This article is written exclusively for Investing.com
U.S. energy policy supports oil and gas prices
Demand for natural gas is rising worldwide
LNG internationalized a domestic market
APA: a profitable producer
Stock cheap at the end of 2021
The price of the CME's NYMEX division rose from its lowest level in a quarter of a century in June 2020 to its highest since early 2014 in October 2021. The price of the energy commodity is more than four and one rose half as high from low to high.
The price of natural gas is just as flammable as the raw material in its raw form when extracted from the earth's crust. Since trading of wet gas futures began in 1990, the price has been as low as $1.02 to as much as $15.65 per MMBtu.
The futures reflect the price on the Henry Hub in Erath, Louisiana. Natural gas at other US delivery points can be traded at huge discounts or premiums on the futures market, the benchmark. Outside of the US pipeline system, natural gas prices may even exceed the highest domestic price in the US, as we saw in 2021. Natural gas shortages in Asia and Europe have caused prices in those areas to reach record highs
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Through its subsidiaries, APA Corporation (NASDAQ:) researches and manufactures oil and gas properties. The company has offices in the US, Egypt and the UK and has exploration activities off the coast of Suriname.
Houston, Texas-based APA operates collection, processing and transmission assets in western Texas and owns four Perm-to-Gulf Coast pipelines. We believe there are five reasons why APA is an energy company to put on your investment radar for 2022.
1. US energy policy supports oil and gas prices
On January 21, 2021, his first day in office, US President Joe Biden canceled the Keystone XL pipeline project. In May, the government banned fracking and drilling for oil and gas on federal lands in Alaska. The Biden administration has tightened regulations for fossil fuel production and plans to shut down pipelines that cause environmental damage.
Meanwhile, energy demand is growing in the US and worldwide. Oil and gas prices rose significantly in 2021, even after the recent corrections from the October peaks.
It took the US decades to achieve energy independence. In 2021, however, the pendulum swung back, giving OPEC and Russia price power in the global petroleum market. In recent months, as gasoline prices rose to their highest levels since 2014, the Biden administration has twice asked the cartel to increase production.
OPEC+ declined after persistently low prices due to rising US shale production in recent years. In November, the US president signed an executive order to release 50 million barrels from the US strategic petroleum reserve to lower prices. The measure may have worked temporarily as NYMEX fell from over $85 to below $63 a barrel.
However, the SPR release was symbolic as it was only three days of US consumption. While the US sold petroleum in November, Chinese hydrocarbon imports soared.
Source: Reuters
China's crude oil imports rose 14.3% to 10.17 mbpd in November. Chinese demand was single-handedly responsible for nearly all US SPR releases.
The Biden administration has put the US on a greener path in energy production and consumption. However, fossil fuels continue to power the world, and the vast majority of American cars run on gasoline.
The bottom line is that as the US is now on a greener path, robust demand for traditional energy products has reduced global supply even as demand increases.
2. Demand for natural gas rises worldwide
In November, Chinese LNG imports rose by 14.4%.
Deficits in Asia and Europe have pushed up global natural gas prices, putting upward pressure on US prices.
Source: CQG
The chart above shows that near NYMEX natural gas futures rose to a high of $6,466 per MMBtu in October, the highest price since February 2014.
Although they fell to the $3,599 level late last week, they were still more than 45% higher than at the end of 2020. The volatile energy commodity was back close to $4 per MMBtu on Dec. 28.
3. LNG internationalized a domestic market
Thanks to technological progress, natural gas has become an exportable product that no longer depends on pipelines. Liquefaction technology allows LNG to flow from the US and other producers around the world via sea tankers.
In addition, US-Russia tensions over Ukraine could trigger sanctions on Russian natural gas pipelines to Western Europe, increasing demand for US natural gas exports. With prices much higher abroad, US producers and LNG processors will shift US production overseas, putting pressure on domestic inventories as US regulations do not support new production.
Existing producers are likely to benefit because few new businesses are created due to regulations.
4. APA: a profitable producer
APA activities at home and abroad, as well as in the North Sea, generate high free cash flow with exposure to oil prices, low operating costs and minimal capital requirements.
APA also has a long runway with drilling potential in the fast-growing, low-cost Permian Basin. APA's partnership in Suriname with Total (NYSE:) opens the door to large-scale manufacturing development.
In recent quarters, APAs have been impressive.
Source: Yahoo (NASDAQ:) Finance
The chart shows that APA has beaten analysts' earnings forecasts for the past four consecutive quarters. Current estimates for the fourth quarter of 2021 are $1.48 per share.
A survey of 28 analysts by Investing.com found a 10-month average price target of $34.02 per share, up nearly 22% with stock trading just below the $28 level on Dec. 27.
Chart: Investing.com
Forecasts range from $23 to $45 a share, and the general consensus on the stock gives it an "Outperform" rating.
5. Inventory cheap at the end of 2021
At the peak of the pandemic, in 2020, APA shares fell to $3.80 per share.
Source: bar chart
The long-term chart shows the first technical resistance level for stocks on January 2020, $33.77 per share. APA shows an upward trend since the March 2020 low.
Along with upward momentum for the share price, APA shareholders will receive an annual dividend of $0.50 per share, translating to a return of 1.79% at the price of $27.97 on 27 December.
APA could be a diamond in the rough in the traditional energy sector by 2022. Many analysts are asking for $100 a barrel for crude oil and natural gas making higher lows, APA will continue to benefit.
Higher profits should drive the share price up. In an environment where the stock market is at or near record highs and finding value is challenging, I am optimistic about the outlook for APA stocks in 2022.
