Analyst Note| Dave Meats, CFA |
We are raising our fair value to $33 per share for APA Corp from $24, after taking a second look at the firm’s third quarter earnings. The primary drivers were threefold. First, the outlook for near-term commodity prices has dramatically improved since our last update after the second quarter, leading to a significant valuation uplift when marking our model to market. Second, while our long-term forecast for WTI crude is unchanged at $55/bbl, we have increased our midcycle natural gas forecast to $3.30/mcf from $2.80/mcf. The increase was justified by chronic bottlenecks in the low-cost Appalachia area, limiting supply growth at the bottom of the cost curve and forcing producers to tap higher-cost resources to balance the market (see our Oct. 27 note for details). The third component of our increased fair value for APA was the suggestion by management that it will probably run a fourth rig in the U.S. onshore region in 2022. While we anticipated the firm expanding to four rigs eventually, we did not expect the ramp to occur next year so the new plan brings value forward in our model.