APA Corp: Egyptian Inflation Takes Attention Away From Advancing Appraisal in Suriname

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.

In a nutshell, the concern is that Egypt’s financial situation has deteriorated following the outbreak of the Ukraine war, leading to spiking inflation and repeated currency devaluations. Against that backdrop, investors are worried that APA can no longer repatriate its profits. These jitters were sparked by a large working capital build of $511 million in the first quarter in APA’s financials, which could hypothetically reflect spiraling accounts receivable. Management was able to account for most of the working capital increase, which was apparently primarily driven by settling payables rather than accruing receivables. Specifically, $300 million of the increase was attributed to accrued compensation, which is typical for the firm as it accrues deferred compensation liabilities through the year and unwinds them in the first quarter (the first quarter impact on working capital is usually only $100 million-$200 million, but the rise of APA’s stock in the past three years drove the payout higher this year). It did acknowledge that its Egypt receivable increased by $180 million in the period, whilst highlighting its strong partnership with the Egypt government (which we’d agree with, as the firm has operated without restriction or curtailment for 30 years, including through the Arab spring period).