With Activist Investors on the Warpath, Apache Is Still Priced Too Low

Tickers in this article: APA BP CVX

NEW YORK (TheStreet) -- Apache is the kind of energy company attracting savvy investors who know a good deal when they see one. That's one of the reasons shares popped over 7% in the last few trading sessions and, at $101, are up 18% for the year to date.

There are still many reasons why the company's stock has room to run besides the fact that Apache is one of the world's leading independent energy companies. It also happens to be undervalued and is about to become much more productive by staying closer to home.

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That's what motivated activist hedge fund Jana Partners to take a $1 billion stake in the company while urging management to enhance shareholder value including exploring a sale. The investment firm reminded Apache it has under-performed its peers, especially those operating exclusively in domestic shale formations such as the Permian basin.

To its credit, Apache quickly welcomed the specific concerns that activities should focus more exclusively on U.S. drilling activities. The company claims it is actively involved in selling international projects and targeting more profit-oriented production growth in North America.

With that emphasis combined with Jana breathing down its neck, Apache seems motivated to expand its sales of overseas interests. This will soon add up to $10 billion of cash proceeds which can be used for shareholder friendly decisions like raising the dividend or buying back shares.

Like Jana Partners, I'd rather see the company's management prepare for a friendly takeover. With a market cap of only $39 billion it would make a digestible target for Chevron or BP  , which are looking to grow production through smart acquisitions.

There's another big activity involving Apache that has tremendous money-making potential. But first let's look at a five-year chart that illustrates that the stock price has begun a new upward era.

APA Chart
APA
data by YCharts

Shares have climbed decisively above the 50-day and 200-day moving average prices. It's my opinion that APA has the momentum to reach the 2011 highs of $130, even without a buyout offer from a bigger energy firm.

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Few investors realize that shares are trading at a forward price/earnings ratio of only 14, 20% lower than many of its peers. Yet the story that's sure to be a future price driver of Apache's stock concerns liquefying natural gas, or LNG.