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Proprietary Data Insights Financial Pros Top Oil & Gas Exploration Stock Searches Last 30 Days
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What we’re watching
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With many of these companies reporting earnings soon, we wanted to review the best of the bunch.
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Stock Analysis |
APA Corp Gushes Profits Off Oil’s Rise |
Oil & Gas exploration companies live and die by the price of the respective commodities. One of the biggest names in the business, APA Corp (APA), formerly Apache, garnered a lot of attention recently as it approaches earnings on the 22nd. As the top search by financial pros for oil & gas exploration companies, it garnered 61% more searches than its closest competitor Northern Oil & Gas (NOG). Since many of these companies all report earnings soon, we wanted to review the best of the bunch. And after comparing the financials and operations of these companies, APA corp came out on top.
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APA Corp’s Business Oil & Gas Exploration is a dirty business, but also a simple one. You find land with the goods in the ground, set up operations, and yank those bad boys out. APA Corp runs operations in the U.S, Egypt, and North Sea of the United Kingdom. It also holds acreage near Suriname and other international locations. In the U.S., the company primarily operates in the Permian Basin in Texas. In Egypt, APA runs 11 rigs with plans to double the average count and increase well completions by ~3x in 2022, increasing production by 13%-15%. APA runs a joint venture with Sinopec in Egypt which is ⅔ owned by APA and ⅓ owned by Sinopec. In Suriname, the company is currently exploring tracts of land with well appraisals and drilling prospects. Lastly, APA is involved in a midstream business through its publicly traded, pure-play Permian subsidiary called Altus Midstream Company, which operates APA’s gathering and processing assets in the region. Financials Like many oil & gas E&P companies, APA got slaughtered when the U.S. fracking market ushered in a domestic energy renaissance. Revenues tumbled from 2012 to 2016 by more than two-thirds. Operating income crashed from +$5.1 billion to -$25.9 billion in a few years. Luckily, operating cash flow remained positive even if free cash flow turned negative. Bankruptcies of wildcat drillers market the landscape for the next few years as supply and demand worked to achieve balance. APA was forced to raise cash and right-size operations.
While 2020 was a difficult year, 2021 has proved much more profitable. Gross profit for the first three quarters of 2021 totaled $3.613 billion compared to $2.727 for all of 2020 and $3.42 over the same period in 2019. Now, if you try to pull gross margins from different sources, you’ll get different answers. The expenses attributable to gross or operating line items isn’t clear. You can see the difference between the data set above and the one below. Our first data set shows gross margins declining while the second one says they’re increasing. And if you go to the company’s own statements it’s not exactly clear either. What we can tell is that the company reduced expenses across the board as a percentage of revenue with the exception of purchased oil and gas, which isn’t a surprise given the higher oil and gas prices throughout the year. In fact, realized energy prices for Q3 were 75%-130% higher than the year prior, though some of this was offset by derivative hedging. The point is, the company is earning more per barrel without too many inflationary pressures working against them. Lastly, we want to highlight the current long-term debt of $7.159 billion on the balance sheet. That’s a significant drop from the $8.7 billion from the year prior and $8.1 billion from 2019. This gives APA more room to expand operations or acquisitions as needed. Valuation As we turn to the valuation metrics, we wanted to bring together our thesis and compare APA to the other E&P companies in the top searches. However, we want to include the forward non-GAAP P/E ratios and price to cash flow ratios missing from the chart above:
Through incorporating this information, we can see that APA isn’t always the cheapest when compared to Northern Oil & Gas (NOG) or EOG Resources (EOG). However, it comes pretty darn close and has a better price-to-sales ratio than both. Now we’re going to skip over growth because each of these companies has taken a different approach to right-sizing itself in the industry over the last decade. And they all suffered from 2020 while scoring big in 2021. We’ll just make one comment here. APA has one of the lowest forecasted revenue growth at 7.01% compared to rates of 28.82% for NOG or 24.38% for Devon Energy (DVN). But, we’re not as bullish on NOG because it doesn’t actually operate any of its own wells. It’s more of an investment vehicle for oil and gas lands, which is fine for a long term. However, we’re focused on the medium term. And in that respect, APA is the our top choice. Our Opinion – 7/10 APA Corp is the best run E&P company in the space with a heavy focus on U.S. production. That said, we’d want to see a pullback in shares after a marvelous run to give us some margin of safety. Ideally, we’d be interested in the stock below $25 per share. |
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