APA Corporation's recent earnings call, on the surface, paints a picture of a company doubling down on its Permian Basin success. The Callon acquisition, a move towards greater Permian dominance, is touted as a significant step towards value creation. But buried within the transcript, overshadowed by the Permian hype, lies a potentially more significant story: the Egyptian turnaround.

Analysts have focused heavily on APA's Permian strategy, scrutinizing cost synergies and capital efficiency improvements expected from the Callon integration. Rightfully so, the Permian represents the lion's share of APA's activity. However, amidst the Permian discussion, the conversation around Egypt reveals a potential inflection point for this often-overlooked asset.

The narrative around Egypt in recent quarters has been one of operational challenges. Limited workover rig availability and an unfortunate string of ESP failures hampered gross oil production growth, casting a shadow on the region's potential. APA acknowledged these challenges and outlined a plan to recalibrate its Egyptian operations, favoring workover activity over drilling to address the backlog and unlock trapped production.

What analysts seem to be missing is the potential magnitude of this shift. APA estimates that nearly 13,000 barrels per day are currently offline, awaiting workovers. This represents a substantial amount of untapped production, significantly above the usual 5,000 barrels per day backlog. While APA hasn't explicitly stated the production increase expected from addressing this backlog, the numbers suggest a substantial potential uplift.

Egypt: Drilling Rigs vs. Workover Rigs

The following table showcases the shift in APA's operational strategy in Egypt, prioritizing workover activities to unlock trapped production.

Let's delve deeper. Assuming APA can successfully work through half of the 8,000 barrels per day excess backlog, that translates to an additional 4,000 barrels per day of oil production. At current oil prices, this represents an annual revenue increase of over $58 million, a significant boost for the Egyptian operations.

But there's more to the story. The recalibration of the Egyptian operations comes on the heels of a renegotiated production sharing contract (PSC) with the Egyptian government. This revised PSC, while not detailed in the transcript, is designed to offer more favorable terms for APA at higher oil prices. With current oil prices exceeding initial 2024 expectations, the impact of the revised PSC on APA's net income could be significant.

Furthermore, Steve Riney, APA's President and CFO, highlighted encouraging macroeconomic trends in Egypt. The devaluation and floating of the Egyptian currency, coupled with increased investment from Gulf states, a larger IMF loan program, and pledges of support from the World Bank and EU, paint a picture of a country on a positive economic trajectory.

"Steve Riney, APA's President and CFO, on Egypt's macroeconomic outlook: "They've floated their currency, they devalued it and floated it. And with that, they had to raise interest rates to control inflation. But with that, their bonds are up and the ratings outlook is improving. The IMF loan, as you talked about, they increased their loan program from $3 billion to $8 billion. They've gotten a significant amount of investment coming in from other Gulf states mostly around some real estate opportunities. And they've got pledges now from both the World Bank and from the EU to offer support as well. So I think all of the signs for Egypt are pointing up now.""

This improving economic landscape, coupled with the renegotiated PSC and APA's operational recalibration, suggests a compelling hypothesis: Egypt is poised to become a significant cash flow generator for APA, potentially exceeding the contributions of the Permian in the coming years.

While the exact timeline remains unclear, APA's commitment to "revisit the rig count at a later date" once workover activity catches up suggests a potential ramp-up in drilling activity once the operational backlog is addressed. This could further accelerate production growth, particularly if oil prices remain elevated and the revised PSC continues to offer favorable terms.

The Egyptian turnaround, while not explicitly highlighted in APA's earnings call, is a story worth watching. It represents a potential hidden gem within APA's portfolio, one that could significantly enhance the company's free cash flow generation and shareholder returns in the years to come.

Potential Revenue Uplift from Egypt Workover Backlog

"Fun Fact: APA Corporation has a long history in Egypt, dating back to 1994. Over the years, the company has discovered over 1 billion barrels of oil equivalent resources in the country."