Apache Corporation Moat Check

Apache Corporation (APA) was the first stock that appeared in the list of potential wide moat stocks that I plan on reviewing. Today I spent some time looking at Apache Corp.

According to Apache Corporation’s website, Apache Corp. is a global oil exploration and production company formed in 1954.  The have $19.3 billion in assets and have interests in the United States, Canada, Egypt, Australia, Argentina, and the United Kingdom. In the United States, APA’s operations focus on oil in the Gulf of Mexico, the Gulf Coast, East Texas, the Permian Basin, and the Anadarko Basin.

Their strategy according to Apache website is as follows:

Apache’s strategy is built on a portfolio of assets that provide opportunities to grow through both grassroots drilling and acquisition activities. In each core area, our goal is to build critical mass that supports sustainable, lower-risk, repeatable drilling opportunities, balanced by higher-risk, higher-reward exploration. Our portfolio also is balanced in terms of gas vs. oil, geologic risk, reserve life and political risk.

Apache’s exploration and production technology group promotes the application of technology to maximize asset values, provides technical support for Apache operations and staff, evaluates emerging technologies appropriate for Apache operations and organizes technical training.

Apache’s strategy appears to be sound.  I especially like their mention of “sustainable” opportunities.  Apache indicates that they are leveraging technology to maximize their asset values.  Looking at their margins, it also Apache’s use of technology is paying off.  Apache appears to be an efficient oil producer.

However, oil is still a commodity. It is exceedingly difficult to build a wide moat when you are producing a commodity.  While Apache seems efficient and may even be a low cost producer, I don’t believe I would characterize their business as having a wide moat.  The price of oil will still largely dictate how much they will earn. 

While, Apache might have some competitive advantages in their industry, I won’t be adding them to my wide moat watch list.  If oil gets real cheap again, I might revisit Apache as a value play on cheap oil, but for now I’m going to move on to look at the next stock on my list.

2 thoughts on “Apache Corporation Moat Check

  • September 29, 2006 at 1:01 am

    APA is a reasonable value here, but I think there may be better opportunities. APA uses an “acquire and exploit” development strategy vs. “growth thru the bit” (organic) strategy. Over last 2 years the market price for aquisitive growth has risen dramatically. IMHO I think those that can develop reserves internally will have lower reserve replacement ratios, higher asset effieciecy, and higher cash flow! I think NFX offers the most compelling opportunity in the E&P space….

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