U.S. energy explorer APA Corporation’s APA stock has dropped by nearly a third since the beginning of 2024, significantly underperforming the sector. The company has also fared worse than its peers like Ovintiv OVV and Chord Energy CHRD. This decline, puzzling in light of the strong production outlook and balance sheet stability, primarily reflects APA’s exposure to fluctuating oil and gas prices.
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This article will dive into the reasons behind this plunge and whether it presents an opportunity for investors.
APA’s Vulnerability to Oil Price Volatility
APA faces significant risk from fluctuating oil prices, which directly impact its cash flow and profitability. With Brent crude recently dipping below $70 compared to the $82.89 used in the company’s production guidance, earnings are at risk if prices remain suppressed. Additionally, China’s ongoing economic struggles could further weaken global oil demand, putting downward pressure on prices. Sustained volatility, combined with potential OPEC+ production increases, threatens to strain APA's revenues and margins in the coming quarters, creating a challenging outlook for the company.
Analysts Take a Bearish Stance on APA’s Earnings Outlook
The Houston, TX-based upstream player has lately been on the receiving end of negative earnings estimate revisions. Looking at the current quarter, analysts have slashed estimates by 17.5% in the past 60 days. The Q3 Zacks Consensus Estimate is now $1.04 per share, reflecting negative growth of 21.8% relative to the prior year. In addition, the company is in the Zacks Oil and Gas - Exploration and Production - United States industry, which is currently ranked in the bottom 15% of all Zacks industries.
While the current market conditions cannot be ignored, APA has strong long-term potential.
Suriname Project: Growth Catalyst for APA
APA’s Suriname portfolio is particularly exciting, where it continues to achieve significant drilling success. The company has partnered with TotalEnergies TTE in this region, which lies off the north coast of South America. Over time, Suriname is expected to become one of APA’s major assets with significant cash flow potential. With TotalEnergies covering a significant portion of capital expenditures, APA’s financial burden is limited to 37.5% of future costs after initial investments. This advantageous arrangement supports APA’s development efforts in Block 58, with the first oil projected for 2028.
APA’s Strategic Divestments to Reduce Debt
APA has divested two non-core assets in the Permian Basin, expected to generate $1.65 billion in gross proceeds. This will reduce the company’s net debt to $5 billion, strengthening its balance sheet. The combined production loss from these sales amounts to less than 10%, while the company can redirect resources to more profitable ventures while optimizing its balance sheet. This provides APA with the capital to navigate oil price volatility and pursue higher-margin opportunities.
Callon Acquisition Expands APA’s Production Capacity
The recent buyout of Callon Petroleum, a smaller rival, further enhances APA Corporation's scale, particularly in the Permian Basin. APA reported a robust second quarter, with U.S. oil production reaching 139,500 barrels per day, a 67% increase from the first quarter of 2024, driven by the successful integration of Callon. APA has also enhanced cost efficiency through the Callon acquisition. The company now anticipates $250 million in annual cost synergies, up from the initial estimate of $225 million.
Final Thoughts: Hold APA Stock for Now
While caution is needed, given its volatility and rapid price swings, a long-term vision could reward APA investors. The company appears to be treading in the middle of the road, and investors could be better off if they trade with caution. Agreed, this might not be the ideal time to invest in the upstream operator despite the recent dip in share prices, but those who already own this Zacks Rank #3 (Hold) stock may stay invested.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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See This Stock Now for Free >>APA Corporation (APA) : Free Stock Analysis Report
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