Apache Upgraded, Can It Keep The Recovery Going?

It’s been a tough decade and change for shares of Apache (NASDAQ: APA), the Houston based energy exploration company. They’ve been setting consistently lower highs since the lofty days of 2008 when oil was close to $150/barrel and are understandably having a hard time of it with oil close trading well below $50/barrel for much of the past five years.

The past few months has really been a consistent pattern of the company blocking and tackling as they try to pivot away from decade lows and back towards profitability. For example, this year alone they have cut back on their activity in Egypt and the North Sea, slashed their capital investment plan in half, and effectively turned off their Permian Basin activities in west Texas. Unsurprisingly, their $0.25 dividend also took a hit and was scaled down to a paltry $0.025.

Tough Q1

Just like pretty much every other equity name out there, the stock became as unattractive as the next during the panic-stricken weeks of late February and March which only added to the downward momentum that was already well established on a fundamental basis. During the lows of March, the stock was down 97% from its 2008 all-time high and 89% from its 2020 high.

The company’s Q1 earnings report in early May showed revenues falling by 22% year on year and a GAAP EPS heavily in the red. For context, this latter number came in at -$11.86/share, which was a full $11.52 lower than analysts were expecting. With these kinds of numbers, it’s not hard to see why investors had been walking away en masse.

However, for all that negative pressure, there are some who think the short-term upside outweighs the risk.

Bulls Step In

On Monday, the folks over at Citi upgraded Apache shares from a Neutral rating to a Buy while also upping their price target to $18 from $13. Analyst Scott Gruber struck a positive tone in a note to clients and was particularly bullish on the company’s exploration activities in Suriname in South America.

He wasn’t the first to spot the long opportunity as shares had been rallying hard from April through the start of June. At the highs of last week, they were up a cool 370% from recent lows, and though they’ve pulled back a little since, Citi’s upgrade comes at a perfect time. The bulls are surely reassessing their positions, wondering how much juice the rally has left and if it's time to take profits off the table.

Technically Attractive

Technically, the stock is attractive from the long side right now. Having traded sideways through most of May, they’ve formed a solid line of support which they fell back too late last week after opening the week with a pop to three-month highs.

This kind of temporary pause is no bad thing as the stock’s RSI was creeping well above 70, an indication of overbought levels. Shares were finding a solid bid again in trading during the start of Tuesday’s session and were up more than 2%. They’re following an impressively solid rising trend line from March’s lows and look to be tightening up in a pennant formed by the lower lows of the past week.

Investors have the recent lows to use as support or for stops and last week’s high as the first target to aim for on the upside. That recent peak happens to coincide with a huge gap down in the stock from March.

These gaps are a favorite target of technical traders and tend to be filled in quickly if the stock can get some momentum. With shares up 30% in June alone, even though the company is on the back foot from a broader perspective, it’s fair to say momentum is still very much with the bulls for now.