An Energy Stock on a Knife's Edge

06/29/2009 9:51 am EST

Focus: STOCKS

Elizabeth Harrow

Financial Analyst, Schaeffer's Investment Research, Inc.

Elizabeth Harrow of Schaeffer’s Investment Research says Apache has some appeal as an energy play, but the bulls and bears are battling over its future direction.

[A recent article in BusinessWeek by Inside Wall Street columnist Gene Marcial]—“Apache—an Undervalued Oil Play”—notes that crude oil prices are beginning to recover from their precipitous plunge, and as a result, investors are starting to rediscover a few names within the oil sector. Apache (NYSE: APA) is cited as one name within the group that's worth taking a look at, thanks to "its large stake in the US and its high success rate in oil drilling of about 93%," according to Joseph Tatusko, chief investment officer at Westport Resources Management.

[Marcial] observes that APA is currently trading at a discount to its larger-cap peers, even though the equity has already regained a significant amount of ground from its 52-week low of $51.03, tagged as recently as mid-March.

In addition to the upside potential in the stock, there's also a chance for APA to bulk up its fundamental position through key property acquisitions. The article notes that the firm "has a history of augmenting its production volume growth through acquisitions." Plus, since the company's 11% debt ratio "is among the lowest in the sector," investors can breathe easy about APA's balance sheet.

If you're going to play the oil sector, it's much better to focus in on a lower-profile name, such as APA, rather than one of the bloated heavyweights in the group, such as Exxon Mobil (NYSE: XOM). However, there are a few pressing technical concerns for APA at the moment, and contrarian investors will want to take note of the relatively heavy optimism surrounding the shares.

Specifically, the shares have pulled back beneath their ten-month trend line. In fact, since early May, APA has spent most of its time bouncing aimlessly between the $75 and $85 levels. (It closed at around $72 Friday, still 50% off last year’s all-time high—Editor.)

Despite the lackluster price action, option traders are favoring bullish bets. APA's [recent] Schaeffer's put/call open interest ratio (SOIR) of 0.60 ranks in the upbeat 18th annual percentile, and traders on the International Securities Exchange (ISE) bought to open 3.41 times more calls than puts [in recent weeks]. This ratio ranks higher than 86% of comparable readings during the past year, indicating that calls on the equity are in greater demand than usual.

In other words, traders seem to have high hopes for the stock, even as it's showing signs of a technical breakdown. Unless the shares can snap out of their sideways channel in short order, APA could be vulnerable to [the] down side as disappointed bulls hit the exits.

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