On August 6, APA Corporation (NASDAQ:APA) held its second-quarter earnings call, and one number stood out from the rest. The oil and gas producer is now holding its Permian oil production steady with four drilling rigs, half the eight it once estimated it would need. Adjusted production of 347,000 barrels of oil equivalent per day beat management’s own guidance, free cash flow kept climbing, and the balance sheet is healing faster than planned. That combination is the story of the quarter.
Doing More With Fewer Rigs
APA raised its full-year US oil guidance to 123,000 barrels per day, up from an original 120,000, while holding its capital budget at $1.3 billion despite higher diesel and other input costs. Management also lifted its cost-savings target to $500 million in annualized run-rate savings by year-end, up from the $450 million goal it set at the start of the year.
That flexibility is showing up in cash flow. Free cash flow hit $738 million in the second quarter, pushing the first half of 2026 past $1.2 billion, which topped what APA generated in each of the past three full years. The company returned $189 million of that to shareholders through dividends and the repurchase of 2.8 million shares at an average price of $35.26, continuing a streak of returning at least 60% of free cash flow to investors every year since 2021.
The balance sheet is moving just as fast. Net debt stood at $3.3 billion at quarter-end after APA repaid $752 million of bonds in the first half, including $673 million in the second quarter alone, cutting total debt by $2.3 billion since the end of 2024 and lowering annualized interest expense by roughly $175 million. Management now expects to hit its $3 billion net debt target in 2027, well ahead of the three- to four-year window it laid out when the goal was first announced.
Further out, APA is building option value beyond its core Permian and Egypt assets. It agreed to acquire Savant Alaska for $70 million, picking up an airstrip, a dock, and a pipeline connection into the Trans Alaska system to support two exploration wells planned for 2027. In Uruguay, ENI signed on as a partner in Block 6, funding a significant share of the first exploration well while APA keeps 60% ownership. In Suriname, the GranMorgu project remains on budget for first oil in mid-2028.
Egypt’s Gas Math Gets Messier
Strong early results from newer, richer gas discoveries pushed APA to defer some lower-pressure gas volumes at the Khafre field, trimming its near-term Egypt gas outlook. Full-year guidance now calls for gross oil production of 118,000 barrels per day and gross gas production of 535 million cubic feet per day. Higher associated liquids are expected to offset the shortfall on a barrel-of-oil-equivalent basis, but it is a reminder that even APA’s most improved asset can still produce surprises.
The exploration calendar slipped too. The next well on Suriname’s Block 58, once expected late in the fourth quarter of 2026, is now scheduled for 2027, trimming this year’s exploration budget and pushing a potential catalyst further out.
Cost inflation has not disappeared either. Rising global diesel prices are weighing on operations in the US and the North Sea, and APA’s savings so far have kept pace with that pressure rather than eliminated it. If input costs accelerate faster than the company’s efficiency gains, the targets driving today’s optimism get harder to hit.
Reported profit also needs a closer look. Second-quarter net income of $747 million included a $92 million unrealized gain from basis hedges, and a jump in deferred tax expense tied to accelerated use of US net operating losses added noise of its own, even though it did not touch cash flow. Strip those out and adjusted net income was $669 million, or $1.89 per diluted share, a reminder that headline numbers in this business often need translation.
What The Smart Money Sees
47 hedge funds held APA shares in the most recent quarter, down from 49 previously, a modest retreat rather than an exodus. Short interest sits at 9.10% of the float, firmly in bear-camp territory. Yet the stock trades at just 9.66 times forward earnings as of September 17, a multiple that assumes little of the operational momentum management just described. That mix suggests that skepticism is still baked into the shares even as the underlying numbers improve.
The Path From Here
APA’s second quarter makes a clear case: production is rising, costs are falling, and debt is disappearing faster than planned. Egypt’s gas hiccup, a delayed exploration well, and persistent diesel inflation show the path is not perfectly smooth. The efficiency gains that let APA run four rigs instead of eight will need to keep holding up against rising input costs. Whether the market’s current skepticism fades likely depends on the debt target and the exploration pipeline in Alaska, Uruguay, and Suriname turning into real results.
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