Emerging Markets And Low-Cost Assets Will Fuel Global Energy

Key Takeaways

• Exposure to underexplored international gas regions and new discoveries could fuel multi-year growth, boosting both revenue and earnings visibility well above current expectations.
  
• Superior cost optimization and a diversified, low-breakeven asset base position APA for higher margins and above-peer returns as global energy markets tighten.
  
• Long-term shifts to renewables, high North American asset decline rates, geopolitical risks, reserve challenges, and tightening ESG regulation collectively threaten APA's future earnings and stability.

Catalysts

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

• Analyst consensus expects Egypt's new gas price agreement and expanded acreage to modestly lift revenue and free cash flow, but with 35% acreage growth, APA is now exposed to massive underexplored gas-rich regions, creating the potential for a multi-year surge in high-margin international gas production, which could dramatically outpace consensus free cash flow and net income forecasts.
  
• While analysts broadly see step-change cost reductions enabling higher margins and capital efficiency, management guidance and recent execution indicate cost and overhead optimization could drive sustained operating costs well below peer averages, meaning both short
• and long-term net margins could move meaningfully higher than currently modeled.
  
• Structural tightness in global oil and gas markets-driven by surging demand in Asia and the ongoing energy transition-positions APA's expanding low-breakeven resource base in the Permian and Suriname to capture structurally higher commodity prices, driving outsized revenue and cash flow growth relative to U.S. shale-focused peers.
  
• The Alaska Sockeye discovery is significantly underappreciated; follow-up 3D seismic and multiple high-quality leads across extensive acreage may support a new growth engine for APA, with potential to add substantial reserves and multi-year oil production, materially boosting forward NAV and earnings visibility.
  
• Industry capital underinvestment and increasing barriers to entry will reward large-scale, low-cost operators; with a multi-basin footprint and diversified production (oil and gas, U.S. and international), APA's resilience positions it for outsized benefits from future market tightening, supporting superior long-term earnings growth and shareholder returns.

APA Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on APA compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming APA's revenue will decrease by 0.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 11.0% today to 23.5% in 3 years time.
• The bullish analysts expect earnings to reach $2.3 billion (and earnings per share of $7.16) by about August 2028, up from $1.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 5.9x on those 2028 earnings, down from 6.8x today. This future PE is lower than the current PE for the US Oil and Gas industry at 13.2x.
• Analysts expect the number of shares outstanding to decline by 3.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.74%, as per the Simply Wall St company report.

APA Future Earnings Per Share Growth

Risks

• The accelerating global shift toward renewable energy and electrification is likely to undermine long-term demand for oil and gas, which could pressure APA's future revenue streams and decrease net asset value over time.
  
• APA's significant focus on shale and North American assets, which have high decline rates and require continual reinvestment, may lead to increased capital expenditure requirements and squeeze free cash flow and net margins in the long run.
  
• Exposure to country-specific risks, particularly in Egypt and Suriname where APA is expanding operations, could result in production disruptions, unpredictable costs, or asset impairments, all of which threaten earnings stability and future revenues.
  
• Persistent reserve replacement challenges and the potential for asset write-downs, especially amidst the company's evolving Permian development strategy with tighter well spacing and lower per-well productivity, create risk for long-term production decline and future revenue uncertainty.
  
• Increasing global ESG regulation, potential carbon taxes, and stricter emission standards are likely to raise compliance costs, elevate liability risks, and make capital more expensive or harder to access, thereby negatively impacting APA's net margins and future earnings stability.

Valuation

• The assumed bullish price target for APA is $34.38, which represents two standard deviations above the consensus price target of $23.5. This valuation is based on what can be assumed as the expectations of APA's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $35.0, and the most bearish reporting a price target of just $16.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $10.0 billion, earnings will come to $2.3 billion, and it would be trading on a PE ratio of 5.9x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of $20.49, the bullish analyst price target of $34.38 is 40.4% 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.