APA Earnings: Permian Output Surges in Q4 but Will Dip in Early 2023

After incorporating APA’s APA 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.

Adjusted production, which excludes tax barrels and a consolidated noncontrolling interest, averaged 334 thousand barrels of oil equivalent per day in the period, compared with guidance of 328-332 mboe/d. The upside was attributed, vaguely, to strong performance in the Permian Basin, where fourth-quarter volumes were also above the top end of guidance at 218 mboe/d. However, management also pointed out the timing of its Permian well completion schedule can be lumpy, and first-quarter guidance shows a 19 mboe/d decline for the same asset, even though Permian output is expected to increase 10% over the coming year. Activity timing presumably shifted some volumes from the current quarter to the prior one, so we wouldn’t read too much into the big guidance beat. However, it is encouraging to see the firm back in growth mode, delivering exit-to-exit growth in 2022 for the first time in several years.

For 2023, the upstream budget is $2 billion-$2.1 billion, which is consistent with preliminary guidance after the prior quarter (the first-quarter lull in Permian activity was also telegraphed previously). That’s a year-on-year increase of about 20%, which is middle of the road for spending growth among peers in 2023 due to ongoing inflationary pressures. That should push firmwide volumes up 5%. Management expects oil production to increase further (10% year on year) as the recent collapse in U.S. natural gas prices makes the oil-weighted portions of the portfolio more attractive for capital allocation.