Suriname Development And Cost Savings To Improve Production Outlook

Key Takeaways

• Strategic reshaping and investments in Egypt and Suriname could significantly boost future revenue, production, and earnings.
  
• Cost reduction and asset integration efforts aim to enhance capital efficiency, net margins, and free cash flow.
  
• The company faces risk from heavy reliance on the Permian Basin and Egypt, while ambitious cost reductions and shareholder returns could constrain growth and operational flexibility.

Catalysts

An independent energy company, explores for, develops, and produces natural gas, crude oil, and natural gas liquids.

• APA's strategic reshaping, including asset acquisitions and sales in the Permian Basin and a new gas price agreement in Egypt, is expected to enhance revenue and sustainable production, which could increase future earnings.
  
• The final investment decision on the GranMorgu project in Suriname, with anticipated production of 220,000 barrels of oil per day by 2028, is a significant forward-looking catalyst for revenue growth and earnings.
  
• Cost reduction initiatives targeting $350 million in annualized savings by year-end 2027 serve to improve net margins and expand free cash flow over the next several years.
  
• Continued investment in expanding gas production in Egypt and efficiency improvements in the Permian Basin are expected to stabilize and possibly increase production, impacting revenue and net margins positively.
  
• The integration of Callon's assets and anticipated well cost reductions are expected to reduce breakeven prices, increasing capital efficiency and positively impacting net margins and future earnings.

APA Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming APA's revenue will decrease by 3.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.5% today to 13.1% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $3.3) by about March 2028, up from $804.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.7 billion in earnings, and the most bearish expecting $637 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.2x on those 2028 earnings, up from 9.1x today. This future PE is lower than the current PE for the US Oil and Gas industry at 12.7x.
• Analysts expect the number of shares outstanding to decline by 1.92% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.18%, as per the Simply Wall St company report.

APA Future Earnings Per Share Growth

Risks

• The company's heavy reliance on the Permian Basin for over 75% of its adjusted production could expose it to risks associated with regional regulatory changes or shifts in production dynamics, potentially impacting its revenue and earnings.
  
• A change in the geopolitical or economic landscape in Egypt could affect operations, especially given the reliance on a new gas price agreement that impacts future drilling opportunities and revenue predictability.
  
• The significant cost reduction initiatives, aiming for $350 million in savings by 2027, might face execution risks, potentially affecting net margins if targeted efficiencies are not realized.
  
• The successful development of the Suriname project is critical for future growth, but any delays or cost overruns before the expected production in 2028 could hinder free cash flow and future earnings.
  
• The company’s strategy of shareholder returns through buybacks and dividends, while beneficial, might limit its ability to allocate sufficient capital for unforeseen operational needs or emerging growth opportunities, potentially impacting future net margins and earnings.

Valuation

• The analysts have a consensus price target of $28.447 for APA based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $40.0, and the most bearish reporting a price target of just $20.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $8.7 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 11.2x, assuming you use a discount rate of 9.2%.
• Given the current share price of $20.17, the analyst price target of $28.45 is 29.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.