This stock will be a big winner as Iran disrupts the global energy market. Investors haven't realized it yet

Geopolitical instability in the Persian Gulf may keep oil prices higher for longer than many investors expect, a favorable backdrop for APA's internationally exposed portfolio. The independent oil and gas exploration and production company is cutting costs and reducing debt, giving it the ability to grow cash flow and return capital to shareholders. APA's Suriname offshore project offers upside to shareholders as its potential value isn't yet reflected in the company's stock price. Energy markets have been roiled by the loss of more than a billion barrels of oil from the global supply since the U.S. and Israel attacked Iran in late February. Each day the Strait of Hormuz remains blocked due to this conflict, the deficit grows. The International Energy Agency predicted in May that if traffic through the critical waterway were to gradually resume in June, the shortfall would linger until at least the fourth quarter — far longer than the market may anticipate. Not every energy company is well positioned to take advantage of the price increases that will accompany this deficit, but APA Corp is. The company has the right mix of high-quality oil and gas assets in locations such as the U.S. Permian Basin and Egypt. Beyond this, shareholders could reap the benefits as it cuts costs and reduces debt. Further upside could be realized as an offshore project in Suriname comes online, boosting cash flow and production and delivering capital returns beyond what investors currently envision. Origins of a global E & P cash flow king Founded in 1954 with just six employees and $250,000, the company, then known as Apache Oil, drilled its first wells in Cushing, Oklahoma. It would go on to diversify in a myriad of businesses before restructuring into a pure play exploration and production company in 1987. In 1994, it began operating in Egypt and announced a joint venture with Total to explore and develop offshore production in Suriname. It survived a Covid-induced oil glut in 2020, and then strengthened its position in the Permian Basin with the acquisition of Callon Petroleum for $4.5 billion in stock in 2024. The deal added 145,000 net acres in the Delaware and Midland Basins to its portfolio from Callon. Now it's reducing overhead costs and finding drilling efficiencies as it integrates the assets. Improved execution led to $350 million in cost savings in 2025 and an additional $450 million is expected this year. APA's Permian assets are the bedrock of its long-term free cash flow generation engine. APA recently predicted these assets have a lifecycle of 10-plus years, up from a prior forecast of seven years. However, "technical upside ... could double that level," according to Wolfe Research analyst Doug Leggate. Overall, "from 2026-2030, APA should generate ~$8.8 billion of FCF, which is ~70% of the company's market capitalization," said John Gerdes of Gerdes Energy Research in a recent note. Building a stronger balance sheet In the first four months of this year, APA repaid $634 million in near-term debt.Total debt has been reduced by $2.2 billion since 2024, leading to a 35% decrease in gross interest expense. Its current net debt is $4.1 billion with a long-term goal of $3 billion. It doesn't have any debt maturities until December 2029. "In the Permian, we've significantly improved capital efficiency, while delivering resilient oil production volumes, all with fewer rigs and lower capital intensity," said CEO John Christmann on the company's first-quarter earnings call earlier this month. That strong execution enabled APA to raise its U.S. oil production forecast for 2026 to 122 million barrels of oil equivalent per day, the high end of its prior range, while keeping capital expenditures unchanged. APA's approach is one of discipline, aimed at reducing risk and maximizing shareholder returns. Since the fourth quarter of 2021, it has used 71% of its free cash flow to return $4.5 billion to shareholders in the form of dividends and buybacks. It also means cutting back on production when it doesn't make economic sense. In the first quarter, APA curtailed some of its natural gas and natural gas liquids production due to weak pricing at the Waha hub, a key U.S. natural gas trading hub where several pipelines connect. "APA's first quarter illustrated a company leaning into control rather than reacting to volatility," Neal Dingmann, an analyst at William Blair wrote in a recent note. "Production was intentionally shaped as material gas volumes were curtailed for essentially the entire quarter due to uneconomic Waha pricing, a decision that was fully baked into guidance and execution plans." Third-party trading success While APA's own Permian gas production may have been constrained due to gathering and processing limits or operational timing, the company has been able to take advantage of the large spread between Waha and Gulf Coast pricing by purchasing third-party gas in the Permian on the cheap and transporting and delivering it to the Gulf Coast under long-term takeaway contracts it has with pipeline companies such as Kinder Morgan for about 750,000 million British thermal units per day. APA also has a long-term 140,000 MMBtu/d contract to sell gas to Cheniere Energy's Corpus Christi Stage III liquified natural gas project. Notably APA receives LNG pricing based on international LNG indices for the gas it sells. This has become a real boon for the company with European and Asian gas prices trading at four- or five-times as much as U.S. prices due to the Persian Gulf conflict. Together, these sales are expected to generate $1.1 billion in pretax cash flow, up from estimates of $650 million at the end of the fourth quarter and the low- to-mid-$400 million range at the end of the third quarter. International price exposure In Egypt, gas production is expected to rise 12% year-on-year to account for 40% to 50% of total production in the region, while realizing prices of $4.25 per 1,000 cubic feet, up from $3.59/Mcf in 2025 and $2.94/Mcf in 2024. Combined, APA's operations give it what Barclays analyst Betty Jiang calls "the greatest exposure to LNG prices in our coverage, in addition to oil price leverage, which amplifies the impact of the Strait closure on its cash flow." That benefit isn't likely to fade anytime soon, even if the war in Iran is resolved. Investors largely have been pricing in a quick resolution and return to the status quo in energy stocks. Since the start of the war through Monday's close, the S & P 500 Energy sector has risen 8% despite a 58% gain in front-month WTI. Higher for longer "That this is the largest oil supply disruption in the history of the oil market is neither an exaggeration nor controversial," Morgan Stanley analyst Martijn Rats recently said. Rats said energy prices would be higher now had there not been a few buffers in place. Prior to the war, there was an oil supply glut and countries and companies had energy stockpiles to draw down. As the weeks have worn on, supplies have diminished. U.S. oil exports have risen and China, the world's largest oil importer, curtailed its demand , but that doesn't close the gap. Meanwhile, traders continue to bet the strait will reopen soon. If the status quo persists until the summer, TD analysts expect " Brent , may well surge to a new, higher trading range above $150/bbl." Such a scenario could raise profits for APA as its 2026 expected cash flow will rise $200 million for every $5 increase in the price of oil. During a first-quarter earnings call on May 1, Exxon Mobil CEO Darren Woods said he sees a "one- to two-month time lag between the strait opening up and the market seeing normal flow." APA YTD mountain APA Corp. year to date "Depending on how long this goes and how far strategic petroleum reserves are drawn, how low commercial inventories go, there will be a period of time where players, markets, governments, countries try to refill and replenish those inventories," Woods said. "And so, that's going to bring an additional level of demand into the marketplace, which we think is going to put upward pressure on prices." On top of that, countries may reassess their strategic needs and commit to holding larger reserves. There will also be a war premium built into prices for the foreseeable future amid the unstable environment. Could the U.S. increase production to offset some of the tightness in the market? Don't count on it. On Chevron 's first-quarter earnings call CEO Michael Wirth said it was "running the Permian to deliver strong free cash flow right now." Wirth explained that the company is focused on improving asset reliability and reducing downtime. To "shift to quickly turn to more production growth might dilute that focus," Wirth said. On the gas side, the market will feel the blow of lost supplies in Qatar, where an Iran missile attack damaged a huge LNG facility and slowed the North Field Expansion project. "Qatar LNG shut-ins imply ~7% of global LNG supply loss in 2026 and a potential lingering loss of 5–7% in '27–'28 depending on NFE delay," said Jiang. Growth potential in Suriname The multiyear undersupply could last until 2028 when APA expects first oil in Suriname. APA has partnered with TotalEnergies on the project, which is expected to produce 220 million bpd. The project economics are very attractive with APA's 40% stake equating to 440 Midland Basin locations at about 30% of the cost. "This is a clear differentiator relative to our peers," said Christmann on the call. Wolfe's Leggate said APA is viewed "as the most undervalued E & P in our coverage" with no value being recognized for Suriname yet. Given the exploration risk in Suriname, Wall Street analysts are somewhat neutral on the stock, though seven rate it a buy, 18 a hold and three an underperform, per LSEG. It currently trades at 3.2x next-twelve-months enterprise value-to-EBITDA, which is the low end of where many of its Permian competitors are valued. Although geopolitical tensions and commodity price swings remain ongoing risks, APA's improved balance sheet, globally diversified asset portfolio, and strong exposure to rising oil and LNG prices position the company well for sustained long-term cash flow and shareholder value growth. 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