APA Corp (APA) Valuation Update - April 9

[dan_s]

I spent the morning reviewing my forecast/valuation model for APA and the initial profile that was drafted by Nataly, one of our three super smart SMU graduates. She always does a great job.

APA is replacing Range Resources (RRC) in the Sweet 16. Nothing is wrong with RRC other than it is now trading a 14% premium to my valuation.

APA closed the merger with Callon Petroleum (CPE) on April 1st. They have already restructured Callon's debt at a lower interest rate and they have helped Callon improve their well results in the Delaware Basin. Today APA's production is over 500,000 Boepd with a mix of approximately 51.5% crude oil, 31% natural gas and 17.5% NGLs. Q2 revenues should exceed $2.3 billion.

The merger was an all-stock transaction that is immediately accretive to operating and free cash flow.

Rising oil prices combined with improving well results will make the merger a great move for APA and for those of you that held on to your CPE stock which was exchanged for APA stock last week. In addition to stock in a larger more valuable company, APA pays a decent dividend of $0.25/quarter for annualized yield of ~2.9%. I expect APA to increase dividends and continue to fund their aggressive stock buyback.

At the time of this post APA was trading at $34.68. My current valuation is $50.00, which is based on 4X annualized operating cash flow per share. If APA's Q1 and Q2 results confirm my forecast, this large-cap deserves to trade at a much higher multiple. It holds a lot of high-quality Running Room in the Permian Basin.

TipRanks: "In the last 3 months, 16 ranked analysts set 12-month price targets for APA. The average price target among the analysts is $39.13. The 16 price targets range from $30 to $53."

Here is how my 2024 forecast compares to the TipRanks' consensus forecast. Keep in mind that TipRanks' numbers include six analysts' forecasts that are dated before March when oil price forecasts were much lower than they are today.

TipRanks' forecast / My forecast for 2024
Revenues: $9,000 million / $9,125 million
Net Income: $1,613 million ($4.30/share) / $1,916 million ($5.11/Share) < 375 million shares outstanding
Operating Cash Flow: $4,519 million ($12.05/share) / $4,416 million ($12.31/share)

APA currently plans to use 60% of free cash flow to pay dividends and buyback stock. < Based on my forecast, APA should generate close to $1.5 billion of free cash flow this year.

This one will take a few months to play out for us. APA's stand alone Q1 results should beat the current First Call EPS forecast of $0.77 and they should provide more detailed guidance for the remainder of 2024 when they release Q1 results early in May. If WTI does average $85/bbl in Q2, their Q2 results should be very good.

My updated forecast model for APA will be posted to the EPG website later today.

The profile will be emailed to all members tomorrow morning.

[Fraser921]

They just got a shout out on CNBC Oakmark funds value investor

[knusser58]

Hi Dan,
can you comment on the new combined Balance Sheet of APA+CPE.
It looks a lot better in leverage terms.
This fact alone should improve the valuation. How much?
Regards,
Klaus

[dan_s]

All stock deals do improve the balance sheet ratios. My $50 valuation of APA is based on just 4X annualized operating cash flow.

With a strong balance sheet, over 500,000 Boepd of production (~70% liquids) and lots of high-quality "Running Room", APA deserves a much higher valuation multiple. If their Q1 results and updated guidance confirm my forecast model assumptions, I will be raising my valuation.

[knusser58]

Thank you Dan