At the start of the year, APA Corporation (NASDAQ:APA) was joining the energy consolidation wave as it announced the purchase of Callon Petroleum in a $4.5 billion all-stock deal.
The transaction added scale and balance in the Permian Basin, while growing production by some 100,000 barrels of oil-equivalent per day. Following the deal having closed, APA announced some substantial non-core asset divestment here, at prices which look pretty reasonable.
Nonetheless, shares kept moving lower amidst still solid earnings power in a lower energy price environment. Frankly, I am puzzled to see the shares perform so poorly, making a small speculative position likely warranted.
Some Perspective
APA, formerly known as Apache, acquired Callon Petroleum at the start of the year in a deal valued at $4.5 billion, at least initially. The rationale was driven by greater scale, synergies between operations, and to bolster the share of domestic production.
The deal was quite substantial, with Callon being valued at around a fifth of the prevailing enterprise valuation of APA. Despite the valid and sound reasons for such a deal, shares fell some 6%, which frankly was quite a big reaction given the size of the transaction.
The deal ended the publicly traded life for investors in Callon, which have been on a roller coaster ride over the past decades. The same more or less applied to investors in APA, whose shares traded at highs above the $100 mark in 2008, and during the shale oil peak in 2014.
Following the dismal environment during the pandemic, APA enjoyed a big recovery in 2021, with sales seen around $8 billion, on which substantial operating profits near $2 billion were reported. This was desperately needed, given a $7 billion net debt load, as 2022 started off well for the business amidst the outbreak of the war between Russia and Ukraine, sending energy prices sharply higher in the process.
With energy prices coming down following the initial scare reaction in response to the war, this caused shares of APA to fall and trade in a range between $30 and $45 per share. Through 2023, earnings power was still trending at $4-5 per share, even in a bit more modest oil price environment. Moreover, the company announced a collaboration with TotaEnergies (TTE) to work on its FPSO project in Suriname.
While there were clear positives in a deal with Callon, it raised some question marks as to why investors in APA reacted negative to the deal. One particular reason could be that investors had to share the potential upside from APA’s potential considerable assets in Alpine and Suriname, with new investors owning 20% of the business.
Coming Down
Since the start of the year, shares of the business have come down by a third, creating a rather disappointing performance for investors. In February, the company posted 2023 results, largely in line with expectations, as it reported adjusted profits of $4.53 per share on $8.2 billion in sales on rather flattish production of 366,000 barrels of oil-equivalent per day, excluding non-controlling interests.
Always of interest, capital spending was earmarked to come in around $1.9-$2.0 billion, looking relatively manageable in relation to a $1.5 billion depreciation expense in 2023.
On the first day of April, APA already closed on the deal with Callon Petroleum and a month later the company posted first quarter results. This was ahead of the Callon deal closing, but the company subsequently upped the full-year capital spending budget to $2.7 billion, which, of course, is no surprise.
In May, the company announced the sale of two properties in the Midland Basin. Production of these properties totaled 13,000 barrels of oil-equivalent per day in the first quarter, of which just about a third is oil. With 261,000 net acres being sold, the company aimed to generate proceeds of about $700 million, with deal closing expected in the third quarter.
In July, second quarter results were reported, the first quarter in which Callon was owned. Reported revenues were up 41%, thanks to the purchase of Callon and higher realized prices, with the share count up more than 20% due to the shares issued in relation to the purchase of Callon. Production, excluding non-controlling interests, was up a quarter to nearly 429,000 barrels of oil-equivalent per day.
What Now?
In September, the company announced further asset divestment. The company has reached an agreement to sell further non-core properties in the Permian Basin in a deal valued at $950 million. Production of these assets comes in at 21,000 barrels of oil-equivalent per day, of which just over half is from oil.
With the two asset sales announced shedding a combined 34,000 barrels of oil-equivalent per day, equal to about 8% of second quarter production, the company will fetch about $1.65 billion in gross proceeds.
This compares to a current enterprise valuation of $15.6 billion. This is comprised out of 372 million shares trading at $24, which gives equity a $9 billion equity valuation, and a $6.6 billion net debt load. Gross proceeds from these asset sales come in at 10-11% of the prevailing valuation, while some 8% of production will leave the door, making the numbers look quite reasonable.
With earnings still trending around $4 per share here, and pro forma net debt down to about $5 billion, this is less than pro forma EBITDAX. This makes that leverage is no concern, and certainly not a concern which explains the overhang on the shares here. Frankly, I am puzzled behind the very soft pricing of the shares. Of course, current low oil prices (CL1:COM), sub $70 for WTI, are not helpful, but earnings power still trends at $4 per share in a mediocre piece environment.
Perhaps this is related to concerns about the Egypt assets, amidst rising political tensions over there, but frankly I am very surprised to see shares trade at current valuations. With a current dividend of $1.00 yielding exceeding 4%, investors get paid to wait for better days, with the wild cards, notably in Suriname, still in play.
This means that a speculative position in APA Corporation seems warranted, with the stress on the word of speculative, as the company has burned investors in the past on various occasions.
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