Apache Walks the Neutral Lane

We are maintaining our long-term Neutral recommendation on Apache Corporation ( APA - Analyst Report ) , reflecting its high-quality and diversified asset base, attractive production outlook and healthy financial profile.

These positives, though, are somewhat offset by the unstable gas/oil prices and depressing macro environment.

Houston, Texas-based Apache is a leading independent energy company engaged in the exploration, development and production of natural gas, crude oil and natural gas liquids.

Apache is poised for production growth given its large geographically-diversified property line-up, its balanced exposure to natural gas and crude oil, and multiyear trends in reserve replacement.

Looking into 2012, Apache expects production to jump about 7% to 13% from the prior-year level. We believe that enhanced operations at the Permian Basin along with extensive exploration activities across the liquids plays of the Granite Wash, the Tonkawa, the Cleveland, the Marmaton, Cherokee and the Canyon Wash will enable the company to achieve its target.

We remain bullish on Apache’s international operations. The company has been steadily expanding its footprint in Egypt, in particular, with positive results from the Qarun joint venture, Khalda acreage and AG development lease. Despite the political disturbances in the country, Apache has received a lot of support from the authorities and plans to carry on its work by exploring new fields.

We also appreciate Apache’s strategy of designing a capital expenditure program that is within the cash flow range, and allocate funds and resources to projects that are expected to generate high-returns in the coming days.

However, our optimism is clouded by the dull first quarter 2012 results, mainly due to deteriorating natural gas realizations. Apache’s earnings and revenue fell short of Zacks Consensus Estimates.

Additionally, Apache’s performances are directly exposed to oil and gas prices, which are inherently volatile and subject to complex market forces. Realized prices could differ significantly from our estimates, thereby affecting the company’s revenues, earnings and cash flow.

The company’s long-term production and reserve growth primarily depends on its acquire-and-exploit model. If Apache fails to complete accretive transactions on schedule in the future, it could negatively impact its growth rate.

Apache, which competes with other energy players such as Anadarko Petroleum Corporation ( APC - Analyst Report ) and Exxon Mobil Corporation ( XOM - Analyst Report ) , currently, retains a Zacks #3 Rank, which translates into Hold rating for a period of one to three months.