Why Hold Strategy Is Apt For Apache (APA) Stock Right Now?

We issued an updated research report on upstream energy player, Apache Corporation (NYSE:APA) on Aug 16. We are upbeat about the company’s promising Alpine High discovery and exit from the high-cost Canadian operations. Meanwhile, the persistent uncertainty in oil prices raises concern.

Apache's Alpine High discovery in West Texas is expected to be a game changer. Estimated to hold massive oil and natural gas reserves, the wells are likely to yield high returns.

Moreover, management has been actively divesting assets, particularly those that do not fit into its long-term growth plan. As part of this initiative, Apache recently entered into an agreement to divest its high-cost Canadian assets, thereby freeing up capital to focus on longer-term lucrative prospects, especially in the Permian basin. Apache has been focused on streamlining its portfolio and strategically redeploying capital toward the highest value opportunities.

On top of that, cash flow for this Zacks Rank #3 (Hold) stock has exceeded capital expenditure for five quarters in a row. As a result, after following a disciplined capital allocation program over the past two years, Apache is now looking to shift its strategic objective. With returns-focused growth in mind, Apache announced 2017 capital budget of $3.1 billion, representing a 60% increase over its 2016 spend.

However, oil prices have been in freefall over the past few weeks, erasing all the gains associated with the OPEC-led output cut. The continued rise in domestic production, thanks to soaring shale output, has dragged down the commodity well below the psychologically-critical $50 level. This will dent Apache's earnings and cash flows considerably. As it is, the effect of the drop in commodity price has been profound on Apache’s top line as the energy explorer did not hedge production.

Also, Apache's stock has lost 36% since the start of this year, underperforming the industry’s decline of 31.4%. Further, the company has been witnessing downward estimate revisions with current-year earnings estimates declining 19% over the last seven days.

Stocks to Consider

A few better-ranked players in the energy sector include TransCanada Corporation (TO:TRP) , Transmontaigne Partners LP (NYSE:TLP) and Range Resources Corporation (NYSE:RRC) . All the stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

TransCanada posted an average positive earnings surprise of 4.06% over the last four quarters.

Transmontaigne posted an average positive earnings surprise of 6.60% over the last four quarters.

Range Resources’ 2017 earnings are estimated to grow 116.5%.

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