.
I sometimes think there are sucker horses in the stock market, too: stocks that consistently seem poised to outperform and then never do. Lately, one such stock is oil and gas driller Apache Corporation (NASDAQ:APA), which after a recent one-two punch of bad news, is trading at about $31 per share, down 41% over the past three years. The stock's price this year is lower than it's been since 2003.
So, at this price, is Apache an incredible bargain, or a sucker stock that's never going to recover?
Why the market hates Apache
Apache was clobbered by the same market forces that hit rivals like Anadarko Petroleum (NYSE:APC) in 2014: The price of oil had collapsed, and independent oil and gas exploration and production companies (E&Ps) like Apache and Anadarko were hit hardest. Unlike most of its peers (including Anadarko), Apache managed to survive without cutting its dividend, but that still didn't keep the stock market from knocking the company's price down by about 65% from its 2014 highs to its 2016 lows.
In late 2016, though, Apache made a big announcement that actually caused its shares to pop: A Permian Basin play that Apache had been quietly picking up on the cheap turned out to have unexpectedly massive oil and gas reserves underneath it. Dubbed "Alpine High," its low price and big potential caused the stock to pop.
But investors soured on Apache as it became clear that it was going to take quite some time to build out the nonexistent infrastructure to get Alpine High oil and gas to market. Meanwhile, production was declining as Apache sold off noncore assets to focus resources on Alpine High, which wasn't yet ramped up.
When the Alpine High buildout was delayed by Hurricane Harvey in 2017, the market fretted that the company would miss out on high energy prices and punished the stock. When oil and gas prices took a hit in December 2018, the market punished the stock. Now, with production rising and Alpine High starting to produce oil and gas in earnest, there's another problem: a big Permian bottleneck.
All dressed up with nowhere to go
The Permian Basin has seen an explosion in activity lately, as drillers have rushed to cash in on the dream combination of cheap shale production and high oil and gas prices. But all that oil and gas needs somewhere to go, and unfortunately, the infrastructure to transport large quantities of oil and gas out of the Permian to refineries and export terminals on the Gulf Coast doesn't yet exist.
Midstream pipeline companies like Kinder Morgan and Enterprise Products Partners are busy working on large-scale pipelines out of the Permian, but many of them won't come online until next year, or later. In the meantime, the oil and natural gas -- especially the natural gas -- has been piling up in the Permian with nowhere to go.
In fact, so much natural gas has been headed to the Waha Hub in the Permian, with so little capacity to move it, that Waha Hub gas prices actually turned negative in April -- meaning that "sellers" have literally been paying "buyers" to take their excess gas away. One of those sellers? Apache.
In late April, Apache announced that it was temporarily deferring some natural gas production at Alpine High to avoid having to pay others to get rid of it. The market didn't like that, and clobbered the stock again.
What's next for Apache?
Apache's biggest asset may be its Alpine High play, but it's been beset by one obstacle after another. However, this time the company may actually have an advantage over other Permian producers like Anadarko.
Apache has created a joint venture called Altus Midstream to construct and operate pipelines and other midstream assets. Altus is partnering with Kinder Morgan on the Gulf Coast Express pipeline, which is expected to be completed in October 2019 -- ahead of most other major Permian pipelines. The Gulf Coast Express will not only provide Apache with an outlet for 550 million cubic feet per day of its Permian natural gas, but also will allow it to profit off of the gas that other producers ship through the pipeline.
Of course, that's assuming everything goes according to plan, which it definitely hasn't thus far for Apache. However, the company's non-Permian assets in the North Sea and Egypt are continuing to to perform well, and Alpine High production is exceeding expectations. If Apache can get its shipping woes straightened out, it may be ripe to (finally) outperform.
For investors or for suckers
There's a compelling case to be made that Apache is a sucker stock. Every time its share price starts to recover, some new hiccup sends it plummeting again. Even once the bottleneck problems in the Permian get resolved, Apache may fall victim to lower prices resulting from more Permian oil and gas hitting the market.
On the other hand, a share price of $31 is quite low, even for Apache. It gives the stock a bargain-basement price-to-book ratio of just 1.6 (Anadarko's, by comparison, is 4.1). And once October hits and the Gulf Coast Express starts flowing, Apache's performance should improve. At this price, the stock looks like a buy given those prospects. But investors should be aware that it's not without risks.