APA Earnings: Maintaining Guidance, Reduced Budget, and Evaluating Oil Hub Project in Suriname

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).

In Suriname, the partnership expects no further drilling this year, and that, coupled with the reduced emphasis on North Sea capital allocation, results in a slight decrease to the full-year budget ($50 million at the midpoint, or 3%). We are surprised by the pause in new drilling, as it deviates from the constant exploration frenzy we observed in ExxonMobil’s Stabroek Block over the border in Guyana (which we view as analogous to APA’s Block 58). This could mean operator Total has other capital priorities or that the block contains fewer attractive exploration activities. However, it is increasingly likely that at least one major development will occur in Suriname, as the firm is evaluating a potential oil hub project targeting the Sapakara and Krabdagu discoveries. These moving parts matter, as Suriname exploration already accounts for close to half of our fair value for APA, despite no projects yet being approved. We expect intense interest on the potential Suriname plan on the upcoming investor conference call.

We intend to incorporate these results shortly, but after this first look, our fair value and no-moat rating are unchanged.