APA Corporation: Stable Business with Good Potential (APA)

investment thesis

APA Corporation (NASDAQ:APA) – which operates mainly in oil and gas exploration, focusing on key areas such as the US (especially the Permian Basin), Egypt and Suriname – has reached a level where I think it is a worthy buy for less conservative investors. The the company can be bought at a better valuation than before, is undervalued compared to its peers, has an asset in the Suriname project and even pays a large dividend, while the outlook is no worse than it was 1- 2 years ago.

The last time I held it in my portfolio was after the oil price crash following the Covid crash, but over the past year, I have considered its price to be fair value, at least not worth buying. This, of course, was largely due to the decline in the company’s stock price over the past few months, which has seen the share price fall by 20-25%.

Below, I would like to provide you with my knowledge and key information about this quota, which is worth considering.

Latest news

On September 10, APA Corp. announced a $950 million deal to sell off-performing properties in the Permian Basin, cutting oil production by 21,000 boe/d. I see the news as positive overall because it’s not critical, I see it basically as an optimization effort and there’s no doubt that this would be used in part to improve the balance sheet, which would secure the situation in the short to medium term. – the long-term perspective.

In addition to the news, it was reported that a production number of 307,000 bpd was targeted for US production in Q3, higher than the Q2 figure of 303,000 bpd and also higher than the guidance of 298,000 bpd .

Where the oil comes from and where it will come from

Mainly from the US Permian Basin, the company is expecting 308 MBO/D next quarter, which I think is realistic. This includes Callon Petroleum, acquired in an all-stock deal valued at about $4.5 billion earlier this year, which has one-off production growth of about 55-60 MBOE/D, which could even grow slightly due to the impact. of integration in the next two quarters, which is also in line with management’s expectations.

In Egypt, according to management, I do not expect growth, but rather stagnation to maintain production at around 43 MBO/d produced in the last quarter.

In the North Sea, I don’t expect much good this quarter, with management expecting a production number of 25 MBO/D, which could normalize by the end of the year. Despite the fact that this area would be a good investment for the company in principle, I do not see that it would be economical and beneficial for the company to invest more in this area due to the recently introduced EPL tax regime in the UK. Here in the North Sea I would only expect current production levels to be maintained as much as possible until they can replace lost production here.

APA Corp is working in partnership with TotalEnergies on Block 58 off the coast of Suriname, one of the world’s most promising deepwater oil fields. Management expects Block 58 to produce 200,000 barrels of oil per day, but actual production will not be possible until 2028. If this project works and there are no major delays in starting production, this could significantly overvalue the company, with the condition that the price of oil. does not drop sharply from current levels. As I calculate, that could mean, if I don’t factor in other production increases, that it would improve by about 100 MBOE/Z from about 400 MBOE/D to about 500 MBOE/D, which to me is a case of basis. that the company’s profits would increase by at least 20%, unless we calculate that this would allow the company to achieve higher margins.

Competitors and how they are evaluated

To increase shareholder value, management pays a quarterly dividend, which has been frozen for 2 years. Since then, it has paid a dividend of $25 cents per share, which is $1 per year, currently producing a trailing dividend yield of 4.22%, which is outstanding compared to its competitors’ dividends. In terms of starting dividend yield, among the competitors on the chart, only Exxon Mobil (XOM) can come close to APA’s dividend yield, but even that is only 3.38%. True, this will probably be able to increase the dividend rate by a low single digit amount each, and of course the other ( HES ) ( OXY ) ( MRO ) companies with Exxon Mobil are larger in terms of capitalization and have financial more stable. balance sheets. Regardless, barring major industry and company-wide negative events, the current dividend level will remain sustainable, so my expectation is that APA Corp will be able to maintain its dividend payout.

Looking at the Dividend Yield (%) chart, we have adjusted to correct for the share price increase after the Covid crash with a uniform dividend yield of 9% to show how the effective dividend yield has evolved. Based on the chart, to me, already at 4% dividend yields and even more so above, the company looks attractive to buy. There haven’t been many times before when you could buy a company with such an initial dividend yield.

In terms of valuation metrics, the picture is mixed as we get very favorable numbers for APA Corp on a P/E and P/S basis, but the free cash flow generated is considerably low on a proportional basis compared to the larger integrated system . oil producers. Although the P/E is 2.58 and that’s because the net profit was much higher in Q4 due to a one-time item, taking into account the previous quarters and the outlook, the EPS for the year could be around 5, which what if I calculate a forward P/E on the current share price, I still come up with a value of 5.95, which is still considered cheap. The closest to it is Marathon Oil at 10.21, but there is still a big gap.

Based on the chart below, I see that the average P/E was around 7-8. I would consider that about fair value for the company.

Also, in terms of P/S, APA Corp is the cheapest compared to its peers with a P/S of 0.98, while the second least valued company, Exxon Mobil, has a P/S of 1.45. Based on this indicator, APA Corp also has room for upside from the current $23-$24 level.

In terms of cash flow generated, the picture is not so clear, with relatively lower generation than its peers, much of which was lower due to the company’s equity investment in Egypt. I expect a clear improvement from the company in the next quarter.

Additionally, it should be noted that the company has a share repurchase program, under which the company bought back shares at an average price of approximately $31.9 per share in the first half of the year, and I expect the company to maintain this. the level of capital invested in the second half of the year, which if I do the math, I calculate that it can spend about $150 million and if I look at the current share price, which is around $24, it will be able to buy 6 .25 million shares, which is about 1.68% of the company. It’s not the greatest value, but it’s a good addition to the dividend in terms of yield.

Risk factors

The financial situation of APA Corp is currently stable, but it would be worth reducing the loan portfolio, improving the financial balance. Short-term movable assets ($2,918 million) only cover short-term debt ($2,887 million). This is not an acute problem at present, but could easily be a problem with low oil and gas prices. I would add to this by saying that management can improve its balance sheet from the $950 million sale of Permian acreage announced a few days ago, as described above.

What I think is a bigger risk factor is the change in oil prices, which have fallen sharply in recent weeks and failed to correct despite the OPEC+ meeting on September 5 maintaining voluntary cuts without increasing production. Despite the fact that Kazakhstan and Iraq have supplied the world market with more oil than OPEC members expected so far this year, they have pledged to maintain the production limits they agreed to. This is good and important news for APA and what I would hate to see is OPEC+ members increasing production in the coming quarters as that would jeopardize the return on investment in APA Corp.

What could put pressure on oil prices is a prolongation of China’s economic problems and a simultaneous slowdown in the world’s major economies. In the long term, oil price developments could be negatively affected by the fact that most analyzes assume a negative outlook for future oil consumption, such as this study on China’s energy transition. However, what makes me positive is that there is quite a bit of negative sentiment towards oil right now, and being a cyclical industry, it’s worth buying when people are negative about the outlook for oil. This was the case in 2020, after the Covid crash, when oil prices dropped to a few dollars and everyone was upset about the outlook.

What to look out for in the next quarterly report

In the next quarterly report I will definitely look at the balance sheet to see if the balance sheet is improving in favor of the assets or to what extent the short term assets can cover the short term debt. The ratio is currently around 1, but I expect it to move towards 1.2. This is also important so that dividend payments are more secure and there is even room to increase the dividend in the future.

The company projects a total adjusted production number of 388 MBO/D based on guidance published at the time of the last report, at the current Brent price of $82.89; however, it currently sits around $72, and looking at the Brent chart, this expectation is unlikely to be realistic this quarter, which could hurt the company’s profitability a bit in the short term. So I would keep an eye on the price of oil.

I would also keep an eye on developments in the Suriname project. In fact, this is the project that would allow the company to grow in a significant way, so this is a priority with the estimated initial capacity of 200,000 barrels per day based on current information.

Summary

Considering the pros and cons discussed above, the current price level of $23-24 may be worth buying. This is generally supported by a more favorable valuation compared to peers on a P/E and P/S basis. A high dividend also increases the company’s potential, either compared to the company’s historical numbers or the dividend yield of its competitors. The management has a lot of potential in its hands thanks to the offshore project in Suriname, which could have a positive impact later. Despite the recently announced asset sale, the company can improve its balance sheet, stabilizing its financial position and continuing to deliver returns for shareholders. To do this, it is worth watching the economic outlook alongside China’s situation and OPEC+ oil price movements. Taking into account all this, the investment thesis is given and worth playing.