Grade: B — Generally Healthy, Minor Concerns
Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles
Data: SEC EDGAR 10-K (Filed 2026-02-26, FY ended December 31, 2025) + Yahoo Finance
Auditor: Ernst & Young LLP — Unqualified opinion
One-line verdict: APA's sole screening flag is a low cash-to-debt ratio, but this is structural for an E&P company actively deleveraging after its $4.5 billion Callon acquisition. The filing reports $1.4 billion net income, $4.5 billion operating cash flow (3.2x net income), an M-Score of -3.68 well below manipulation thresholds, and zero goodwill. The real risks are geopolitical: Egypt receivables from EGPC, North Sea asset retirement obligations approaching shutdown before 2030, and a $10.5 billion Suriname development that won't produce oil until 2028.
| Metric | Result |
|---|---|
| Red Flags | **0** |
| Watch Items | **0** |
| Checks Completed | **18/18** |
| Beneish M-Score | **-3.68** (clean; threshold is -2.22) |
| Piotroski F-Score | **0.41** (low fraud probability) |
| Altman Z-Score | **1.46** (grey zone) |
| Auditor | Ernst & Young LLP — Unqualified opinion |
A Diversified E&P With Post-Acquisition Deleveraging
APA Corporation is an independent energy company operating across three geographies: the U.S. Permian Basin (62% of production), Egypt's Western Desert (31%), and the U.K. North Sea (7%). The company also has a significant exploration position in Suriname offshore Block 58 with TotalEnergies.
Per the 10-K: "On April 1, 2024, APA completed its acquisition of Callon Petroleum Company (Callon) in an all-stock transaction valued at approximately $4.5 billion, inclusive of Callon's debt." The company spent 2025 aggressively deleveraging, reducing total debt from $6.0 billion to $4.5 billion through asset sales ($571 million from New Mexico exit), open-market debt repurchases ($122 million at discount), and a major debt exchange and tender offer in January 2025.
Profitability: Headline Numbers
| Metric | FY2023 | FY2024 | FY2025 | Trend |
|---|---|---|---|---|
| Revenue | $8.3B | $9.7B | $8.9B | Callon added, then prices fell |
| Net Income | $2.9B | $0.8B | $1.4B | FY2024 hit by $1.1B impairments |
| Gross Margin | 51.1% | 44.2% | 40.6% | Declining with oil prices |
| Operating Cash Flow | $3.1B | $3.6B | $4.5B | Strong despite lower prices |
| Free Cash Flow | $0.8B | $0.7B | $1.8B | Improving post-acquisition |
Revenue breakdown from the filing: Oil revenues $5.8B (80%), natural gas $770M (11%), NGLs $650M (9%). The U.S. contributed 53% of oil and gas revenues, Egypt 36%, North Sea 11%.
Average realized oil prices fell 14% to $66.92/bbl. Per the MD&A: "A 14 percent decrease in average realized prices reduced 2025 revenues by $996 million compared to 2024, while a 3 percent lower average daily production decreased revenues by $161 million."
Cash Flow: The Deleveraging Story
| Metric | FY2023 | FY2024 | FY2025 |
|---|---|---|---|
| Operating Cash Flow | $3.1B | $3.6B | $4.5B |
| Net Income | $2.9B | $0.8B | $1.4B |
| **CFFO / Net Income** | **1.10** | **4.50** | **3.17** |
| CapEx | $2.4B | $2.9B | $2.8B |
| Free Cash Flow | $0.8B | $0.7B | $1.8B |
CFFO/NI of 3.17 is excellent -- operating cash flow massively exceeds reported earnings, consistent with E&P companies where DD&A ($2.3B) is a large non-cash charge. The $1.1B impairment in FY2024 (primarily North Sea assets) depressed net income without affecting cash flow, explaining the 4.5x ratio that year.
Per the filing: "DD&A Oil and gas property and equipment $2,275 million" in FY2025. This non-cash charge is the primary reconciling item between net income and operating cash flow.
The 18-Point Screening
Revenue Quality
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO Change | PASS | DSO 43 days, improved 30 days YoY |
| A2 | AR vs Revenue Growth | PASS | AR -45.8% vs revenue -8.4% |
| A3 | Revenue vs CFFO | PASS | Revenue -8.4%, CFFO +25.6% |
DSO dropped dramatically from 73 to 43 days. Per the filing, sales to EGPC in Egypt accounted for approximately 15% of worldwide revenues. The large DSO improvement reflects faster Egypt receivable collections and the timing of U.S. asset dispositions.
Expense Quality
| # | Check | Result | Detail |
|---|---|---|---|
| B1 | Inventory vs COGS | PASS | Inventory -17.4% vs COGS -2.4% |
| B2 | CapEx vs Revenue | PASS | CapEx -5.0% vs revenue -8.4% |
| B3 | SG&A Ratio | PASS | SG&A/Gross Profit = 9.7% |
| B4 | Gross Margin | PASS | 40.6%, -3.6pp YoY |
Per the filing: "LOE decreased $186 million, or 11 percent, compared to 2024. On a per-boe basis, LOE decreased $1.30, or 13 percent, compared to 2024, from $10.16 per boe to $8.86 per boe." This reflects cost synergies from the Callon integration and non-core asset sales.
Gross margin decline from 44.2% to 40.6% is entirely price-driven (oil prices fell 14%) and not a red flag for an E&P company.
Cash Flow Quality
| # | Check | Result | Detail |
|---|---|---|---|
| C1 | CFFO vs Net Income | PASS | CFFO/NI = 3.17 |
| C2 | Free Cash Flow | PASS | FCF $1.8B, FCF/NI = 1.24 |
| C3 | Accruals Ratio | PASS | -17.5%, strongly negative (clean) |
| C4 | Cash vs Debt | FAIL* | Cash $0.5B covers only 11% of $4.6B debt |
C4 context: The screening engine flags this as a fail because cash of $516M covers only 11% of total debt of $4.5B. However, per the filing: "Available committed borrowing capacity under syndicated credit facilities $4,020 million." Adding this liquidity brings total available resources to $4.5B. Debt/EBITDA is only 0.9x, and the company reduced debt by $1.6B in FY2025 alone. This is a company in active deleveraging, not financial distress.
Per the filing, debt maturities include: "$211 million of APA and Apache notes coming due within the next year." The company's January 2025 exchange offers restructured $3.6B of Apache indenture debt into APA paper, extending maturities with new issuances including "$350 million aggregate principal amount of APA's 6.10% Notes due 2035 and $500 million aggregate principal amount of APA's 6.75% Notes due 2055."
Balance Sheet
| # | Check | Result | Detail |
|---|---|---|---|
| D1 | Goodwill + Intangibles | PASS | Zero goodwill |
| D2 | Leverage | PASS | Debt/EBITDA = 0.9x |
| D3 | Soft Asset Growth | PASS | Other assets -11.5% vs revenue -8.4% |
| D4 | Asset Impairment | PASS | Write-offs normal ($44M vs $1.1B prior year) |
Zero goodwill despite the $4.5B Callon acquisition. Per the 10-K, the Callon transaction was treated as an asset acquisition, not a business combination, so no goodwill was recorded. This is a clean balance sheet.
FY2024 impairments of $1.1B were primarily North Sea related. FY2025 impairments dropped to $44M, a normalized level.
Acquisition Risk
| # | Check | Result | Detail |
|---|---|---|---|
| E1 | Serial Acquirer FCF | PASS | FCF after acquisitions positive |
| E2 | Goodwill Surge | PASS | No goodwill |
Manipulation Score
| # | Check | Result | Detail |
|---|---|---|---|
| F1 | Beneish M-Score | PASS | -3.68 (well below -2.22 threshold) |
M-Score components are all benign. DSRI of 0.592 reflects the dramatic DSO improvement (positive signal, not manipulation). TATA of -0.175 confirms cash-basis earnings quality.
Key Risks from the 10-K
1. Egypt Geopolitical and Payment Risk
Per the filing: "Sales to EGPC in Egypt accounted for approximately 15 percent of the Company's worldwide crude oil, natural gas, and NGLs revenues." Egypt operations are conducted under production-sharing contracts (PSCs) where "the Contractor's income taxes...are paid by EGPC on behalf of the Contractor out of EGPC's production entitlement."
The filing notes that Egypt contributed 36% of oil and gas revenues ($2.6B). The Company operates under a merged concession agreement (MCA) with the Government of Egypt and EGPC, with "a fixed 40 percent cost recovery limit, and a fixed profit-sharing rate of 30 percent." Any disruption in EGPC payments or changes to PSC terms would materially impact revenue.
2. North Sea Shutdown Before 2030
Per the filing: "The Company determined that expected returns did not economically support making investments required under the combined impact of the regulations and expects to cease production at its facilities in the North Sea prior to 2030. The Company's investment program in the North Sea is now directed toward asset safety and integrity."
North Sea contributed 7% of production but carries significant asset retirement obligations. The filing states the Company suspended all new drilling in the North Sea in 2023. This is an orderly wind-down, but decommissioning costs could be substantial.
3. Suriname Development -- $10.5B Total Investment, First Oil 2028
Per the filing: "Total investment is estimated at $10.5 billion, with APA's share of the investment subject to the existing joint venture agreement with TotalEnergies to carry a portion of Apache's appraisal and development capital." The GranMorgu development targets 220,000 b/d oil production capacity with first oil anticipated in 2028.
APA's carried cost structure is favorable: "For the first $10 billion of gross capital expenditures, TotalEnergies pays 87.5 percent, and the Company pays 12.5 percent." However, this is a massive frontier project in deep water with execution risk.
4. Commodity Price Sensitivity
The 10-K states: "Uncertainties include the impacts of ongoing international conflicts, inflation, current and potential tariffs or other trade barriers, global trade policies, and actions taken by foreign oil and gas producing nations, including OPEC+." Average oil prices fell 14% YoY to $66.92/bbl. Gross margins are directly correlated to commodity prices, and every $5/bbl move in oil prices has an outsized impact on profitability.
5. Altman Z-Score in Grey Zone
The Z-Score of 1.46 places APA in the grey zone (between 1.23 and 2.90), reflecting negative working capital and negative retained earnings. Retained earnings are negative because cumulative share repurchases and dividends have exceeded cumulative earnings over the corporate history. This is common for mature E&P companies that return capital aggressively.
Summary
Grade: B. APA passes 17 of 18 screening checks with zero genuine red flags.
The sole fail (C4: cash vs. debt) reflects a structural choice during active deleveraging, not financial distress. Total debt dropped $1.6B in FY2025, Debt/EBITDA is 0.9x, and the company has $4.0B in undrawn credit facilities. Operating cash flow of $4.5B at 3.17x net income confirms strong earnings quality. The M-Score of -3.68 is far from manipulation territory. Zero goodwill, low accruals ratio (-17.5%), and declining DSO all point to a clean set of books.
The real risks are forward-looking: Egypt's EGPC payment dependency (36% of revenue), North Sea decommissioning costs before 2030, and execution on the $10.5B Suriname development. The pending commodity price environment -- with oil at $65-70/bbl vs. $75-80 in 2024 -- will continue to compress margins across the E&P sector. But the financial statements themselves are clean.
**Disclaimer**: This report is based on APA Corporation's FY2025 10-K filed with SEC EDGAR on February 26, 2026. This is NOT investment advice.
Data: SEC EDGAR 10-K + Yahoo Finance
Auditor: Ernst & Young LLP (Unqualified opinion)
Fiscal year ended: December 31, 2025