Executive Summary / Key Takeaways

• APA Corporation has strategically transformed its portfolio, focusing on core unconventional assets in the Permian Basin and Egypt, while building long-term growth potential through offshore exploration in Suriname.
• Significant cost reduction initiatives, accelerated by Permian drilling efficiency gains ($800k per well) and overhead streamlining ($35M initial run rate savings), are driving substantial improvements in free cash flow generation.
• The company is leveraging operational technology and expertise, including optimized drilling designs and waterflood programs, to sustain production volumes with lower capital intensity and enhance well economics.
• A new gas price agreement in Egypt has brought gas development into economic parity with oil, providing portfolio flexibility and contributing to expected gas volume growth and increasing realized prices ($3.80/Mcf target exit Q4 2025).
• APA is committed to its 60% free cash flow return framework, balancing debt reduction (>$750M reduced in Q1 2025) with opportunistic share repurchases, while managing risks including commodity price volatility and potential decommissioning liabilities.

A Transformed Portfolio Focused on Efficiency and Future Growth

APA Corporation, an independent energy company with a history stretching back to 1954, has undergone a significant strategic transformation over the past decade, particularly in recent years. What began as a diversified exploration and production (E&P) company has been reshaped into a more focused entity centered on core unconventional assets in the United States and Egypt, complemented by high-impact exploration opportunities. This journey included a series of strategic acquisitions, notably the $4.5 billion Callon Petroleum (CPE) transaction, and targeted divestitures, such as the recent agreement to exit New Mexico Permian assets. These moves were designed to add scale, enhance inventory quality, and streamline operations, positioning the Permian Basin as a cornerstone of the company's business.

In parallel, APA has cultivated its presence in Egypt for over three decades, modernizing its Production Sharing Contract (PSC) terms to improve capital allocation and operational flexibility. A recent landmark agreement has aligned the economics of natural gas development with oil, unlocking new opportunities in a gas-short market. Beyond these foundational assets, APA made a countercyclical investment in long-cycle offshore exploration over ten years ago, a strategy now poised to deliver significant future growth through the GranMorgu project in Suriname.

The competitive landscape for APA is dynamic, featuring large integrated majors like Exxon Mobil (XOM) and Chevron (CVX), major independent E&P companies such as ConocoPhillips (COP) and Occidental Petroleum (OXY), and other regional players. While integrated majors benefit from scale and downstream operations, and some independents boast lower debt levels or specific regional dominance, APA positions itself through a diversified geographic footprint and a focused approach to operational efficiency. Its scale in the Permian now rivals many U.S. independent shale peers. The company's strategy emphasizes achieving top quartile operational performance, particularly in the Permian, and leveraging its unique exploration portfolio in Suriname and Alaska as key differentiators.

Central to APA's strategy and competitive approach is its focus on operational technology and expertise to drive efficiency. While not defined by a single, proprietary hardware technology like some industrial companies, APA's differentiation lies in its application of advanced drilling and completion techniques and optimized field operations. In the Permian, this includes implementing slim hole drilling, modifying casing designs, and utilizing fit-for-purpose directional tools, resulting in significantly shortened drilling durations. These process improvements have translated into impressive cost savings, with the company capturing approximately $800,000 in savings per well since the beginning of the year. Further efficiency is expected from shifting development patterns towards denser well spacing with smaller fracs and favoring brownfield facility modifications over new builds. In Egypt, operational technology is applied through waterflood implementation programs to enhance base production and optimize workover activities to reduce offline volumes. These operational advancements are critical to lowering the capital intensity required to sustain production and are foundational to APA's cost reduction initiatives.

Operational Strength and Financial Resilience in Q1 2025

APA's strategic focus on operational efficiency and portfolio optimization yielded strong results in the first quarter of 2025. Net income attributable to common stock rose to $347 million, or $0.96 per diluted share, a significant increase from $132 million, or $0.44 per diluted share, in the prior-year quarter. This improvement was primarily driven by higher production volumes resulting from increased drilling activity in the Permian and the integration of Callon, coupled with gains from debt extinguishment.

Operating cash flow saw a substantial 198% increase, reaching $1.10 billion in the first three months of 2025 compared to the same period in 2024. This surge was a direct result of higher revenues, benefiting from increased oil and gas production and higher realized natural gas prices, alongside favorable working capital timing.

Segment performance reflected these trends. The U.S. segment, now predominantly Permian-focused, saw total revenues (including purchased oil and gas sales) jump to $1,713 million in Q1 2025 from $979 million in Q1 2024. Oil, natural gas, and NGL production revenues increased to $1,116 million from $776 million, driven by a 39% increase in U.S. daily BOE production, which accounted for 64% of worldwide production. This growth was fueled by the Permian drilling program, where APA averaged eight rigs and brought 31 operated wells online. The profitability of U.S. gas marketing activities, supported by approximately 750 MMBtud of firm pipeline capacity and basis swap contracts, also contributed significantly, with purchased oil and gas sales rising to $597 million from $203 million.

In Egypt, total revenues decreased slightly to $673 million in Q1 2025 from $734 million in Q1 2024, partly due to lower oil prices. However, net production increased by 3% despite a 5% decrease in gross production, demonstrating the impact of operational focus and potentially favorable PSC mechanisms at lower prices. The segment maintained a robust operational pace with 13 drilling rigs and 19 workover rigs, drilling 18 new productive wells. The North Sea segment saw a modest increase in total revenues to $250 million from $238 million, with volumes ahead of guidance due to strong operational efficiency at Beryl.

Operating expenses saw varied trends. While Lease Operating Expenses (LOE) and Gathering, Processing, and Transmission (GPT) costs increased in absolute terms due to higher activity and some inflationary pressures (particularly in compression and water disposal), per-unit LOE remained relatively flat. Exploration expenses decreased significantly, reflecting lower dry hole expenses compared to the prior year. Depreciation, Depletion, and Amortization (DD&A) increased, influenced by higher depletion rates from the Callon acquisition and prior-year reserve revisions. Financing costs decreased substantially, benefiting from gains on debt extinguishment.

Outlook and Strategic Execution

Looking ahead, APA's guidance for 2025 underscores its commitment to cost efficiency and disciplined capital allocation. The estimated full-year upstream capital investment is set at approximately $2.20 billion to $2.30 billion. This includes a development budget of $2.00 billion to $2.10 billion for the core Permian, Egypt, and North Sea assets, plus $200 million for Suriname development and $75 million for other exploration activities.

A key strategic adjustment is the reduction of the Permian drilling program from eight rigs to six by the end of the second quarter of 2025. This decision is driven by confidence in continued operating efficiency gains, with management believing that 6.5 rigs can sustainably hold oil volumes flat beyond 2025, and six rigs can maintain this level well into 2026. Despite shifts in completion timing, the company expects to deliver U.S. Permian oil volumes within the 125,000 to 127,000 barrels per day guidance range. The recent agreement to sell New Mexico Permian assets for $608 million, expected to close in Q2 2025, further streamlines the portfolio, allowing focus on the Texas side and using proceeds primarily for debt reduction.

In Egypt, the 12-rig program will see a strategic shift, with approximately one-third of activity becoming gas-focused. This is a direct result of the new gas price agreement, which makes gas development economically competitive with oil at mid-cycle Brent prices. Gross gas volumes are expected to grow from Q1 levels, targeting an exit rate of around 500 MMcfd by year-end 2025. Realized gas prices are anticipated to increase steadily throughout the year, reaching approximately $3.80/Mcf in the fourth quarter.

Underpinning the financial outlook is a significant cost reduction initiative targeting over $350 million in annualized savings by the end of 2027. Progress has been faster than anticipated, leading to increased 2025 targets of $130 million in realized savings and a $225 million annualized run rate by year-end. These savings are expected across capital, LOE, and overhead, with initial overhead reductions already contributing an estimated $35 million in annualized run rate savings. These efficiencies are projected to underpin free cash flow generation through 2027, providing a strong financial foundation ahead of the anticipated first oil from Suriname in 2028, which is expected to accelerate growth further.

APA maintains a commitment to its capital return framework, aiming to return 60% of free cash flow to shareholders through dividends and share repurchases. In Q1 2025, the company repurchased $100 million of shares and paid $91 million in dividends. Balance sheet strength remains a priority, with long-term debt reduced by $754 million in Q1 2025. The company's liquidity is supported by approximately $2.94 billion in available committed borrowing capacity.

Risks and Competitive Dynamics

While APA has made significant strides in optimizing its portfolio and cost structure, it faces inherent risks within the energy sector. Commodity price volatility, influenced by global supply/demand, geopolitical events (conflicts in Ukraine, Israel/Gaza), and OPEC actions, remains a primary concern, directly impacting revenues and cash flows. Operational risks, including natural production decline and drilling uncertainties, require continuous management. Regulatory and political risks, such as changes to tax legislation (like the UK's Energy Profits Levy increase) and environmental regulations, can affect profitability and operational timelines.

Legal and contingent liabilities, particularly the estimated $1.00 billion contingent liability related to potential decommissioning obligations on previously sold Gulf of America properties, pose a financial risk, although the company recently settled a related dispute with sureties. Counterparty risk, including the timely collection of receivables from EGPC in Egypt, also requires monitoring.

In the competitive landscape, APA's operational efficiency gains are crucial to maintaining its position against peers like COP and OXY in the Permian, who also focus on cost control and scale. While APA's Permian scale is growing, some larger integrated companies like XOM and CVX possess greater financial resources and technological R&D capabilities, potentially offering efficiency advantages and better resilience in downturns. APA's geographic diversity, particularly the high-potential Suriname asset and the flexible Egypt operations under the new gas price agreement, provides a competitive differentiator compared to companies focused solely on U.S. shale. The ability to shift capital allocation between oil and gas in Egypt based on price signals adds a layer of flexibility not available to all competitors. The success of APA's cost reduction initiatives relative to its peers will be a key factor in its ability to improve margins and enhance its competitive standing.

Conclusion

APA Corporation has successfully executed a multi-year strategy to transform its asset base, focusing on high-quality, unconventional plays in the Permian and Egypt while nurturing long-term growth in Suriname. The first quarter of 2025 demonstrated the tangible benefits of this approach, with strong operational performance, significant increases in cash flow, and notable progress on debt reduction.

The core investment thesis for APA is now firmly rooted in its ability to leverage operational efficiencies and cost reductions to drive sustainable free cash flow growth from its streamlined core assets. The accelerated pace of cost savings, particularly in Permian drilling and overhead, is expected to underpin financial performance through 2027. This period serves as a critical bridge to 2028, when the GranMorgu project in Suriname is anticipated to commence production and provide a step-change in volumes and cash flow. While risks inherent to the energy sector persist, APA's diversified portfolio, operational flexibility, and commitment to disciplined capital allocation and shareholder returns position it to navigate the current environment and capitalize on future opportunities. Investors will be closely watching the continued execution of the cost reduction plan, the ramp-up of the Egypt gas program, and progress towards Suriname first oil as key indicators of value creation.