Why Apache Corporation Might Pull Back

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

Brian D. Pacampara, CFA
Brian D. Pacampara, CFA
Apr 9, 2014 at 10:10AM
Energy, Materials, and Utilities

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

What: Shares of Apache Corporation (NYSE:APA) slipped in premarket trading Wednesday after Deutsche Bank downgraded the natural gas and oil producer from buy to hold.

So what: Along with the downgrade, analyst Stephen Richardson planted a price target of $91, representing about 7% worth of upside to yesterday's close. So while momentum traders might be attracted to the Apache's price strength in recent weeks, Richardson's call could reflect a growing sense on Wall Street that its valuation is becoming a bit stretched.

Now what: According to Deutsche, Apache's risk/reward trade-off is pretty balanced at this point. "Asset sales to support reinvestment in the growth driver of the business, particularly in the US onshore, was central to our thesis," said Richardson. "With portfolio restructuring largely concluded, the thesis from here must shift to the ability of the US onshore to drive differentiated growth and returns. Here we have lower conviction than previously, and see the stock as a 'show me' story over the balance of 2014." When you couple that long-term growth uncertainty with Apache's recent share-price strength, it's tough to disagree with Deutsche's cautiousness.