Argus Downgrades Apache Corp. To Hold, Cites Falling Oil Price

• Apache Corporation APA shares have gained 8 percent over the last three months, after having declined steadily since mid-April.
• Argus’ Bill Selesky downgraded the rating on the company from Buy to Hold.
• The company may report another loss in 4Q15 and in 2016, since oil prices are declining faster than management can cut costs, Selesky stated.

Over the last 18 months, Apache has been selling assets in an attempt to shift its focus to higher-margin North American liquids production. “We have a favorable view of this strategy and expect the market to eventually reward APA with a higher valuation than it has typically seen in the past,” analyst Bill Selesky wrote.

He added, however, that this is unlikely to materialize in the near term. Apache reported a loss in 3Q, and could report a loss for both 4Q15 as well as full-year 2016, since oil prices are declining at a rate faster than management can cut costs.

While management has paid down debt using cash proceeds from asset sales, the analyst has lowered the financial strength rating “to Medium from Medium-High, based on the outlook for profitability.”

In the report Argus noted, “From a fundamental standpoint, APA shares trade at a discount to peers based on enterprise value/trailing 12-month EBIDA, enterprise value/reserves, enterprise value/daily production, price/cash flow and price/book. But given the expectation for losses in 2015 and 2016, the discounts appear deserved.”

Selesky further commented that Apache’s shares have outperformed over the past quarter, having risen 8 percent, versus the market’s 2 percent gain. Looking at the past year, the company’s shares have underperformed, falling 23 percent, versus a 2 percent gain in the S&P 500.

“We think investors seeking bargains in the oil patch will first focus on profitable energy companies with higher yields,” the analyst stated.