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Has a Lower Crude Oil Price Affected Apache’s Valuation?

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Apache’s valuation

Apache’s 3Q15 EV/EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio was 4.6x. EV is the summation of a company’s market capitalization and net debt.

As we saw in Part One of this series, APA’s stock fell almost 20% this year. So has its enterprise value. APA’s enterprise value stood at $53.2 billion on November 18, 2015, compared to $57.8 billion on December 31, 2014. Also, as we saw in Part Six, Apache has reduced its net debt from $12 billion in 1Q15 to $7.7 billion in 3Q15.

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APA’s valuation

As we saw above, APA’s EV/EBITDA was 4.6x in 3Q15. This is mostly in-line with its five-year average multiple of 4.1x. When we look at APA’s forward EV/EBITDA multiple, which uses market expectations for a company’s EBITDA for the current fiscal year, Apache’s forward EV/EBITDA multiple is 7.2x. The higher forward multiple indicates that Wall Street expects APA’s EBITDA to be lower this year compared to the last 12 months.

This could either mean that APA is overvalued compared to its own historical multiples, indicating a potential drop in its EV via its market capitalization, or that the market is viewing the drop in EBITDA as an aberration.

Apache recorded an adjusted net loss of $21 million in 3Q15. Many upstream companies have been hit by weak crude and natural gas prices. APA’s peers Pioneer Resources (PXD), Hess (HES), and Marathon Oil (MRO) reported adjusted net losses of $1 million, $291 million, and $138 million, respectively. All these companies make up ~4.7% of the Vanguard Energy ETF (VDE).

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Apache’s proved reserves

As of December 31, 2014, Apache (APA) had total proved reserves of 1,074 MMbbls (million barrels) of crude oil and 282 MMbbls of NGLs (natural gas liquids). It had proved reserves of 6.2 Tcf (trillion cubic feet) of natural gas. Combined, these proved reserves are the energy equivalent of 2.4 billion barrels of oil. Of this, oil accounts for 44.8%.

Recent revisions to proved reserves

Apache’s recent quarterly filing noted that in the first nine months of 2015, it recognized negative reserve revisions of ~13% compared to its estimated 2014 year-end reserves due to lower commodity prices in 2015. Apache added that if realized prices for the remainder of 2015 continue to approximate crude futures as of September 30, 2015, there is a high chance that it could report additional negative revisions.

Proved reserves are the estimated quantities of crude oil, condensate, natural gas, and NGLs that can be recovered with a reasonable level of certainty. Proved reserves are an important metric when considering a company’s valuation. They determine the volumes of oil a company can recover in the future, so they also determine future cash flows.

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