APA Corporation

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

APA Corporation (APA) is an independent energy company engaged in the exploration and production of oil and natural gas, primarily in the United States, Egypt, and the North Sea.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview APA is an oil and gas exploration and production company with operations in the U.S., Egypt, and the North Sea. The company focuses on acquiring and developing properties that produce oil and gas, and sells their production to the market. APA’s business is heavily influenced by commodity prices, which creates volatility in revenue and profits.

  • Revenues Distribution: APA’s revenues are generated primarily through the sale of crude oil, natural gas, and natural gas liquids (NGLs). In 2023, oil and condensate accounted for 67% of total production revenues, while NGLs and natural gas made up 23% and 10% respectively.
  • Geographic Overview: In the U.S., APA focuses on the Permian Basin, and has significant activity in West Texas and Southeast New Mexico, and operates oil and natural gas properties in the Gulf of Mexico as well, though oil and NGLS make a much bigger impact in their production in that region. In Egypt, the company’s operations are in the Western Desert and are primarily oil-focused. Their international production in the North Sea is almost entirely oil production.
  • Margins: The Company’s adjusted EBITDA margins in the U.S. were approximately 48% in 2023. This rate is significantly reduced, however, in the company’s operations in Egypt, as well as in their operations in the North Sea, where their profitability is around 18% and 37% respectively.
  • Competitive Landscape: The global oil and gas market is highly competitive, with numerous large and small players. APA competes with major integrated oil and gas companies, as well as independent exploration and production companies. The global energy market is also highly susceptible to price volatility based on global macroeconomic and geopolitical conditions.

The overall industry is also susceptible to government regulations and environmental concerns.

What Makes APA Different? APA stands out from competitors due to its diverse geographical operations. It has a significant international presence, particularly in Egypt, which exposes the business to additional levels of currency and geopolitical risk, but also gives the business geographic diversification. Further, their strategic use of long term price contracts could be a valuable strategic advantage, if these contracts result in prices higher than the future average price.

Recent Developments and Concerns

  • The recent drop in oil and gas prices has caused concerns: Prices for oil and gas have dropped over the past year which has caused analysts to be pessimistic about its future revenue and profits.
  • Acquisition of Callon Petroleum: In April 2024, APA completed the merger with Callon, creating a combined entity with operations in the Permian Basin, and a new stock was created and issued in exchange for the old ones. This caused concern among some investors about share dilution, and if the benefits will materialize at all.
  • Debt and Capital Allocation: The company has increased its debt to finance the Callon merger, adding to its debt burden. It is also planning to use cash from the deal and its future cash flows to pay down its debt as well as buy back shares. The way these investments are structured and how the company manages its debt is a key area of investor concern.

Financials APA’s financial performance has fluctuated over the past few years, largely due to price changes in oil and natural gas.

  • Revenue: In the first three months of 2024, APA’s revenue was $2.2 Billion, driven by the prices of oil and gas as well as production. This marks a decrease of around 15 percent year over year.
  • Income: Net income was recorded to be $55 million for the first three months of 2024. The previous year the net income for the same period was $620 million.
  • Profitability: Operating margins have been impacted by pricing volatility and operational expenses.
  • Cash Flow: The company generates cash from operations, but significant amounts are used for capital expenditures and debt service. The cash flow available for investments, buybacks, and shareholder distributions can vary with the company’s performance and its future strategy.
    • Debt and Leverage: APA has significant debt, which increased due to the Callon acquisition, with debt to capital ratios in the 20-40% range.
    • Capital Allocation: The company has announced a plan to pay down debt and buy back shares over a long term horizon, implying more value creation through buybacks than through growth projects, which in turn signals a mature, stable business model.
  • Liquidity: While cash holdings are adequate, they are not very high relative to its debt and operations, implying financial management might have to take tough decision should the energy market undergo another downward cycle.

Understandability: 3 / 5 While the company’s core business of oil and gas exploration and production is relatively straightforward, the complexity in evaluating its financials, coupled with the influence of global prices on profits, and the number of moving factors, brings it to a 3 in understandability.

Balance Sheet Health: 4 / 5 APA has a stable balance sheet, with sufficient liquidity. However, the company is also highly leveraged with debt, so it’s not without some risks, which puts it at a 4. Further, their reliance on commodity markets makes it so that their financial health is volatile, though recent restructuring of assets and debt has improved this outlook.

Note that as of 2023, over half of the company’s net tangible assets are in oil and gas properties that are not actively producing. This suggests there could be more production coming in the future. This is good for the long-term health of the company.

Risks to the Moat

  • Commodity Price Volatility: The biggest threat to APA’s moat is commodity prices. A drop in the prices of oil or gas would severely affect revenue and returns on capital, making the business much less valuable.
  • Technological Disruption: Newer technologies could make their current mode of operations less profitable.
  • Geopolitical Risks: APA’s international operations are exposed to a variety of geopolitical risks that could negatively impact production and profitability.
  • Regulatory Changes: Government regulations related to environment, safety, and taxation may impact costs and profitability.
  • Competition: Competition from competitors who produce and sell similar resources.
  • Debt Levels: The company’s increasing levels of debt, combined with potential changes in interest rates, is a serious concern that could impact financial health and the company’s ability to generate consistent profits.
  • Climate Change: Transition to renewable energies might reduce the value of traditional oil and gas resources, posing long term risk to the business.

Resilience: APA’s resilience to these risks varies depending on the specific area of exposure. For instance, long term contracts provide revenue guarantees, but at the same time limit the gains if prices go higher. Its diversification in geographies and its operational and technical capabilities to extract resources makes it more resilient than it would be otherwise. Having said this, the company is still subject to the industry wide market forces. Also, their use of derivatives to control the price of their commodities, and a willingness to pay down their debt implies long term value focus over just optimizing short term gains, which in turn suggests a good level of resilience.

In conclusion, while APA is trying to improve its long term outlook, a lot depends on the energy market prices. Overall, APA is a company that is very interesting but comes with its fair share of risk.