Apache (APA -2.63%), the Houston-based independent oil and gas exploration and production company, reported better-than-expected first-quarter results on Thursday. The company's North American operations continued to deliver strong liquids production growth, while asset sales over the past year have significantly improved its financial health and allowed it to return much more cash to shareholders.

Let's take a closer look at some of the most important takeaways from the company's first-quarter results and why shares of Apache could have more than 20% upside.

Photo credit: LINN Energy LLC.

Key first-quarter numbers
Adjusted for one-time items, Apache delivered first-quarter earnings of $707 million, or $1.78 per share, down from $797 million, or $2.00 per share, in the prior-year period but still well ahead of analysts' expectations of $1.61 per share.  

Operating cash flow before changes in working capital totaled $2.2 billion, up from $2 billion in the fourth quarter of 2013. Meanwhile, total oil and gas production declined 13.4% year over year to average 639,804 barrels of oil equivalent per day, or boe/d, largely because of the sale of producing properties over the past year.

North America continues to deliver
Despite the year-over-year decline in companywide production, Apache's North American operations -- the centerpiece of its growth strategy -- delivered yet another solid quarterly performance. Onshore North American liquids production jumped 21% year over year and 6% sequentially to an average of 198,500 boe/d.

This strong growth was led primarily by the company's Permian and Central region operations, which delivered liquids production growth of 31,000 boe/d over the year-earlier quarter. These assets, which offer highly attractive rates of return and predictable production growth, will account for a larger share of Apache's production, earnings, and cash flow in the years ahead, boosting margins and cash flow.

Asset sale strategy paying off
Meanwhile, Apache's asset sale strategy, which has seen the monetization of some $8 billion worth of assets over the past year, not including the most recent sale of its Gulf of Mexico assets to Freeport-McMoRan (FCX -4.33%) for $1.4 billion, has significantly improved the company's financial health by allowing it to pay down debt and return more cash to shareholders.

Since Apache launched its 30 million-share buyback program back in early 2013, it has repurchased nearly 17 million shares for $1.5 billion, including $485 million worth of shares in the first quarter alone. And once the proceeds from its recent sale of Gulf of Mexico assets come in, Apache will be able to buy back even more of its own stock.

As a result of its asset sale strategy, as well as stronger operating cash flows and reductions in spending, the company finds itself in strong financial health. It ended the first quarter with $1.64 billion in cash and equivalents and a healthy debt-to-total-capitalization ratio of 22%. With $1.8 billion in additional proceeds from its sale of Canadian and deepwater assets on the way, Apache has ample liquidity to fund its investment program and should be able to cover its exploration and production capital program through cash flow this year.

Why Apache has big upside
Apache's first-quarter performance reinforces my belief that the company's portfolio rebalancing strategy over the past year has positioned it for much stronger and more profitable growth in the years ahead. The company's core operations in the Permian and Central regions should drive several years of double-digit liquids production growth, while its international assets will continue to generate substantial amounts of cash flow.

I also remain convinced that Apache is still one of the most undervalued midmajor E&Ps out there. The company's shares currently trade at just under 12 times forward earnings and at just 1.1 times book value, representing a significant discount to other similarly sized North America-focused peers. Apache also commands an EV/EBITDA multiple of less than 4, one of the lowest multiples in the industry.

Once the market fully recognizes Apache's potential, I think multiple expansion could push Apache's share price to as high as $110 per share, which would represent roughly 25% upside from its current price of around $88 a share.