Energy has been one of the hottest sectors of the past year, with the XLE energy ETF posting a scintillating 26% year-to-date (YTD) gain (compared to a 7% loss for the S&P 500) and a 60% gain over a one-year timeframe (versus a 12% gain for the S&P 500). While some investors may feel like it is "too late" to invest in energy and others are expecting the hot sector to cool down, remember that due to a decade of underperformance and underinvestment, energy still only makes up about 3% of the weighting of the S&P 500.
Many investors are still underweight oil. Some investors will not invest in the sector at all due to ESG concerns. For these reasons, I think energy stocks still have plenty of room to run. One great example is APA Corp. (APA 1.15%), formerly known as Apache. APA has gained 100% off of its 52-week low but could just be getting started. Here's why.
Image source: Getty Images.
Buyback machine
While APA doesn't boast the high dividend yield of some of its oil patch peers, that doesn't mean it isn't serious about shareholder returns. One of the things I like about the company is its steadfast commitment to return cash to shareholders. In its January investor presentation, APA states that it is planning to return 60% of free cash flow to shareholders via share repurchases and its dividend. The company has become a share-buyback machine.
Last quarter, it bought back 31.8 million shares. This equates to an astounding 7% of the shares outstanding in just one quarter. Furthermore, Apache bought these shares back at an average of $27.13 per share, well below the current stock price. This is great for shareholders as it increases earnings per share by reducing the number of shares on the market and also indicates that management believes the company is undervalued.
In addition to the massive share repurchase plan, APA also has a 1.5% dividend yield and the company is also reducing debt, paying down over $1 billion last year and planning more deleveraging this year.
All over the world
While APA isn't as big as majors like ExxonMobil or Chevron, I like the fact that it is well diversified with operations all over the globe, which reduces the risk that smaller companies have when they have just one asset or one geography online. APA operates in two of the United State's prime oil-producing regions, the Permian Basin in Texas and Eagleford in Texas. The company is the largest oil producer in Egypt, and it also operates offshore north of Scotland in the North Sea. And then there is the discovery in Suriname...
Monster discovery
APA has the potential for a monster asset on its hands in Suriname; the company has made several discoveries there since 2020, and its studies indicate it could have 325 million to 375 million barrels of oil in just one of these reservoirs. The company is still appraising the other discoveries, but needless to say, there is reason to be excited about the potential upside here.
Is APA a buy?
APA is cheaper than the largest U.S. oil companies like ExxonMobil and Chevron on next year's earnings, trading at just 5 times forward earnings versus a still-reasonable 12 and 14 times forward earnings for Exxon and Chevron, respectively. APA is also cheaper than the next tier of U.S. producers like Occidental Petroleum (OXY 0.75%) and Devon Energy (DVN 0.29%) which trade at 11 and 9 times next year's earnings, respectively. Keep in mind that all of these stocks are still reasonably valued compared to the broader market.
With a strong commitment to shareholder returns by aggressively buying back shares, a well-diversified portfolio of operations, an attractive valuation, and the upside of the exciting discovery in Suriname, APA looks like a strong buy.
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