APA - APA Group

[divs4ever]

Not my proudest buy!

APA downgraded to a Sell by UBS today, citing possible downgrade of credit rating due to debt.

Share price reacted accordingly.

IMO , APA has always had an unacceptable amount of debt , and yet many analysts and fund managers love it anyway

that being said several other large companies are also known for having high debt levels

so the question is ... will APA have issues servicing the debt ( paying the interest regularly maybe even paying down the debt )


BTW as long as the logic used to buy APA continues to hold solid , pride has little to do with it , if your strategy is still sound , what level of discount would tempt you to buy more ?

 

[finicky]

Market Matters afternoon report:

APA Group (APA) $7.59

APA +2.57%: Some good news for the provider of energy infrastructure with the Australian Energy Regulator’s (AER) draft decision released today following its review of the form of regulation to apply to the South West Queensland Pipeline (SWQP). There was concern that full price regulation would be applied, however, the draft decision recommended that the existing light regulation regime should remain in place, which is likely to be ratified. APA bounced 5% on open, which was about right in our view, however it sold off from those highs during the day.

APA​ MM remains long & bullish APA for Income

APA Group (APA) 09/10/2024 16:37​

Not Held

 

[So_Cynical]

APA Contrarian play looking super cheap, yield pushing 8% with Gas demand projected to only fall 25 odd % over the next 20 years.
APA isn't going to disappear and will play a part in the energy transition, they have deep pockets and like spending money so we can expect them to keep growing going forward. Trading at a near 10 year low.
~

 

[Smurf1976]

This hasn't gone well as a pick for the trading competition but looking at a long term chart, and noting the particularly high volume recently, I do wonder if a bounce form this point may occur?

Chart is weekly:

 

[The Triangle]

APA continues to get kicked in the groin. I liked APA a while back, but past two years have pretty much seen all operating cashflows used for capex/(PP&E). that trend is only sustainable if you're not paying dividends. I don't care about their EBITDA forecasts because I don't trust their write down potential and high debt leading to high interest.

Anyone know what levels of spending on Capex to expect this year?

Also funds aren't dumber than moms and dads. Ethics and DEI is the best excuse for everything these days when it comes to buying bad and dumping good. It allows everyone to kinda look ok.

 

[basilio]

APA is flogging its own story here. IE that gas is Good and Necessary.

https://www.apa.com.au/news/opinion-articles/2024/lets-not-forget-the-net-in-net-zero/

 

[divs4ever]

APA is flogging its own story here. IE that gas is Good and Necessary.

https://www.apa.com.au/news/opinion-articles/2024/lets-not-forget-the-net-in-net-zero/

well , unless Australia starts building ( several ) nuclear power plants ( or abandons all the ' climate initiatives' ) they are probably correct

remember some nations have designated biomass ( wood-chip/wood-pulp ) as 'sustainable ' .. BUT they are importing it from places like Afghanistan ( NOT their own woodland/forest )

but back to APA as an investment , HIGH debt ( like many infrastructure stocks ) buy gee as a ( new ) investment vehicle , it is starting to get a tiny bit interesting

 

[Ferret]

I don't have spare cash to invest at this time, but APA is looking tempting at these levels. Maybe I need to trade into this.

 

[Value Collector]

APA continues to get kicked in the groin. I liked APA a while back, but past two years have pretty much seen all operating cashflows used for capex/(PP&E). that trend is only sustainable if you're not paying dividends. I don't care about their EBITDA forecasts because I don't trust their write down potential and high debt leading to high interest.

Anyone know what levels of spending on Capex to expect this year?

Also funds aren't dumber than moms and dads. Ethics and DEI is the best excuse for everything these days when it comes to buying bad and dumping good. It allows everyone to kinda look ok.

The dividends are paid from free cash flows, after all the sustaining cap ex, growth capex is paid for with the retained earnings and supplemented with long term debt.

Focus on free cash flows not the reported profits, the reported profits are artificially much lower than they really are.

 

[finicky]

Market Matters Weekend report answering a subscriber's questions about APA.

"Hi Chris,

We haven’t called APA very well through 2024 and its certainly in the centre of a few headwinds as we head into Christmas:

• Following Trumps victory interest rates look likely to say higher for longer.
• Markets are now concerned around APA’s broader funding and commercial challenges moving forward. We think this is overblown but we’re clearly wrong at the moment.
• UniSuper recently sold a $500 million block of APA at $7.23, and they still hold ~4% of the stock suggesting more may come.

Buyers have been filled above $7 implying there will be selling into any short term strength from current levels.

• Honestly, we’re at a loss as to why it’s being sold down so much i.e. we are currently down 22% on our position, having been fairly patient before buying back in at $9.82, having sold it previously above $12.
• We continue to believe its good value ~$6.75, now trading on a yield of 8.4%, which is 412bps over the US 10 year yield vs historical average ~280bps, but its going to take time to regain the markets confidence."

APA Group (APA)
LAST UPDATED 07/11/2024 15:18

 

[Value Collector]

Market Matters Weekend report answering a subscriber's questions about APA.

"Hi Chris,

We haven’t called APA very well through 2024 and its certainly in the centre of a few headwinds as we head into Christmas:

• Following Trumps victory interest rates look likely to say higher for longer.
• Markets are now concerned around APA’s broader funding and commercial challenges moving forward. We think this is overblown but we’re clearly wrong at the moment.
• UniSuper recently sold a $500 million block of APA at $7.23, and they still hold ~4% of the stock suggesting more may come.

Buyers have been filled above $7 implying there will be selling into any short term strength from current levels.

• Honestly, we’re at a loss as to why it’s being sold down so much i.e. we are currently down 22% on our position, having been fairly patient before buying back in at $9.82, having sold it previously above $12.
• We continue to believe its good value ~$6.75, now trading on a yield of 8.4%, which is 412bps over the US 10 year yield vs historical average ~280bps, but its going to take time to regain the markets confidence."

View attachment 187616

APA Group (APA)
LAST UPDATED 07/11/2024 15:18

When in doubt buy more, I have topped up twice recently, 8.5% divvy with tax advantages is pretty seductive.

I spent around 2 hours doing for of a deep dive into APA last night to really try and find out if there is something about their long term future I am missing and I came up with nothing, very happy to continue to hold.

 

[Value Hunter]

When in doubt buy more, I have topped up twice recently, 8.5% divvy with tax advantages is pretty seductive.

I spent around 2 hours doing for of a deep dive into APA last night to really try and find out if there is something about their long term future I am missing and I came up with nothing, very happy to continue to hold.

I do not own the stock but if I currently had spare cash I would buy some. It is certainly starting to look attractive now.

 

[finicky]

I still don't get it and the monthly chart is uninspiring. The weekly chart had an indecisive candle this week which followed a high volume negative candle for the previous week. That can signify 'capitulation'. A rally might come but the long term picture is still bleak until the monthly chart shows recovery signs. Price has blown through all the lows of the past 9-10 years.

I admit to not getting the 'free cashflow' argument, I just go by CommSec summary stats - why doesn't the free cashflow manifest in strong trends of dividends, book value and a higher ROE? Why is APA priced at a blended +40 price to earnings? Please, no complicated explanation, let me dwell in my ignorance. The other thing I don't like is the susceptibility to government regulation. This company had big downturns in the GFC and Wuhan flu just like everything else so I also don't see it as a safer place to park cash.

Not Held
Not all that interested

WEEKLY

 

[Smurf1976]

I spent around 2 hours doing for of a deep dive into APA last night to really try and find out if there is something about their long term future I am missing and I came up with nothing, very happy to continue to hold.

The market is plausibly concerned about the political direction. Aiming to avoid taking sides in politics given this is a stock thread, just noting the basic issues:

Energy has been a dominant theme politically for quite some time, indeed it's arguably now the single most contentious subject and policy divide with both major parties having a very different position but with a common element that neither are free market approaches.

Whilst the states have all run energy utilities in the past, and some still have direct involvement in the industry today, those have mostly been run as commercial undertakings. Tasmania's a good illustration of that - the Hydro is technically a corporation owned by shareholders, it's just that the state government is the only actual shareholder. Other than that though it's a for-profit business funded from the sale of what it produces, it doesn't have access to general government revenue which is the key point of relevance.

Versus the federal government that in practice has access to essentially unlimited funds via taxation and the ability to print the currency. The federal government has the ability to do non-commercial things driven by political considerations if it chooses to, using taxpayer funds to prop them up. That's a scenario that hasn't been of relevance historically, but now seems at least plausible.

We've already seen the price caps on coal and gas and at present there's the direct federal subsidy of household electricity accounts. What happens next?

Put all that together and, without focusing on any specific scenario or side of politics, there's a trend of rising government influence on the sector and I do think we're plausibly seeing the market re-rate the perceived risk associated with this stock to include such risks.

 

[Value Collector]

I still don't get it and the monthly chart is uninspiring. The weekly chart had an indecisive candle this week which followed a high volume negative candle for the previous week. That can signify 'capitulation'. A rally might come but the long term picture is still bleak until the monthly chart shows recovery signs. Price has blown through all the lows of the past 9-10 years.

I admit to not getting the 'free cashflow' argument, I just go by CommSec summary stats - why doesn't the free cashflow manifest in strong trends of dividends, book value and a higher ROE? Why is APA priced at a blended +40 price to earnings? Please, no complicated explanation, let me dwell in my ignorance. The other thing I don't like is the susceptibility to government regulation. This company had big downturns in the GFC and Wuhan flu just like everything else so I also don't see it as a safer place to park cash.

Not Held
Not all that interested

WEEKLY
View attachment 187648

The free cash flow does translate to strong dividends, their dividend has risen every year for 25 years.

Book value is artificially low because they are writing off large amounts of their investments each year, so their owned infrastructure listed on their books at a fraction of its real value.

And the return on equity is low because the earnings are artificially low.

Think of a tradie who buys a $70K Ute, and gets to write it off on his tax return in one year, the book value of the Ute is now $0 because it’s been written off but it’s not really worth $0, and his earning drop from $100k to $30k.

In reality the tradie didn’t earn $30k he earned $100k, and Ute didn’t go to $0 it maybe went to $60k.

————

What is really important with APA is the following factors.

1, how much free cash flow do they have left after paying for all the “stay in business” cap ex?

2. What are they doing with this free cashflow?

At the moment their strategy is simple, they pay out about 60% of that free cashflow, as dividends, and the rest they invest in growth.

I mean look at this dividend growth over time, and it’s been like this for 20 years +. And the reported earnings story has always been the same.

 

[Value Collector]

I do not own the stock but if I currently had spare cash I would buy some. It is certainly starting to look attractive now.

I ran some numbers, it’s an 8.5% dividend yield at face value.

But, considering that the next dividend goes ex dividend in less than 2 months, if you weight the dividends you will receive in the next 14 months it’s a 10.4% return for the first 14 months you hold, before it will revert back to around 8.5% but buy then the dividends will also have increased.

At they level if you can find cheap financing, a loan is going to generate positive cashflow, and potentially a decent capital gain.

 

[Value Collector]

@finicky
Take a look at a couple of these slides to better understand APA. In particular notice the big difference between the depreciation they charge against their existing infrastructure vs the actual “stay in business” capex they actually spend to keep it running.

This is why free cashflow is more important, than reported profit. Because the free cashflow is the actual amount they can use to pay dividends and make new investments, the reported profit is a much lower number that is less related to actual income.

As I said some of the capex they spend on growth and new investments is rapidly written off via depreciation charges, for example if they build a new solar installation, it will generate cashflow for maybe 30 years, with minimal annual stay in business spending. But due to tax incentives the capital value might be written off in 5 years or less.

Same with their gas pipelines, they cost very little to keep them operating but they cost a lot to build, the building costs get written off at a much larger dollar amount each year than it actually costs to maintain them.

 

[Value Collector]

APA Contrarian play looking super cheap, yield pushing 8% with Gas demand projected to only fall 25 odd % over the next 20 years.
APA isn't going to disappear and will play a part in the energy transition, they have deep pockets and like spending money so we can expect them to keep growing going forward. Trading at a near 10 year low.
~
View attachment 185891

if you take a look at this prediction graph, ignoring the purple because that is the export market that APA is less aligned with, and focus on the green, yellow and red which is the Australian domestic demand.

You can see that the current predictions are for industrial use of gas to be stable, while house hold use slowly declines (this is because it’s predicted as gas equipment wears out people will replace it with electric), but the interesting part is the red, which is gas used for electricity generation. This is predicted to grow over time as coal plants switch off, and more electrical demand comes on, but will decline some years leading up to a coal plant closure as renewables are built.

So I think there will be a good level of demand for APA’s “legacy” gas assets for some time at around 2024 levels and over time retained free cash flow will be put into other areas like electricity transmission and renewable projects, electricity storage. etc etc.

 

[So_Cynical]

if you take a look at this prediction graph, ignoring the purple because that is the export market that APA is less aligned with, and focus on the green, yellow and red which is the Australian domestic demand.

You can see that the current predictions are for industrial use of gas to be stable, while house hold use slowly declines (this is because it’s predicted as gas equipment wears out people will replace it with electric), but the interesting part is the red, which is gas used for electricity generation. This is predicted to grow over time as coal plants switch off, and more electrical demand comes on, but will decline some years leading up to a coal plant closure as renewables are built.

So I think there will be a good level of demand for APA’s “legacy” gas assets for some time at around 2024 levels and over time retained free cash flow will be put into other areas like electricity transmission and renewable projects, electricity storage. etc etc.

Yep i saw a similar chart thus came to my conclusion, demand will be strong going forward for at least a decade.

 

[Smurf1976]

if you take a look at this prediction graph

My own view is toward somewhat higher domestic market consumption as a distinct possibility.

At the residential level there's a lot of homes where electrification is physically problematic. That is, it's far more involved than simply replacing a gas appliance with an electric equivalent.

At the industrial level any push to re-industrialise will require more gas not less.

For electricity gas is in layman's terms the gap filler, it generates whatever coal and renewables don't generate. Given the overall state of generation development, and bearing in mind the prospect of plant failure, I'd say risk there is to the upside for gas. Because in practice any transmission or generation failure has that outcome, gas is the workaround.

Plus noting the influence of politics on al that.