APA Corporation Q1 Earnings: Still A Buy Despite Disappointing Production Guidance?

seekingalpha05-11

APA Corporation missed the consensus for earnings per share in the first quarter of 2024 by 17%, mainly due to impairment charges in Alaska and Suriname.Most disappointing, however, was the ...

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I first covered APA stock in a (modestly) bullish note published here on Seeking Alpha in February. The stock has seen some nice short-term gains against the backdrop of higher oil prices, but is now back down to $30, which I had previously considered a good price to initiate a position. In this update, I'll share my thoughts on APA's first quarter results, particularly the updated production guidance following the closing of the Callon Petroleum Company (CPE) acquisition on April 1. Since I only started accumulating APA shares in February, I will also share whether I still think the stock is a buy now after the earnings report. How Were APA Corp.'s Q1 2024 Earnings And What To Make Of The Guidance Update  APA missed quarterly earnings per share (EPS) estimates by a whopping 17%, delivering $0.78 instead of $0.94. Revenue of $1.90 billion was in line with consensus, indicating \"business as usual\" - more on that later. The earnings miss was largely related to dry hole expenses in connection with two exploration wells in Alaska and the Bonboni 1 well in the northern part of Block 58 offshore Suriname. Sockeye 1 and Voodoo 1 in Alaska were plugged before reaching the targeted formations due to operational and weather-related issues, but CEO Christmann did not rule out the possibility of drilling new wells in these areas. Another exploration well in Alaska - King Street 1 (total depth 10,241 ft) - encountered high-quality oil at depths of 8,130 ft and 9,850 ft, and the company is now evaluating drilling more wells to determine the size of this discovery. In terms of total production (Figure 1), APA production increased by 0.5% year-over-year on an adjusted basis (taking into account production attributable to Egypt non-controlling interest and tax barrels). Compared to the previous quarter, production fell by 6.1%, primarily driven by significantly lower production of natural gas liquids (NGL) (-16.0%), but also to declines in oil and gas production. The lower NGL production volume was already announced in the press release on the results for the fourth quarter and full year 2023, while oil and gas volumes were expected to remain roughly flat year-over-year. Figure 1: APA Corp. (APA): Adjusted production of oil, natural gas liquids, and natural gas on a quarterly basis (own work, based on company filings) Overall, management previously expected total adjusted production of approximately 324 Mboe/d for 2024, a decrease of approximately 6 Mboe/d compared to total adjusted production for 2023, as noted on slide 8 of the earnings presentation. Including the contribution from Callon (consolidated since Q2 start), management now expects total adjusted production of 392 - 394 Mboe/d for 2024. This is arguably a rather weak guidance, considering that Callon produced 103 Mboe/d as a standalone company in 2023. In terms of average crude oil production in 2023, Callon produced an average of 60 Mboe/d, which is around 76% of APA's average production of 78.9 Mboe/d. Now, one could argue that Callon management has ramped up production in anticipation of a sale of the company, but a look at crude oil production over the last three years confirms that Callon typically produces 22-23 million barrels per year - that's between 76% (2023) and 90% (2022) of APA's annual crude oil production (Figure 2). Figure 2: APA Corp. (APA) vs. Callon Petroleum Co. (CPE): Comparison of annual U.S. crude oil production (own work, based on company filings) I already pointed out the comparatively low quality of Callon's assets in my previous article, and the significantly lower production of the merged entities indicates that underperforming rigs will be decommissioned at the end of their contract term in 2024. Both Callon and APA have significant operating leases expiring in 2024 (Figure 3). The merged entity currently operates 11 rigs in the Permian, but management expects to operate an average of 10 rigs for the remainder of the year. While the lower than originally expected production is of course disappointing, APA management was quite upbeat on the earnings call about additional cost synergies, currently estimated at $75 million on top of the previously expected $150 million. Most of the cost savings are expected to be realized by the end of the year. Figure 3: APA Corp. (APA) vs. Callon Petroleum Co. (CPE): Comparison of operating lease maturities (own work, based on company filings) In addition to the changes in the number of rigs operated in the Permian, a small part of the now lower than previously expected adjusted total production is due to the lower production in Egypt as a result of the renegotiation of the production sharing contract (now 64 vs. 66 MBoe/d previously, excluding non-controlling interest and tax barrels). The production guidance for the North Sea segment was left unchanged at 35 - 37 Mboe/d despite slightly lower than expected production in Q1. Hence, and due to the (previously announced) maintenance work for Q2 and Q3 and the age of the facilities, I believe it is possible that full-year North Sea production could fall short of expectations. As I noted in my last article, APA has assets in the North Sea that are worthwhile in principle, but has stopped drilling activities due to the U.K. Energy Profits Levy (\"windfall tax\") that was legislated for in July 2022. I firmly believe that such a - in my view disproportionate - tax burden will hamper exploration and production activity and thereby jeopardize the country's long-term energy security and reliability. I therefore regard such Draconian measures as temporary and expect APA's drilling program in the North Sea to resume eventually. Finally, as is well known, APA's investment case is significantly dependent on the discoveries in the southern part of Block 58 offshore Suriname. Since my last note, there has been no news of note from APA Corp. and management was also quite silent during the Q1 conference call. However, CEO Christmann still expects the final investment decision (FID) to be made in 2024, and remains confident. TotalEnergies SE (TTE, OTCPK:TTFNF) management noted that it plans to order project-related long lead time equipment in May, which could point to a positive outcome, and of course, also confirmed that it expects to make the FID before the end of the year. Personally, I remain constructive on the Suriname discovery and appreciate the comparatively low risk to APA due to the favorable sharing of appraisal and development costs with TotalEnergies. However, the lack of insider buying at APA leaves a bit of a bland aftertaste. This is one reason why I keep APA stock a small position in my portfolio. Conclusion – Is APA Stock Still Worth Buying After Q1 Earnings? APA Corp. reported mixed Q1 2024 results last Wednesday, with impairment charges related to two dry holes in Alaska and one in the northern part of Block 58 offshore Suriname mainly responsible for missing EPS consensus by a wide margin. Personally, I looked past these charges as a cost of doing business but was rather disappointed with the updated 2024 production guidance as Callon is now fully consolidated. Management expects that, on average, only 10 rigs will be operated in the U.S. for the remainder of 2024 and that total production will only be between 392 and 394 Mboe/d. There is a discrepancy of approximately -8% between the current guidance and the previous standalone production guidance of 324 Mboe/d plus Callon's average 2023 production of 103 Mboe/d. The lower expected production in Egypt has also contributed to the softer guidance, but I would argue that a difference of 2 Mboe/d is not worth a deeper discussion. However, the cost synergies related to the merger with Callon, which are now expected to be 50% higher than previously stated and expected to be fully realized in 2024, were a positive point in this otherwise rather disappointing earnings report. APA's management did not provide an in-depth update on the progress of the Block 58 Suriname front-end engineering design study, but remains optimistic about the FID, which is still expected to be made before the end of the year. TotalEnergies' Q1 report also contained no newsworthy of discussion in this context, apart from a confirmation of the FID decision before year-end and ordering of project-related long lead time equipment in May. From a valuation perspective, and given the flat share price since my last note, I still consider APA shares at $30 to be favorably valued - despite the soft consolidated production guidance (Callon was very cheap, despite the somewhat low asset quality). However, investors should be aware that the price of APA stock would likely fall significantly in the event of a negative FID in Suriname - despite the fact that the valuation is already quite favorable in terms of proved reserves and production rates (see my last article). Clearly, the bottom of the last energy cycle is well behind us and the market is increasingly pricing in a \"higher-for-longer\" scenario in terms of oil prices. APA shares have not really benefited from this bullish trend and I believe this is largely due to high uncertainty (FID in Suriname, lack of insider buying, prospects for drilling in the North Sea) and a somewhat risky portfolio component (Egypt). Theoretically, APA could be a takeover candidate and discussions in this context could be a reason for the lack of insider transactions. However, with an enterprise value to market capitalization ratio of 1.44, net debt still at $5.1 billion and certainly not a great asset base, I would not overestimate the likelihood of such an outcome. Taken together, I continue to consider APA shares a modest \"buy\", but the risks should not be underestimated. Investors in APA - as with all smaller E&P companies that have important decisions ahead of them - must be able to withstand considerable volatility.  Thank you very much for reading my latest article. Whether you agree or disagree with my conclusions, I always welcome your opinion and feedback in the comments below. And if there's anything I should improve or expand on in future articles, drop me a line as well. As always, please consider this article only as a first step in your own due diligence.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.5","shortVersion":"4.22.5","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2434640768"}