APA Corp.: 10.6% Combined Yield
Summary
- APA Corporation has good and bad aspects that investors need to think about.
- The negative consideration is its proven reserves. Inventory levels are on the low side.
- The positive is that APA has a 10.6% combined yield going forward.
- Since the stock is priced around 5x next year's free cash flow, the risk reward here is attractive.
- I also discuss the interest rate on its debt, and how to think about this.
- Looking for more investing ideas like this one? Get them exclusively at Deep Value Returns. Learn More »
undefined undefined/iStock via Getty Images
Investment Thesis
APA Corporation (NASDAQ:APA) has oil and gas properties in the United States, Egypt, and the United Kingdom, plus exploration offshore Suriname. Approximately 68% of its production is based in the US.
Like all oil and gas companies, there are some positive and negative considerations to keep in mind.
Even if overall, I'm compelled by its cheap valuation, of 5x next year's free cash flows. I'll first discuss the one blemish in the investment thesis. APA's low proven reserves.
Next, I'll turn our focus to discussing the positive considerations that readers should keep in mind. More specifically, APA's 10.6% combined total return.
So, let's get to it.
One Negative Aspect
The one area where APA doesn't fare well is in its proven reserves.
APA 2021 10-K
By my rough estimates, Egypt has no more than 5 years' worth of proven reserves. While the US has roughly 7 years' worth. However, keep in mind that this data comes from the 10-K. That means this data is 1 year old.
It doesn't mean that APA can't acquire more properties. APA obviously will acquire more proven wells. The problem is the associated cost to buy up those wells.
On yet the other side of the argument, valuations presently are still only around 3x to 4x EBITDAX, so this may not be a significant problem.
For example, APA acquired assets in Texas Delaware Basin. For approximately 8 years' worth of proven inventory, APA deployed approximately $600 million.
Next, we'll discuss APA's capital allocation policy.
Capital Allocation Strategy, 10.6% Combined Return
Before discussing APA's capital allocation, let's first turn to discuss APA's financial position.
APA Q3 2022
APA holds approximately $5.3 billion of debt. The debt carries an average interest of approximately 5.3% and is extended out over a long period of time.
APA Q3 2022
There are no significant debt trenches until 2026. And even then, given that APA just reported $606 million of free cash flow over a 90-day period, I don't believe that $211 million worth of debt 4 years out is a meaningful problem.
Put simply, the debt does have to be repaid, but there's no further sudden urge to bring down its debt.
Next, we'll discuss its capital allocation program.
APA Q3 2022
What you see highlighted above is APA's capital allocation strategy disclosed. APA seeks to return 60% of its free cash flows. This means that going forward, APA's capital return strategy will be approximately 10.6%.
APA Stock Valuation - 5x Next Year's Free Cash Flow
APA believes that at current stripe prices, APA's 2023 free cash flows will be stronger than in 2022.
For 2022, a very rough estimate for free cash flow points to $2.7 billion. Does this mean that $3 billion of free cash flow is possible in 2023?
In this event, APA is priced at 5x next year's free cash flows. Very much in a similar ballpark to other small and medium-cap oil and gas companies.
The Bottom Line
The one-line summary is this, APA Corporation is well placed to benefit from higher oil prices.
The longer summary notes that there are some negative considerations to be mindful of, namely, relatively low inventory levels.
However, this is countered by APA's combined capital return policy reaching 10.6% of its market cap. Hence, not only do investors get a double-digit return, but at approximately 5x free cash flow the stock is cheap too.
Indeed, if APA's debt is rated at approximately 5.3%, while its free cash flow yields close to 19%, it's possible that APA could even increase its capital return program further.
For example, by my estimates, its recently increased dividend of $1 per share annualized will come to approximately $310 million as a run rate.
What this means is that as APA repurchases shares, its company-wide dividend payout can trend lower, even as the dividend per share remains high and could in time even go higher.
Strong Investment Potential
My Marketplace highlights a portfolio of undervalued investment opportunities - stocks with rapid growth potential, driven by top quality management, while these stocks are cheaply valued.
I follow countless companies and select for you the most attractive investments. I do all the work of picking the most attractive stocks.
Investing Made EASY
As an experienced professional, I highlight the best stocks to grow your savings: stocks that deliver strong gains.
- Deep Value Returns' Marketplace continues to rapidly grow.
- Check out members' reviews.
- High-quality, actionable insightful stock picks.
- The place where value is everything.
This article was written by
DEEP VALUE RETURNS: The only Marketplace with real performance. No gimmicks. I provide a hand-holding service. Plus regular stock updates.
We are all working together to compound returns.
WARNING: Any stocks that you feel like buying after discussions with me are your responsibility.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.