APA Group: Expensive Debt and Equity Should Force the Company to Recalibrate Strategy

APA Group's renewable transition strategy is too aggressive. The cost of debt and equity has increased with higher interest rates and the firm's lower share price. However, management continues to pursue low-quality and low-returning renewable energy acquisitions and developments. Relatedly, APA Group suffered the first strike against its remuneration report at its recent annual general meeting, which we think was because bonus targets for management are overly focused on driving the renewable transition instead of improving returns for shareholders. We downgrade APA Group's Capital Allocation Rating to Poor. We'd likely return the rating to Standard if management becomes more disciplined with investment decisions or if it can sufficiently improve returns from new investments. Alternatively, bond yields could fall and negate the pressure on equity returns.