Is This Energy Stock On Nobody’s Radar?

Few investors realize that APA Corporation, formerly Apache Corporation, has quietly become a key player in one of the most sought-after regions for oil and gas exploration: Suriname.

This emerging hotspot may very well reset APA’s growth trajectory but it appears few investors have cottoned on to its promise.

APA Corporation’s joint venture with TotalEnergies in Suriname’s Block 58 is one of the most under-the-radar exploration stories in the energy sector today yet early drilling results have confirmed multiple discoveries, including high-quality reservoirs that could rival the prolific Guyana-Suriname Basin.

Energy analysts estimate that Block 58 holds billions of barrels of recoverable oil equivalent and for shareholders that translates to a potentially transformative opportunity for APA.

 With additional wells planned and TotalEnergies’ on board for further support, APA may well capitalize on Suriname’s potential to a large degree that investors have not priced in fully.

Financial Strength & Shareholder Returns?

In recent years, APA management has had a clear focus on the firm’s balance sheet, lowering debt levels and returning cash to shareholders but in recent quarters it’s ticked up again.

APA’s current dividend yield of approximately 4.59% is attractive and, better yet, is well-supported by cash flows of over half a billion dollars in the past four quarters.

Where concerns lie is the low cash levels of $64 million, down from $160 million in the prior quarter in conjunction with the $6.3 billion in long-term debt, up from $5.5 billion a year ago.

In addition, 11 analysts have revised their estimates lower for earnings in the upcoming quarter so it’s clear that sentiment is on a downward trajectory and that’s being mimicked by share price declines.

Yet there are reasons to be highly optimistic.

Production Base In Permian Basin Is Strong

APA’s asset portfolio spans several key regions, including the Permian Basin, the North Sea, and Egypt but, those aside, Suriname appears to be where the sharper growth curve lies thanks to a stable production base with competitive break-even prices.

The Permian Basin also offers a means to generate steady cash flows as a result of the low-cost yet well-developed infrastructure.

In Egypt, APA has a long-standing relationship with the government, and recent efforts to keeps costs in check have yielded higher production and lower costs. Meanwhile, the North Sea remains a reliable cash generator, even as APA stays modestly exposed to this fairly mature basin.

Is APA Stock Undervalued?

APA currently trades at a price-to-earnings ratio of just 3.5x, an astonishingly low figure and a severe discount that reflects skepticism about both geopolitical risks in Egypt and Suriname. For optimists solace can be taken from the fact that these risks appear overstated given APA’s diversified asset base and track record of operating well in such regions.

So will APA stock bounce back? The consensus among 30 analysts is that APA stock will bounce back sharply to $34.44 per share, fair value representing 51.6% upside opportunity to new investors.

So, what could spark the move higher?

Why Will APA Stock Go Up?

If APA stock does rise one potential catalyst stems from a positive final investment decision on Block 58 that could unlock significant upside and highlight to investors APA’s commitment to developing this resource.

Another positive tailwind will stem from higher oil prices where APA remains highly levered to price movements, as well as any upward revision in oil demand forecasts.

Accelerated shareholder returns that come from higher free cash flows and lower long-term debt on the balance sheet offer another growth lever.

In addition, APA may start to look attractive to larger energy companies who are on the hunt for the assets owned by the firm and can handle taking over the heavier debt loads on its balance sheet without much duress.

It won’t all be rainbows and unicorns though it seems with APA’s operations in Egypt and Suriname exposed to political and regulatory uncertainties. And while early results are promising, further drilling may surface challenges that slow development timelines.

One final concern that investors should not overlook is the impact of new Trump administration policies to augment the supply of oil reserves that in turn are likely to lower energy prices, all else being equal, because they would further pressure margins and reduce cash flows.

Is APA Stock a Buy?

APA Corporation has strong production base, a potentially transformative growth catalyst in Suriname, and a shareholder-friendly capital allocation strategy.

As a result it may well be hidden gem in Suriname that is starting to gain but still lacks much investor attention, and so is an under-appreciated stock that offers significant upside potential for patient investors.

Investors considering a purchase need to keep their eyes wide open however that cash levels are low, debts are high and analysts sentiment has dimmed quite dramatically in the recent quarter. So, while there is upside on a valuation front and a substantial history of dividends stretching back 54 years, it’s not without commensurate risks.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.