What happened
Oil and natural gas explorer APA Corporation (APA 1.15%) rose 16% in March, according to data from S&P Global Market Intelligence.
It's no surprise this oil and natural gas driller went up in March; the price for both commodities skyrocketed in the early part of the month following Russia's invasion of Ukraine.
Additionally, APA also completed some asset sales, which brought in lots of cash. In a strong oil and gas market, it could be a savvy move in order to pay down debt.
So what
Oil prices spiked during March, after President Biden signed an executive order banning the import of Russian oil, liquified natural gas, and coal on March 8. While the U.S. has lots of its own resources, investors contemplated that more countries might ban the import of Russian resources, which could lead to higher prices. The price of oil spiked from around $100 per barrel at the beginning of the month to nearly $130, before settling back near the $100 mark by month's end.
For APA specifically, management took advantage of the current oil and gas bull market to offload some assets. During March, the company completed the sale of undeveloped land in the Delaware Basin for $805 million, and also sold shares of Kinetik (KNTK) for another $224 million. Kinetik is a new company that was formed by the combination of Altus Midstream and BCP Raptor Holdco LP in February.
CEO John Christmann said:
Completion of these transactions reflects the ongoing streamlining of our portfolio. We remain committed to returning free cash flow to shareholders and continuing to strengthen the balance sheet. As such, we plan to direct a portion of these sales proceeds toward debt reduction.
The sales will allow APA to pay down debt and also de-consolidate its shares of Altus/Kinetic, which will take Kinetic's debt off its balance sheet. So APA stands to materially lower its debt this year, which stood at $7.2 billion as of Dec. 31.
Image source: Getty Images.
Now what
At strip prices as of February, Apache forecast just over $2 billion in free cash flow this year. At just a $15 billion market cap, APA trades at less than 7.5 times this year's free cash flow. And keep in mind, oil prices are still a bit higher than they were in February when the company reported, so free cash could be even better than that.
Although APA is still paying down debt, it's also growing shareholder returns. The company hiked its dividend twice last year, and has put forth a new framework whereby APA will return 60% of free cash flow to shareholders in dividends and share repurchases.
That setup looks tantalizing; however, much will depend on oil prices. With the Federal Reserve looking to hike interest rates and slow the economy, and with the U.S. government releasing barrels from the Strategic Petroleum Reserve, prices could moderate from here. However, given the lack of supply growth seen over the past decade in the industry, oil prices should still remain at levels where APA and its peers remain solidly profitable.
