Energy Prospectus

Wells Fargo Securities upgrades AR, EOG; downgrades APA

Upgrade:
EOG Resources (EOG $124.62) upgraded to overweight from equal weight; target increased to $150 from $147, 20% upside (FactSet average target ~$146; range $128-170)
Antero Resources (AR $31.58) upgraded to equal weight from underweight; target increased to $32 from $24, 1% upside (FactSet average target ~$37; range $28-46)

Downgrade:
APA Corp. (APA $21.94) downgraded to equal weight from overweight; target cut to $25 from $42, 14% upside (FactSet average target ~$32; range $23-49)
Analyst is Roger Read

Comments on APA from Paul Sankey after hanging out in Houston last week:

North Sea: chatter in Houston suggests APA’s auditor forced their recent writedown of the North Sea that we covered in a recent note calling for APA’s board to be changed.
APA has bounced recently on recent changes to its debt structure that had the market thinking “it is selling itself”. Below APA recent strength off a low base. Might be one to play if you like oil here into cold winter and OPEC discipline.

My updated forecast/valuation model for APA will be posted to the EPG website this afternoon.

> APA reported a Q3 loss because they decided to abandon their North Sea assets and focus on Suriname development, which has much more upside. They recorded a $1.1 billion non-cash impairment charge related to the North Sea. Abandonment of the North Sea assets are justified because of UK laws requiring big investment to reduce emissions. APA still holds the assets thru at least 2028. UK might back off the requirements if more upstream companies abandon their North Sea assets. APA might find a buyer.
> Q3 also included lower production due to voluntary curtailments related to low natural gas prices.
> Production will be up quarter-over-quarter in Q4. < Per APA "Q4 production will be the highest of the year".
> APA generated $1.118 billion of Adjusted Operating Cash Flow in Q3, their best quarter in over two years. Per my forecast, Adjusted Operating Cash Flow will be higher in Q4.
> APA generates a lot of free cash flow. It has no problem servicing its debt.

TipRanks: "In the last 3 months, 21 ranked analysts set 12-month price targets for APA. The average price target among the analysts is $29.00." The 21 price targets range from $23 to $48.

Recent selloff probably due to tax loss selling.

Higher natural gas and NGL prices in 2025 should offset $5/bbl lower oil prices in 2025.

Great analysis. The UK tax grab is an insane policy and hopefully they will get the Drill Baby Drill memo before the North Sea development is abandoned with minerals in the ground.as I recall APA has some sort of carry arrangement by Total such that no cash flow forthcoming from Suriname before 2028 if my memory is correct. The bottom like is APA is undervalued and with a deal friendly administration coming in a month, APA may be in play in 2025.

The financial numbers on APA are very good, but the Wall Street Gang continues to be negative on it. Note that Suriname has no impact on my valuation because I'm valuing each company on a multiple of 2024-2026 operating CFPS.

APA's share of Suriname definitely has a high market value if they decide to sell it. It appears to be a world class oil discovery and Total is a good partner.