Company Reports

No-moat APA missed on FactSet consensus earnings per share by 19% while delivering on sales. It also came below the midpoint of guidance on production, but only narrowly. The earnings miss was driven by the write-off of two exploration locations in Alaska and one in Suriname. Despite these disappointing results, management remained an active repurchaser of shares, which, we believe, is a prudent action after the close of the stock-heavy Callon acquisition in April. Our new fair value is $54, down slightly from $55, driven mainly by the removal of one rig in acquired acreage and changes to our near-term commodity price forecast.

APA is an upstream oil and natural gas producer with assets in the United States and overseas. The vast majority of its domestic production is derived from the Permian Basin. The firm's footprint of 500,000 net acres extends across several subbasins and mainly focuses on the same reservoirs that competitors are targeting (the Spraberry and Wolfcamp intervals in the Midland Basin and the Bone Spring and Wolfcamp formations in the Delaware). However, APA also has its own discovery in the Permian region, the Alpine High play. Alpine High wells are characterized by very strong initial production rates but with a much higher gas and natural gas liquids content than we'd expect elsewhere in the Permian. This gives the firm optionality: When natural gas prices compare favorably with oil prices, APA can allocate more capital to its gassier assets.

Each year, we reevaluate well productivity for our entire US shale coverage. For each covered company, we scrutinize third-party data on both a basin and region basis. As in prior years, our process prompted mostly modest valuation changes but left our moat, capital allocation, and uncertainty ratings unchanged.

APA is an upstream oil and natural gas producer with assets in the United States and overseas. The vast majority of its domestic production is derived from the Permian Basin. The firm's footprint of 500,000 net acres extends across several subbasins and mainly focuses on the same reservoirs that competitors are targeting (the Spraberry and Wolfcamp intervals in the Midland Basin and the Bone Spring and Wolfcamp formations in the Delaware). However, APA also has its own discovery in the Permian region, the Alpine High play. Alpine High wells are characterized by very strong initial production rates but with a much higher gas and natural gas liquids content than we'd expect elsewhere in the Permian. This gives the firm optionality: When natural gas prices compare favorably with oil prices, APA can allocate more capital to its gassier assets.

APA delivered strong results, with production volumes of 405 thousand barrels per day (mboe/d) in 2023 just below the midpoint of guidance. We continue to see APA as extremely undervalued, and after refreshing our near-term commodity price forecast, we are increasing our fair value estimate to $65 from $61. The strength of the portfolio including Suriname provides ample opportunity for organic growth in the next few years even as it constrains potential cash returns to shareholders.

APA is an upstream oil and natural gas producer with assets in the United States and overseas. The vast majority of its domestic production is derived from the Permian Basin. The firm's footprint of 500,000 net acres extends across several subbasins and mainly focuses on the same reservoirs that competitors are targeting (the Spraberry and Wolfcamp intervals in the Midland Basin and the Bone Spring and Wolfcamp formations in the Delaware). However, APA also has its own discovery in the Permian region, the Alpine High play. Alpine High wells are characterized by very strong initial production rates but with a much higher gas and natural gas liquids content than we'd expect elsewhere in the Permian. This gives the firm optionality: When natural gas prices compare favorably with oil prices, APA can allocate more capital to its gassier assets.

APA has agreed to acquire Callon Petroleum in an all-stock transaction worth $4.5 billion. Callon is a pure-play Permian producer with about 145,000 net acres and third-quarter 2023 production of about 102,000 barrels of oil equivalent per day (57% oil). On a pro forma basis, APA’s Permian production will increase about 48% to 311,000 boe/d. After incorporating Callon into our model, we’ve increased our APA fair value estimate to $61 per share from $56. We maintain our no-moat rating. Broadly, we think the Callon assets are very low-quality, but APA is acquiring the firm for an extremely cheap price, more than offsetting the value lost by offering its undervalued shares. While the deal is positive for our fair value estimate, we think the overall quality of APA’s portfolio has decreased.

APA is an upstream oil and natural gas producer with assets in the United States and overseas. The vast majority of its domestic production is derived from the Permian Basin. The firm's footprint of 500,000 net acres extends across several subbasins and mainly focuses on the same reservoirs that competitors are targeting (the Spraberry and Wolfcamp intervals in the Midland Basin and the Bone Spring and Wolfcamp formations in the Delaware). However, APA also has its own discovery in the Permian region, the Alpine High play. Alpine High wells are characterized by very strong initial production rates but with a much higher gas and natural gas liquids content than we'd expect elsewhere in the Permian. This gives the firm optionality: When natural gas prices compare favorably with oil prices, APA can allocate more capital to its gassier assets.

APA’s third-quarter results were slightly above our expectations, as production was 412,000 barrels of oil equivalent a day, a bit better than our 407,000 boe/d forecast. This was primarily attributable to strength in the Permian as well as the North Sea. After refreshing our model for the latest oil and gas prices as well as third-quarter results, our fair value estimate moves up to $56 per share from $55, while our no-moat rating is unchanged. We continue to think that Suriname's potential is mispriced by investors and that APA remains very undervalued.

APA is an upstream oil and natural gas producer with assets in the United States and overseas. The vast majority of its domestic production is derived from the Permian Basin. The firm's footprint of 500,000 net acres extends across several subbasins and mainly focuses on the same reservoirs that competitors are targeting (the Spraberry and Wolfcamp intervals in the Midland Basin and the Bone Spring and Wolfcamp formations in the Delaware). However, APA also has its own discovery in the Permian region, the Alpine High play. Alpine High wells are characterized by very strong initial production rates but with a much higher gas and natural gas liquids content than we'd expect elsewhere in the Permian. This gives the firm optionality: When natural gas prices compare favorably with oil prices, APA can allocate more capital to its gassier assets.

We have adjusted our valuation methodology for U.S. exploration and production companies. Our multistage DCF valuation incorporates five years of explicit projections for a fixed period, typically five years. Terminal values are derived by assuming firms eventually earn their cost of capital in perpetuity. This contrasts with our previous methodology, which modeled the harvesting of all company assets over a 30-year timeframe. The change brings our E&P valuations in line with Morningstar’s standard equity research methodology.

APA is an upstream oil and natural gas producer with assets in the United States and overseas. The vast majority of its domestic production is derived from the Permian Basin. The firm's footprint of 500,000 net acres extends across several subbasins and mainly focuses on the same reservoirs that competitors are targeting (the Spraberry and Wolfcamp intervals in the Midland Basin and the Bone Spring and Wolfcamp formations in the Delaware). However, APA also has its own discovery in the Permian region, the Alpine High play. Alpine High wells are characterized by very strong initial production rates but with a much higher gas and natural gas liquids content than we'd expect elsewhere in the Permian. This gives the firm optionality: When natural gas prices compare favorably with oil prices, APA can allocate more capital to its gassier assets.

APA delivered adjusted production (excluding minority interest volumes and tax gross-up barrels related to its production-sharing contract in Egypt) of 325 thousand barrels of oil equivalent per day. That compares with prior guidance of 323-325 mboe/d. Volumes were above guidance in the Permian Basin and Egypt and slightly below guidance in the North Sea, where activity has been deferred in recognition of a less supportive UK fiscal regime. There was no change to the full-year production outlook, but management added a concerning disclaimer to the guidance that it excludes the impact of Permian gas curtailments amid Waha price weakness (signaling to the market that such curtailments are potentially on the horizon).

We have refreshed our oil and gas producer valuations to incorporate the latest outlook for near-term commodity prices after a particularly volatile spell for both oil and gas futures during the recent reporting season. In addition, we have incorporated a slight reduction in well costs from 2024 across our upstream coverage, based on consistent commentary from both producers and oil service firms. The latter supplies equipment and services to the former to enable the drilling and completion of oil and gas wells. This includes oil-country-tubular goods, or OCTG, which is sensitive to prevailing steel prices, proppant (typically sand, for fracking), and labor. Supply and demand for these services also impacts pricing. As oil services firms typically operate under contract, there is a lag between inflationary pressures and the resulting impact on upstream spending levels, when contracts are renewed at current rates. And the same holds true in reverse. Producers mainly agree that inflation has cooled off, with several anticipating moderate price declines in the back half of 2023, and service providers are reporting that the markets for rigs, OCTG, and proppant have leveled off. The recent decline in commodity prices also supports a moderating environment for well costs, as these are historically correlated. And since the late 2022 peak, the North American rig count has declined by about 6%, signaling weakening demand for oil services in that region. Our upstream valuations now include a 5% decrease in well costs beginning in the first quarter of 2024.

APA is an upstream oil and natural gas producer with assets in the United States and overseas. The vast majority of its domestic production is derived from the Permian Basin. The firm's footprint of 500,000 net acres extends across several subbasins and mainly focuses on the same reservoirs that competitors are targeting (the Spraberry and Wolfcamp intervals in the Midland Basin and the Bone Spring and Wolfcamp formations in the Delaware). However, APA also has its own discovery in the Permian region, the Alpine High play. Alpine High wells are characterized by very strong initial production rates but with a much higher gas and natural gas liquids content than we'd expect elsewhere in the Permian. This gives the firm optionality: When natural gas prices compare favorably with oil prices, APA can allocate more capital to its gassier assets.

Our first take on APA Corp's second-quarter earnings was very positive, and we are maintaining that enthusiasm after scrutinizing the commentary on its conference call. However, the market went in a different direction. Questions on APA's ability to get cash out of the country, which accounts for the plurality of its cash flow, sparked a selloff. Shares were down 4% at the time of writing on May 4, and while both oil and upstream stocks were also in the red, APA was a clear underperformer. We think the issue is overblown, and separately we've corrected a modeling error understating the value of APA's Cheniere gas contract. Our updated fair value estimate is $46 per share.

APA is an upstream oil and natural gas producer with assets in the United States and overseas. The vast majority of its domestic production is derived from the Permian Basin. The firm's footprint of 500,000 net acres extends across several subbasins and mainly focuses on the same reservoirs that competitors are targeting (the Spraberry and Wolfcamp intervals in the Midland Basin and the Bone Spring and Wolfcamp formations in the Delaware). However, APA also has its own discovery in the Permian region, the Alpine High play. Alpine High wells are characterized by very strong initial production rates but with a much higher gas and natural gas liquids content than we'd expect elsewhere in the Permian. This gives the firm optionality: When natural gas prices compare favorably with oil prices, it can allocate more capital to its gassier assets.

We're raising our fair value estimate for APA to $43 per share from $39, after incorporating the firm's extremely strong first-quarter results. The increase makes APA stand out as the only upstream oil firm under coverage currently undervalued on a price/fair value basis. But the wide range of outcomes also justifies an increase in Morningstar Uncertainty Rating from High to Very High.

APA is an upstream oil and natural gas producer with assets in the United States and overseas. The vast majority of its domestic production is derived from the Permian Basin. The firm's footprint of 500,000 net acres extends across several subbasins and mainly focuses on the same reservoirs that competitors are targeting (the Spraberry and Wolfcamp intervals in the Midland Basin and the Bone Spring and Wolfcamp formations in the Delaware). However, APA also has its own discovery in the Permian region, the Alpine High play. Alpine High wells are characterized by very strong initial production rates but with a much higher gas and natural gas liquids content than we'd expect elsewhere in the Permian. This gives the firm optionality: When natural gas prices compare favorably with oil prices, it can allocate more capital to its gassier assets.

After incorporating APA's fourth-quarter financial and operating results, we are raising our fair value estimate to $39 per share from $35. That makes APA the only oil-weighted exploration and production firm we cover to trade a P/FVE ratio below 1, although the discount is razor-thin. And three fourths of our fair value estimate stems from the Suriname assets, where APA has several exploration successes but has yet to sanction a single development.