Why I Bought Apache Stock Instead of ExxonMobil

On Thursday, May 18, I bought shares of oil and gas drillerApache(NYSE: APA) for less than $50/share. Before I did, I did some analysis on Apache's rival Devon Energy (NYSE: DVN), which had astellar first-quarter performance (especially compared to Apache's lackluster Q1), and top industry companyExxonMobil(NYSE: XOM), which has a robust downstream operation that Apache lacks.

In spite of all of that, I believe Apache is one of the best bargains in the oil sector today, and that its outlook is particularly strong. Here's why I'm now an Apache shareholder.

Apache is forecasting huge production growth from its Alpine High find, but first it needs to build pipelines and other infrastructure at the site. Image source: Getty Images.

Big prospects

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A lot of ink has already been spilled about Apache's big Alpine High find in the West Texas Permian Basin.The company was able to pick up more than 300,000 acres of oil- and gas-rich land on the cheap thanks to misconceptions about the resources in the area. But Apache estimates it's now sitting on at least 75 trillion cubic feet of gas and 3 billion barrels of oil in Alpine High.

Now, Apache can't get at that oil and gas all at once, because of the lack of infrastructure in the region. However, the company has devoted a substantial portion of its resources to building out the area, and earlier this month, it announced its first gas delivery at Alpine High, two months ahead of schedule. As a result, the company raised its production guidance for 2017.

According to one analyst from Stifel, Alpine High alone is worth about $18 per share of Apache, and the company paid less than $1 per share to buy the position.Apache believes Alpine High is worth even more, estimating at least 2,000 drilling locations with a present value range of $4 million to $20 million per well, worth a minimum of about $21 per share.

ExxonMobil, on the other hand, has struggled to turn a profit from its Permian Basin operations, and it has had some trouble turning its billions of dollars in capital spending into higher production.

Big bargain

With Alpine High being such a big deal, you'd expect Apache's stock to have skyrocketed, or at the very least shown modest improvement. You'd be wrong. The stock did see a small bump in share price immediately after the Alpine High discovery was announced, but it has eased steadily downward ever since. Currently, it's sitting just above $48/share, a discount to its $52 share price in August 2016, before it announced the Alpine High discovery.

That can only mean one of three things. Either:

1. The market doesn't think Alpine High is going to perform as well as the company's test data indicates.
2. The company's shares were grossly overvalued before the discovery, and this is a legitimate correction that factors in Alpine High.
3. The company's shares were correctly valued, or possibly slightly overvalued (or even undervalued) prior to the discovery, and the stock is now incredibly undervalued.

There's no reason to believe the company is overstating its test results, or that the data it's gathering is somehow incorrect. Certainly, that would represent an unprecedented failure on the part of Apache's management, which has staked its fortunes on Alpine High. That leaves one of the other two options.

Let's use a conservative estimate for Alpine High's value and say it's worth $15 per share -- significantly lower than Stifel's or the company's estimates. That would mean that, without Alpine High, the rest of the company is currently valued by the market at about $33/share. Which would mean that in order to believe the company is overvalued now, you'd have to believe the company was overvalued by more than 56% in August 2016, despite having performed in line with companies like Devon and the rest of the E&P industry for the past decade. That seems pretty unlikely.

"Big" dividend

Given how poor stock performance has been across the oil and gas industry lately, it's nice to have a dividend to provide some income to investors while we wait for a market recovery. Unfortunately, most E&P dividends have been slashed substantially since 2014. Devon, for example, cut its quarterly dividend from $0.24/share to $0.06/share, for a current yield of less than 0.7%.

Apache, though, has bucked this trend, holding its dividend steady at $0.25/share since 2014. Coupled with the declines in its stock price, that means the company is currently yielding more than 2%. While that's peanuts compared to ExxonMobil's 3.7% yield, it gives investors an added incentive to stick around for the juicy returns the company is projecting in the second half of the year.

Investor takeaway

It's not too late to buy Apache at these prices. The stock has been jumping around the $50 mark for the past month, and it could drop even lower if further headwinds hit the industry. But once Alpine High begins to pay off for the company later this year, I expect my investment in Apache to similarly pay off handsomely.

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John Bromels owns shares of Apache. The Motley Fool owns shares of Devon Energy and ExxonMobil. The Motley Fool has a disclosure policy.