APA Earnings: Beats Guidance on Volumes and Expenses, Lowers Budget, and Hints at Suriname FID

We’re raising our fair value estimate for APA 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.

The firm cruised past its own estimate for production, with adjusted volumes (excluding noncontrolling interests and tax gross-ups) coming in at 318 mboe/d. This compares with guidance of 312-314 mboe/d, with most of the outperformance coming from the U.S. and North Sea. The firm also kept costs well below guidance, with lease operating expenses, marketing, G&A, and depreciation all significantly lower than expected (though lower commodity prices will explain a portion of the positive surprise, and updated full-year guidance indicates these items will rebound from first quarter lows). The firm’s financial performance was much better than expected, with adjusted EBITDA and adjusted earnings per share beating FactSet consensus estimates by 8% and 16%, respectively. There was no change to the full-year outlook for production, but the capital budget was lowered by $100 million at the midpoint to account for less gas-directed drilling in the lower-price environment—this activity was not expected to affect volumes meaningfully until 2024.

In addition, the language in the release hints at a forthcoming FID for the development of the firm’s discoveries in Suriname. The resource estimate for the Sapakara and Krabdagu areas in Block 58 was unchanged from previous estimates, but the firm is apparently “progressing toward oil-hub development.” The vast potential for this as-yet unproven asset accounts for almost half of our enterprise value estimate for the firm, making APA’s stock a call option on Suriname success. Therefore, the first project sanction in the region could be a huge catalyst.