Intensifying Renewables And Regulation Will Erode Oil Margins

Key Takeaways

• Shifting to renewables and advancing technology threaten APA's long-term revenue, relevance, and asset value as traditional energy demand declines.
  
• Political risk, regulation, and aging assets raise earnings volatility, increase costs, and create uncertainty about sustained profitability and production.
  
• Aggressive cost reductions, enhanced core assets, disciplined capital allocation, and operational efficiencies position APA for sustained growth, improved margins, and long-term financial strength.

Catalysts

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

• The accelerating global shift toward renewable energy sources is set to structurally erode long-term demand for oil and gas, putting sustained pressure on APA's future revenues as core hydrocarbon markets shrink and alternative energies become more economically attractive.
  
• Intensifying government regulation and growing potential for stricter carbon pricing or taxes are poised to drive up ongoing compliance and operational costs, which will pressure net margins and reduce profitability over time regardless of cost-efficiency initiatives.
  
• Large-scale international asset exposure-especially in Egypt and Suriname-makes APA highly vulnerable to political instability, foreign exchange risks, and unpredictable fiscal regimes, increasing the volatility and downside risk to both earnings and cash flow.
  
• The company's reliance on core legacy assets with maturing production profiles raises the likelihood of declining production volumes and lower future revenues as their productive life shortens, and ongoing capital spending on new exploration carries material risk without guaranteed returns.
  
• Rapid advances in technology are enabling increased energy efficiency and accelerating production of cost-competitive alternative energy sources, undermining the long-term relevance and competitive positioning of traditional oil and gas producers like APA and threatening net asset value and future cash generation.

APA Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on APA compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming APA's revenue will decrease by 9.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 11.0% today to 9.0% in 3 years time.
• The bearish analysts expect earnings to reach $651.6 million (and earnings per share of $1.92) by about August 2028, down 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 bearish analyst cohort, the company would need to trade at a PE ratio of 10.1x on those 2028 earnings, up from 6.6x 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 2.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.77%, as per the Simply Wall St company report.

APA Future Earnings Per Share Growth

Risks

• Significant and ongoing cost reduction initiatives-such as moving up the $350 million annual run-rate target for savings to 2026, substantial capital efficiency gains in the Permian and Egypt, and successful overhead reductions-are driving lower unit operating costs and could directly bolster both net margins and free cash flow, contradicting a bearish view on future profitability.
  
• Substantial increases and upgrades to APA's core acreage in Egypt, combined with a new, higher gas sales price agreement and strong recent and prospective exploration results, position the company for multi-year growth in both production volumes and free cash flow, which can positively impact top-line revenue and bottom-line earnings.
  
• Material progress in Suriname, with first oil on track for mid-2028 alongside a strong development partnership with Total, sets up APA for a potential step-change in production and cash flow in the latter half of the decade, providing long-term revenue and earnings visibility.
  
• The company's disciplined approach to capital allocation-marked by aggressive net debt reduction, continued returns of capital to shareholders, and a long-term net debt target of $3 billion-improves financial flexibility, reduces risk profile, and could support more sustainable earnings per share growth.
  
• Structural improvements in capital efficiency in the Permian, including reduced rig count, lower drilling and completions costs, and a move toward lower breakeven oil prices in the low $40 range per barrel, expand APA's inventory and provide resilience against commodity price volatility, all pointing toward greater earnings durability and asset value uplift over time.

Valuation

• The assumed bearish price target for APA is $16.0, which represents the lowest price target estimate amongst analysts. 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 more bearish 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 bearish analysts, you'd need to believe that by 2028, revenues will be $7.3 billion, earnings will come to $651.6 million, and it would be trading on a PE ratio of 10.1x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $20.01, the bearish analyst price target of $16.0 is 25.1% lower.
  
• 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.