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We have maintained our Neutral recommendation on U.S. energy firm Apache Corporation (APA - Analyst Report).

Founded in 1954, Houston, Texas-based Apache is one of the world's leading independent energy companies engaged in the exploration, development and production of natural gas, crude oil and natural gas liquids. Approximately 68% of the company’s proved reserves and 55% of its production comes from North America, where its operations are focused in the Gulf of Mexico (GoM), the Gulf Coast, East Texas, the Permian basin, the Anadarko basin and the Western Sedimentary basin of Canada.

Internationally, Apache has core operations in onshore Egypt, offshore U.K. North Sea, onshore Argentina and offshore Western Australia. Additionally, Apache holds exploration interests on the Chilean side of the island of Tierra del Fuego.

We like Apache’s large geographically diverse reserve base, its balanced exposure to natural gas and crude oil, and its multi-year trends in reserve replacement and production growth.

Apache is noted for growing through the acquisition and development of existing reserves. Long-term production growth visibility has significantly improved following the recent asset acquisition from BP plc (BP - Analyst Report), the purchase of a portion of Devon Energy Corporation’s (DVN - Analyst Report) GoM properties and the deal to acquire Mariner Energy. These new acreage positions further complement the company’s diversified asset base.

Despite being one of the largest domestic exploration and production companies, Apache still boasts annual output growth in excess of 10%. A pristine balance sheet helps the company to capitalize on investment opportunities and strategic acquisitions, thereby further improving growth visibility.

However, we see limited upside potential for shares, taking into consideration Apache’s sensitivity to gas/oil price volatility, its drilling results, costs, geo-political risks and project timing delays. As such, we expect Apache to perform in line with the broader market.

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

Lastly, Apache sells natural gas in Western Australia under long-term, fixed-price contracts, many of which contain price escalation clauses based on the Australian consumer price index. This exposes the company to greater-than-average margin compression.

Considering these factors, we see Apache shares performing in line with the broader market. Our long-term Neutral recommendation is supported by a Zacks #3 Rank (short-term Hold rating).

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