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During the darkest days of the pandemic, at least on the stock market, I concluded that shares of APA Corporation (NASDAQ:APA), perhaps still better known as Apache, were just a gamble in March 2020. With demand for oil plunging, OPEC not willing to cut supply, prices came under a great deal of pressure as I believed that equity represented just a call option at the time on the survival of the company.
Some Perspective
Hard to believe, yet APA was a $150 stock ahead of the 2008 financial crisis, and while the shale revolution inspired some enthusiasm around 2015, shares kept falling and traded at around the $30 mark. During the pandemic in March, shares fell to just $3 as investors were fearful about the impact of the pending economic crisis and collapse in oil prices.
If we look at APA at the time, the company produced 430,000 barrels of oil-equivalent per day for the final quarter of 2019, yet the profitability of the operations and debt were at the forefront of the minds of investors. This includes a net debt load of $8.3 billion, including the midstream operations, as the company lost $3.5 billion in 2019. That was a bit shortsighted as well, as the loss included a $3 billion impairment charge, as adjusted for this and some other items, the company was essentially breaking even at $60 per barrel in terms of oil, with natural gas prices trading at $2 and LNG priced at $15.
With oil prices down to the $20 mark at the moment of writing in March 2020, only to turn negative in the weeks following, one should have expected a huge haircut to the $6.3 billion in product revenues posted in 2019, making that billions of realistic operating losses should be expected.
Even as deprecation charges of $2.7 billion would exceed anticipated capital spending by more than $1.5 billion in 2020, this cash flow was not enough to cover the losses, as production levels would be impaired as well given the dramatic cuts in capital spending.
With 377 million shares trading at $5, the $2 billion equity valuation indicated that investors were simply considering equity as a call option, during these times of uncertainty, certainly as OPEC was not willing to cut production. The only good news is that few bonds were due before 2023, giving equity holders some time, as North American producers were even contemplating production cuts, unprecedented thought of course given the economic model of the country. Hence, shares were just a gamble and with implied volatility way beyond 100%, the long-dated calls were a bit too rich for me, albeit with the benefit of hindsight, they were a big investment opportunity.
A Recovery
As oil prices recovered to $15 by year-end 2020, to $25 by 2021, shares even hit a high of $50 earlier this year as global economies were recovering, and the inflation debate came at the forefront of the discussion, especially following the Ukraine-Russian war. After peaking at $50 in early June, shares have lost quite some ground, now down to $32 per share.
In February 2021, APA posted its 2020 results with production posted at 365,000 barrels of oil-equivalent per day. Relatively in line with my projection in March, full year sales fell from $6.5 billion to $4.4 billion, largely due to lower prices as the company posted a large operating loss of $4.8 billion following a $4.5 billion impairment charge. Adjusted for the charge, losses were pretty modest with average realization down to $40 per barrel of oil, as net debt was pretty flat at round $8.5 billion while no dilution was incurred.
In February this year APA posted its 2021 results, with production down to 331,000 barrels of oil-equivalent per day by the fourth quarter, the impact of reduced capital spending since the outset of the pandemic. While production is falling, rapidly increasing prices made that product revenues recovered to $8.0 billion, including $1.5 billion in purchased oil & gas. The company posted operating profits of $1.9 billion, net earnings of a billion, at around $2.50 per share. Note that the fourth quarter results were far stronger with earnings trending at a dollar per quarter already as net debt was down to $7.1 billion.
Despite the lower capital spending, APA is no longer net divesting in the business. Following some large impairment charges, depreciation charges are down to $1.4 billion a year, while the company is budgeting $1.6 billion in capital spending in 2022. These 2021 results were based on realised oil prices of $69 per barrel, $4 for a thousand cubic feet in terms of natural gas and $28 for LNG, although prices have been heading higher towards the end of the year.
2022 – Solid So Far
In March, APA closed two transactions. This includes the sale of Delaware Basin mineral package in a deal fetching $805 million in proceeds, with production reported at 7,000 barrels of oil-equivalent per day. The company furthermore sold 4 million shares of Kinetik (KNTK) in a transaction raising $224 million in proceeds. Kinetik is the merged operation between Altus Midstream and BCP Raptor which created Kinetik earlier this year, as APA combined received over a billion in proceeds from these two deals.
In May, APA posted first quarter results with production reported at 322,000 barrels of oil-equivalent per day, excluding the Egypt noncontrolling interest and tax barrels. The continued increase in prices made that APA generated $2.7 billion in product sales for the quarter, and excluding over a billion gain on divestments, operating earnings came in around a billion, with adjusted for that net earnings of nearly a billion working down to earnings around $2.50 per share, trending at $10 per share on an annual basis.
Despite the continued pressure on production numbers, it has been continued rising prices driving this growth, with oil prices averaging at $100 during the quarter, natural gas at $5 per thousand cubic feet, and NGL prices up to $38, as the cash flow generation made that net debt is down to $5.6 billion. Despite the rapidly increasing prices, APA only raised the full year capital spending guidance to $1.7 billion, hardly a big increase, certainly if we account for inflationary pressures.
Tricky Times
While the recent pullback looks enticing, these are interesting times. Oil is trading at $98 a barrel, in line with average realizations in the first quarter, a quarter in which earnings trend around $4 per share. More so, second quarter results should be stronger as oil prices have been trading higher in recent weeks, as notably natural gas and NGL have been trading strong, certainly as Russia is threatening and cutting back on supply (to Europe).
Cash flow conversion is very strong here, yet the company has been employing some cash flows as well, amidst modestly rising capital spending budgets, as the company has started to pay dividends and engaged in some meaningful share buybacks as well, limiting the reduction in net debt.
APA is furthermore providing some other wildcards as well following the large discovery in the Alpine High of recent years, for which a lot of infrastructure has been invested in, while a large part of the investments have been written down. Furthermore, the Block 58 assets in Suriname have real potential as well.
In the meantime, we are dealing with a potential slowdown in the economic growth, continued rise of ESG practices, increasing capital spending budgets, although the industry has been much more disciplined with regard to capital spending, which is a big positive. Given all these thoughts and developments, I feel a bit upbeat here, yet find APA too volatile and not having a decent enough capital allocation track record to really consider a position (in size).
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