Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion relates to APA Corporation (APA or the Company) and its consolidated subsidiaries and should be read together with the Company’s Consolidated Financial Statements and accompanying notes included in Part I, Item 1—Financial Statements of this Quarterly Report on Form 10-Q, as well as related information set forth in the Company’s Consolidated Financial Statements, accompanying Notes to Consolidated Financial Statements, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

On March 1, 2021, Apache Corporation consummated a holding company reorganization (the Holding Company Reorganization), pursuant to which Apache Corporation became a direct, wholly owned subsidiary of APA Corporation, and all of Apache Corporation’s outstanding shares automatically converted into equivalent corresponding shares of APA Corporation. Pursuant to the Holding Company Reorganization, APA Corporation became the successor issuer to Apache Corporation pursuant to Rule 12g-3(a) under the Exchange Act and replaced Apache Corporation as the public company trading on the Nasdaq Global Select Market under the ticker symbol “APA.” The Holding Company Reorganization modernized the Company’s operating and legal structure to more closely align with its growing international presence, making it more consistent with other companies that have subsidiaries operating around the globe.

Overview

APA is an independent energy company that explores for, develops, and produces natural gas, crude oil, and natural gas liquids (NGLs). The Company’s upstream business currently has exploration and production operations in three geographic areas: the U.S., Egypt, and offshore the U.K. in the North Sea (North Sea). APA also has active exploration and appraisal operations ongoing in Suriname, as well as interests in other international locations that may, over time, result in reportable discoveries and development opportunities. Prior to the BCP Business Combination defined below, the Company’s midstream business was operated by Altus Midstream Company (ALTM) through its subsidiary Altus Midstream LP (collectively, Altus). Altus owned, developed, and operated a midstream energy asset network in the Permian Basin of West Texas.

APA believes energy underpins global progress, and the Company aims to be a part of the conversation and solution as society works to meet growing global demand for reliable and affordable energy. Today, the world faces a dual challenge: To meet growing demand for energy and to do so in a cleaner, more sustainable way. APA believes society can accomplish both and strives to meet those challenges while creating value for all its stakeholders.

The global economy and the energy industry have been deeply impacted by the effects of the conflict in Ukraine and coronavirus disease 2019 (COVID-19) pandemic and related governmental actions. Uncertainties in the global supply chain, commodity prices, and financial markets, including the impact of inflation and rising interest rates, continue to impact oil supply and demand. Despite these uncertainties, the Company remains committed to its longer-term objectives: (1) to maintain a balanced asset portfolio, including advancement of ongoing exploration and appraisal activities offshore Suriname; (2) to invest for long-term returns over production growth; and (3) to budget conservatively to generate cash flow in excess of its upstream exploration, appraisal, and development capital program that can be directed to debt reduction, share repurchases, and other return of capital to its stakeholders. The Company continues to aggressively manage its cost structure regardless of the oil price environment and closely monitors hydrocarbon pricing fundamentals to reallocate capital as part of its ongoing planning process. For additional detail on the Company’s forward capital investment outlook, refer to “Capital Resources and Liquidity” below.

In the second quarter of 2022, the Company reported net income attributable to common stock of $926 million, or $2.71 per diluted share, compared to net income of $316 million, or $0.82 per diluted share, in the second quarter of 2021. Net income for the second quarter of 2022 benefited from higher revenues attributable to a new merged concession agreement in Egypt and higher commodity prices. The increase in realized prices was primarily driven by the effects of global inflation, the conflict in Ukraine on global commodity prices, and uncertainties around spare capacity and energy security globally.

The Company generated $2.4 billion of cash from operating activities during the first six months of 2022, a 48 percent increase from the first six months of 2021, driven by higher oil and gas revenues. Since year-end 2021, the Company has reduced its total outstanding debt and redeemable preferred interests by $2.2 billion and $712 million, respectively, through the deconsolidation of ALTM and the retirement of outstanding notes and debentures. The Company also repurchased 14.2 million shares of its common stock for $552 million during the first six months of 2022. The Company had $282 million of cash on hand at June 30, 2022.

The Company remains committed to its capital return framework established in the prior year for equity holders to participate more directly and materially in cash returns.

The Company believes returning 60 percent of cash flow over capital investment creates a good balance for providing near-term cash returns to shareholders while still recognizing the importance of longer-term balance sheet strengthening.
The Company’s quarterly dividend was increased in the third quarter of 2021 from $0.025 per share to $0.0625 per share and, in the fourth quarter of 2021 further increased to $0.125 per share.
Beginning in the fourth quarter of 2021 and through the end of the second quarter of 2022, the Company has repurchased 45.4 million shares of the Company’s common stock. As of June 30, 2022, the Company had remaining authorization to repurchase up to 34.6 million shares under the Company’s share repurchase programs. Additionally, the Company repurchased an additional 6.9 million shares of the Company’s common stock in July of 2022.

The Company does not anticipate any significant changes to the activity levels set forth in its three-year capital investment program or capital return framework in the context of higher strip oil and gas prices, remaining committed to safe, steady, and efficient operations across all assets and returning free cash flow to shareholders through dividends and share repurchases.

Operational Highlights

Key operational highlights for the quarter include:

United States

Daily boe production from the Company’s U.S. assets accounted for 52 percent of its total production during the second quarter of 2022. The Company’s initial delineation program in its Austin Chalk area had mixed results, prompting a pause in planned drilling and completion activity.
During the quarter the Company entered into a transaction to acquire properties in the Texas Delaware Basin near existing operations, primarily in Loving and Reeves counties. The acquired properties have a combination of producing wells, wells in the process of drilling and completion, and an inventory of undrilled locations. The Company expects production will average 12,000 to 14,000 boe/d for the remaining five months of the year. The purchase price was $505 million, and the transaction closed on July 29 for a total cost of $555 million after including post-effective date adjustments to date.

International

In Egypt, the Company averaged 12 drilling rigs and drilled 11 new productive wells during the second quarter of 2022. Second quarter 2022 gross equivalent production in the Company’s Egypt assets increased 1 percent from the second quarter of 2021, while net production increased 25 percent, primarily a function of improved cost recovery under the new merged concession agreement ratified at the end of 2021. The Company continues to build and enhance its drilling inventory in Egypt, supplemented with recent seismic acquisitions and new play concept evaluations on both new and existing acreage. The Company continues to increase drilling and workover activity as a result of the merged concession agreement.
The Company averaged two rigs in the North Sea during the second quarter of 2022. Production was impacted by downtime from maintenance turnaround at Forties during the first half of 2022. North Sea production in the second half of 2022 is expected to benefit from completion of maintenance activities and production commencing on the Garten-3 development well.
During the second quarter of 2022, the Company announced flow test results from the Krabdagu exploration well on Block 58 offshore Suriname, which encountered approximately 32 meters of net pay in each of the Upper Campanian and Lower Campanian zones. Appraisal drilling will be necessary to confirm additional resource and optimal development well locations. The Maersk Valiant drillship is currently drilling the Dikkop exploration well in the central portion of the block, after which it is expected to continue exploration and appraisal activities in the central portion of Block 58. APA holds a 50 percent working interest in Block 58, with TotalEnergies, the operator, holding a 50 percent working interest.
The Company is currently drilling the Baja exploration well on Block 53 offshore Suriname, adjacent to Block 58 operations. APA is the operator and holds a 45 percent interest in Block 53.

Results of Operations

Oil, Natural Gas, and Natural Gas Liquids Production Revenues

Revenue

The Company’s production revenues and respective contribution to total revenues by country were as follows:


	For the Quarter Ended June 30,								For the Six Months Ended June 30,
	2022				2021				2022				2021
	$ Value		% Contribution		$ Value		% Contribution		$ Value		% Contribution		$ Value		% Contribution

	($ in millions)
Oil Revenues:
United States	$	654	35	%	$	493	43	%	$	1,253	35	%	$	841	39	%
Egypt(1)	902		48	%	432		38	%	1,692		47	%	834		39	%
North Sea	307		17	%	216		19	%	635		18	%	457		22	%
Total(1)	$	1,863	100	%	$	1,141	100	%	$	3,580	100	%	$	2,132	100	%

Natural Gas Revenues:
United States	$	281	65	%	$	134	59	%	$	464	57	%	$	345	64	%
Egypt(1)	88		20	%	65		29	%	186		23	%	135		25	%
North Sea	64		15	%	27		12	%	163		20	%	58		11	%
Total(1)	$	433	100	%	$	226	100	%	$	813	100	%	$	538	100	%

NGL Revenues:
United States	$	214	93	%	$	141	96	%	$	418	92	%	$	261	95	%
Egypt(1)	3		1	%	2		1	%	6		2	%	4		1	%
North Sea	12		6	%	4		3	%	28		6	%	10		4	%
Total(1)	$	229	100	%	$	147	100	%	$	452	100	%	$	275	100	%

Oil and Gas Revenues:
United States	$	1,149	46	%	$	768	51	%	$	2,135	44	%	$	1,447	49	%
Egypt(1)	993		39	%	499		33	%	1,884		39	%	973		33	%
North Sea	383		15	%	247		16	%	826		17	%	525		18	%
Total(1)	$	2,525	100	%	$	1,514	100	%	$	4,845	100	%	$	2,945	100	%

(1) Includes revenues attributable to a noncontrolling interest in Egypt.

Production

The Company’s production volumes by country were as follows:


	For the Quarter Ended June 30,			For the Six Months Ended, June 30,
	2022	Increase (Decrease)	2021	2022	Increase (Decrease)	2021
Oil Volume (b/d)
United States	64,759	(22)%	82,852	67,184	(11)%	75,313
Egypt(1)(2)	85,502	20%	71,182	85,261	19%	71,673
North Sea	32,493	2%	31,992	33,860	(10)%	37,726
Total	182,754	(2)%	186,026	186,305	1%	184,712

Natural Gas Volume (Mcf/d)
United States	457,459	(15)%	541,088	467,493	(11)%	524,396
Egypt(1)(2)	346,424	35%	256,262	366,390	37%	267,145
North Sea	42,802	16%	36,769	40,645	(6)%	43,268
Total	846,685	2%	834,119	874,528	5%	834,809

NGL Volume (b/d)
United States	59,267	(13)%	68,492	60,482	(4)%	63,183
Egypt(1)(2)	297	(46)%	553	394	(31)%	568
North Sea	1,195	9%	1,095	1,345	9%	1,231
Total	60,759	(13)%	70,140	62,221	(4)%	64,982

BOE per day(3)
United States	200,269	(17)%	241,525	205,582	(9)%	225,895
Egypt(1)(2)	143,536	25%	114,445	146,720	26%	116,765
North Sea(4)	40,822	4%	39,216	41,979	(9)%	46,169
Total	384,627	(3)%	395,186	394,281	1%	388,829

(1) Gross oil, natural gas, and NGL production in Egypt were as follows:


	For the Quarter Ended June 30,		For the Six Months Ended June 30,
	2022	2021	2022	2021
Oil (b/d)	141,432	135,494	137,934	135,408
Natural Gas (Mcf/d)	555,694	578,380	576,637	590,756
NGL (b/d)	464	866	599	881

(2) Includes net production volumes per day attributable to a noncontrolling interest in Egypt of:


	For the Quarter Ended June 30,		For the Six Months Ended June 30,
	2022	2021	2022	2021
Oil (b/d)	28,516	23,759	28,423	23,923
Natural Gas (Mcf/d)	115,534	85,574	122,112	89,235
NGL (b/d)	99	184	131	189

(3) The table shows production on a boe basis in which natural gas is converted to an equivalent barrel of oil based on a 6:1 energy equivalent ratio. This ratio is not reflective of the price ratio between the two products.

(4) Average sales volumes from the North Sea for the second quarters of 2022 and 2021 were 38,029 boe/d and 41,941 boe/d, respectively, and 40,833 boe/d and 48,208 boe/d for the first six months of 2022 and 2021, respectively. Sales volumes may vary from production volumes as a result of the timing of liftings.

Pricing

The Company’s average selling prices by country were as follows:


	For the Quarter Ended June 30,					For the Six Months Ended, June 30,
	2022		Increase (Decrease)	2021		2022		Increase (Decrease)	2021
Average Oil Price - Per barrel
United States	$	110.98	70%	$	65.32	$	103.05	67%	$	61.68
Egypt	115.97		74%	66.70		109.65		71%	64.30
North Sea	113.77		66%	68.34		107.47		69%	63.48
Total	113.79		71%	66.40		106.87		69%	63.06

Average Natural Gas Price - Per Mcf
United States	$	6.75	147%	$	2.73	$	5.48	51%	$	3.63
Egypt	2.78		(1)%	2.80		2.80		—	2.80
North Sea	18.15		124%	8.10		24.72		233%	7.43
Total	5.65		89%	2.99		5.16		45%	3.56

Average NGL Price - Per barrel
United States	$	39.79	75%	$	22.72	$	38.20	67%	$	22.84
Egypt	75.14		97%	38.10		76.80		85%	41.49
North Sea	71.71		85%	38.79		73.29		66%	44.21
Total	40.97		77%	23.10		39.63		69%	23.41

Second-Quarter 2022 compared to Second-Quarter 2021

Crude Oil Crude oil revenues for the second quarter of 2022 totaled $1.9 billion, a $722 million increase from the comparative 2021 quarter. A 71 percent increase in average realized prices increased second-quarter 2022 oil revenues by $814 million compared to the prior-year quarter, while 2 percent lower average daily production decreased revenues by $92 million. Crude oil revenues accounted for 74 percent of total oil and gas production revenues and 48 percent of worldwide production in the second quarter of 2022. The Company’s worldwide oil production decreased 3.3 Mb/d to 182.8 Mb/d during the second quarter of 2022 from the comparative prior-year period, primarily a result of natural production decline across all assets, offset by an increased net production in Egypt resulting from improved cost recovery under the merged concession agreement ratified at the end of 2021.

Natural Gas Gas revenues for the second quarter of 2022 totaled $433 million, a $207 million increase from the comparative 2021 quarter. An 89 percent increase in average realized prices increased second-quarter 2022 natural gas revenues by $202 million compared to the prior-year quarter, while 2 percent higher average daily production increased revenues by $5 million. Natural gas revenues accounted for 17 percent of total oil and gas production revenues and 37 percent of worldwide production during the second quarter of 2022. The Company’s worldwide natural gas production increased 12.6 MMcf/d to 847 MMcf/d during the second quarter of 2022 from the comparative prior-year period, primarily a result of increased net production in Egypt resulting from improved cost recovery under the merged concession agreement ratified at the end of 2021 and increased production in the North Sea due to lower operational downtime as compared to the second quarter of 2021. These increases were partially offset by natural production decline across all assets and the Company’s divestiture of non-core assets in the Permian Basin during the first quarter of 2022.

NGL NGL revenues for the second quarter of 2022 totaled $229 million, a $82 million increase from the comparative 2021 quarter. A 77 percent increase in average realized prices increased second-quarter 2022 NGL revenues by $114 million compared to the prior-year quarter, while 13 percent lower average daily production decreased revenues by $32 million. NGL revenues accounted for 9 percent of total oil and gas production revenues and 15 percent of worldwide production during the second quarter of 2022. The Company’s worldwide NGL production decreased 9.4 Mb/d to 60.8 Mb/d during the second quarter of 2022 from the comparative prior-year period, primarily a result of natural production decline across all assets and the Company’s divestiture of non-core assets in the Permian Basin during the first quarter of 2022.

Year-to-Date 2022 compared to Year-to-Date 2021

Crude Oil Crude oil revenues for the first six months of 2022 totaled $3.6 billion, a $1.4 billion increase from the comparative 2021 period. A 69 percent increase in average realized prices increased oil revenues for the 2022 period by $1.4 billion compared to the prior-year period, while the change in average daily production was insignificant compared to the prior-year period. Crude oil revenues accounted for 74 percent of total oil and gas production revenues and 47 percent of worldwide production for the first six months of 2022. Crude oil prices realized during the first six months of 2022 averaged $106.87 per barrel, compared to $63.06 per barrel in the comparative prior-year period. The Company’s worldwide oil production increased 1.6 Mb/d to 186.3 Mb/d in the first six months of 2022 compared to the prior-year period, primarily a function of improved cost recovery under the merged concession agreement in Egypt ratified at the end of 2021, offset by operational downtime in the North Sea and natural production decline across all assets.

Natural Gas Gas revenues for the first six months of 2022 totaled $813 million, a $275 million increase from the comparative 2021 period. A 45 percent increase in average realized prices increased natural gas revenues for the 2022 period by $241 million compared to the prior-year period, while 5 percent higher average daily production increased revenues by $34 million compared to the prior-year period. Natural gas revenues accounted for 17 percent of total oil and gas production revenues and 37 percent of worldwide production for the first six months of 2022. Natural gas prices realized during the first six months of 2022 averaged $5.16 per Mcf, compared to $3.56 per Mcf in the comparative prior-year period. The Company’s worldwide natural gas production increased 40 MMcf/d to 875 MMcf/d in the first six months of 2022 compared to the prior-year period, primarily a result of increased net production in Egypt resulting from improved cost recovery under the merged concession agreement ratified at the end of 2021, offset by natural production decline across all assets.

NGL NGL revenues for the first six months of 2022 totaled $452 million, a $177 million increase from the comparative 2021 period. A 69 percent increase in average realized prices increased NGL revenues for the 2022 period by $191 million compared to the prior-year period, while 4 percent lower average daily production decreased revenues by $14 million compared to the prior-year period. NGL revenues accounted for 9 percent of total oil and gas production revenues and 16 percent of worldwide production for the first six months of 2022. NGL prices realized during the first six months of 2022 averaged $39.63 per barrel, compared to $23.41 per barrel in the comparative prior-year period. The Company’s worldwide NGL production decreased 2.8 Mb/d to 62.2 Mb/d in the first six months of 2022 compared to the prior-year period, primarily a result of natural production decline across all countries.

Altus Midstream Revenues

Prior to the deconsolidation of Altus on February 22, 2022, Altus Midstream services revenues generated through its fee-based contractual arrangements with the Company totaled $32 million during the second quarter of 2021 and $16 million and $64 million during the first six months of 2022 and 2021, respectively. These revenues were eliminated upon consolidation.

Purchased Oil and Gas Sales

Purchased oil and gas sales represent volumes primarily attributable to transport, fuel, and physical in-basin gas purchases that were sold by the Company to fulfill natural gas takeaway obligations. Sales related to these purchased volumes totaled $522 million and $242 million during the second quarters of 2022 and 2021, respectively, and $871 million and $682 million during the first six months of 2022 and 2021, respectively. Purchased oil and gas sales were offset by associated purchase costs of $528 million and $262 million during the second quarters of 2022 and 2021, respectively, and $879 million and $756 million during the first six months of 2022 and 2021, respectively. Gross purchased oil and gas sales values were higher in the second quarter and first six months of 2022 primarily due to higher average natural gas prices during the 2022 periods.

Operating Expenses

The Company’s operating expenses were as follows:


	For the Quarter Ended June 30,				For the Six Months Ended June 30,
	2022		2021		2022		2021

	(In millions)
Lease operating expenses	$	359	$	311	$	703	$	575
Gathering, processing, and transmission	94		61		175		119
Purchased oil and gas costs	528		262		879		756
Taxes other than income	78		51		148		95
Exploration	56		26		98		75
General and administrative	89		86		245		169
Transaction, reorganization, and separation	3		4		17		4
Depreciation, depletion, and amortization:
Oil and gas property and equipment	269		322		547		634
Gathering, processing, and transmission assets	1		19		6		38
Other assets	8		10		16		21
Asset retirement obligation accretion	29		28		58		56

Financing costs, net	76		107		228		217
Total Operating Expenses	$	1,590	$	1,287	$	3,120	$	2,759

Lease Operating Expenses (LOE)

LOE increased $48 million and $128 million in the second quarter and the first six months of 2022, respectively, from the comparative prior-year periods. On a per-unit basis, LOE increased 20 percent and 22 percent in the second quarter and the first six months of 2022, respectively, from the comparative prior-year periods. The increase was driven by overall higher labor costs and operating costs trending with higher oil and gas prices and global inflation. These increases were coupled with higher workover activity in the U.S. and in the North Sea in the second quarter and the first six months of 2022. LOE costs for the first six months of 2022 were also impacted by mark-to-market adjustments for cash-based stock compensation expense resulting from an increase in the Company’s stock price and anticipated achievement of performance and financial objectives as defined in the stock award plans.

Gathering, Processing, and Transmission (GPT)

The Company’s GPT expenses were as follows:


	For the Quarter Ended June 30,				For the Six Months Ended, June 30,
	2022		2021		2022		2021

	(In millions)
Third-party processing and transmission costs	$	68	$	53	$	134	$	104
Midstream service costs - ALTM	—		32		18		63
Midstream service costs - Kinetik	26		—		36		—
Upstream processing and transmission costs	94		85		188		167
Midstream operating expenses	—		8		5		15
Intersegment eliminations	—		(32)		(18)		(63)
Total Gathering, processing, and transmission	$	94	$	61	$	175	$	119

GPT costs increased $33 million and $56 million in the second quarter and the first six months of 2022, respectively, from the comparative prior-year periods. Third-party processing and transmission costs increased $15 million and $30 million in the second quarter and the first six months of 2022, respectively, from the comparative prior-year periods. The increase in third-party costs for the second quarter and the first six months of 2022 was primarily driven by an increase in average transportation rates during the year. Costs for services provided by ALTM in the first quarter of 2022 and prior to the BCP Business Combination (as defined in the Notes to the Company’s Consolidated Financial Statements set forth in Part I, Item 1—Financial Statements of this Quarterly Report on Form 10-Q) totaling $18 million were eliminated in the Company’s consolidated financial statements and reflected as “Intersegment eliminations” in the table above. Subsequent to the BCP Business Combination and the Company’s deconsolidation of Altus on February 22, 2022, these midstream services continue to be provided by Kinetik Holdings Inc. (Kinetik) but are no longer eliminated. Midstream services provided by Kinetik totaled $26 million and $36 million in the second quarter and the first six months of 2022, respectively, and will continue to result in higher GPT costs in future periods as compared to periods preceding the ALTM deconsolidation.

Purchased Oil and Gas Costs

Purchased oil and gas costs totaled $528 million and $879 million during the second quarter and the first six months of 2022, respectively, compared to $262 million and $756 million during the second quarter and the first six months of 2021, respectively. Purchased oil and gas costs were offset by associated purchase sales of $522 million and $871 million during the second quarter and the first six months of 2022, respectively, compared to $242 million and $682 million during the second quarter and the first six months of 2021, respectively, as further discussed above.

Taxes Other Than Income

Taxes other than income increased $27 million and $53 million from the second quarter and the first six months of 2021, respectively, primarily from higher severance taxes driven by higher commodity prices as compared to the same prior-year periods.

Exploration Expenses

The Company’s exploration expenses were as follows:


	For the Quarter Ended June 30,				For the Six Months Ended, June 30,
	2022		2021		2022		2021

	(In millions)
Unproved leasehold impairments	$	2	$	3	$	6	$	21
Dry hole expense	36		6		41		25
Geological and geophysical expense	3		6		18		10
Exploration overhead and other	15		11		33		19
Total Exploration	$	56	$	26	$	98	$	75

Exploration expenses increased $30 million and $23 million from the second quarter and the first six months of 2021, respectively, primarily the result of higher dry hole expenses and exploration overhead, a function of increased exploration activities. These increases were partially offset by lower unproved leasehold impairments driven by improved commodity prices.

General and Administrative (G&A) Expenses

G&A expenses increased $3 million and $76 million from the second quarter and the first six months of 2021, respectively. The year-over-year increase was primarily driven by higher cash-based stock compensation expense resulting from an increase in the Company’s stock price and anticipated achievement of performance and financial objectives as defined in the stock award plans. Higher overall wages across the Company also impacted G&A expenses compared to the prior-year period.

Transaction, Reorganization, and Separation (TRS) Costs

TRS costs decreased $1 million and increased $13 million from the second quarter and the first six months of 2021, respectively. The increase in costs during the first six months of 2022 compared to the same prior-year period was primarily a result of transaction costs from the BCP Business Combination.

Depreciation, Depletion, and Amortization (DD&A)

DD&A expenses on the Company’s oil and gas properties decreased $53 million and $87 million from the second quarter and the first six months of 2021, respectively. The Company’s DD&A rate on its oil and gas properties decreased $1.16 per boe and $1.28 per boe from the second quarter and the first six months of 2021, respectively. The decrease on an absolute basis was driven by lower depletion rates in Egypt, partially offset by higher production volumes.

Financing Costs, Net

The Company’s Financing costs were as follows:


	For the Quarter Ended June 30,				For the Six Months Ended, June 30,
	2022		2021		2022		2021
	(In millions)
Interest expense	$	79	$	110	$	169	$	222
Amortization of debt issuance costs	5		3		7		5
Capitalized interest	(5)		(2)		(8)		(4)
(Gain) loss on extinguishment of debt	—		(1)		67		(1)
Interest income	(3)		(3)		(7)		(5)
Total Financing costs, net	$	76	$	107	$	228	$	217

Net financing costs decreased $31 million and increased $11 million from the second quarter and the first six months of 2021, respectively. The lower overall interest expense was a result of the reduction of fixed-rate debt during 2021 and the first quarter of 2022. During the first six months of 2022, the lower interest expense was more than offset by a $67 million loss on extinguishment of debt recognized in the first quarter of 2022.

Provision for Income Taxes

The Company estimates its annual effective income tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which the Company operates. Non-cash impairments on the carrying value of the Company’s oil and gas properties, gains and losses on the sale of assets, statutory tax rate changes, and other significant or unusual items are recognized as discrete items in the quarter in which they occur.

During the second quarter of 2022, the Company’s effective income tax rate was primarily impacted by a decrease in the amount of valuation allowance against its U.S. deferred tax assets. The Company’s 2022 year-to-date effective income tax rate was primarily impacted by the gain associated with deconsolidation of Altus, the gain on sale of certain non-core mineral rights in the Delaware Basin, and a decrease in the amount of valuation allowance against its U.S. deferred tax assets. During the second quarter and the first six months of 2021, the Company’s effective income tax rate was primarily impacted by a decrease in the amount of valuation allowance against its U.S. deferred tax assets.

On May 26, 2022, the U.K. Chancellor announced a new tax on the profits of oil and gas companies operating in the U.K. and the U.K. Continental Shelf. On June 21, 2022, the U.K. Government published draft legislation concerning this new tax and on July 14, 2022, the Energy (Oil and Gas) Profits Levy Act 2022 was enacted, receiving Royal Assent. Under the new law, an additional levy is assessed at a 25 percent tax rate and will be effective for the period of May 26, 2022, through December 31, 2025. Under U.S. GAAP, the financial statement impact of new legislation will be recorded in the period of enactment. Therefore, in the third quarter of 2022, the Company expects to record a deferred tax expense of approximately $230 million to $250 million related to the remeasurement of the June 30, 2022 U.K. deferred tax liability.

The Company recorded a full valuation allowance against its U.S. net deferred tax assets. The Company will continue to maintain a full valuation allowance on its U.S. net deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of this allowance.

The Company is subject to U.S. federal income tax as well as income or capital taxes in various state and foreign jurisdictions. The Company’s tax reserves are related to tax years that may be subject to examination by the relevant taxing authority. The Company is currently under audit by the Internal Revenue Service for the 2014-2017 tax years and is also under audit in various states and foreign jurisdictions as part of its normal course of business.

Capital Resources and Liquidity

Operating cash flows are the Company’s primary source of liquidity. The Company’s short-term and long-term operating cash flows are impacted by highly volatile commodity prices, as well as production costs and sales volumes. Significant changes in commodity prices impact the Company’s revenues, earnings, and cash flows. Significant commodity price decreases potentially impact the Company’s liquidity if costs do not trend with related changes in commodity prices. Historically, costs have trended with commodity prices, albeit on a lag. Sales volumes also impact cash flows; however, they have a less volatile impact in the short term.

The Company’s long-term operating cash flows are dependent on reserve replacement and the level of costs required for ongoing operations. Cash investments are required to fund activity necessary to offset the inherent declines in production and proved crude oil and natural gas reserves. Future success in maintaining and growing reserves and production is highly dependent on the success of the Company’s drilling program and its ability to add reserves economically. Changes in commodity prices also impact estimated quantities of proved reserves.

The Company’s capital investment for the second quarter of 2022 was below its guidance for the period as some activity shifted to later in the year, and the Company expects its full-year estimated upstream capital to be approximately $1.725 billion. This is nearly 8 percent higher than initial guidance, primarily on increased Suriname drilling activity.

The Company believes its available liquidity and capital resource alternatives, combined with proactive measures to adjust its capital budget to reflect volatile commodity prices and anticipated operating cash flows, will be adequate to fund short-term and long-term operations, including the Company’s capital development program, repayment of debt maturities, payment of dividends, share buy-back activity, and amounts that may ultimately be paid in connection with commitments and contingencies.

The Company may also elect to utilize available cash on hand, committed borrowing capacity, access to both debt and equity capital markets, or proceeds from the sale of nonstrategic assets for all other liquidity and capital resource needs. As such, the Company believes it has sufficient resources to satisfy cash requirements over the next twelve months and beyond.

For additional information, refer to Part I, Items 1 and 2—Business and Properties, and Item 1A—Risk Factors, in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Sources and Uses of Cash

The following table presents the sources and uses of the Company’s cash and cash equivalents for the periods presented:


	For the Six Months Ended June 30,
	2022		2021

	(In millions)
Sources of Cash and Cash Equivalents:
Net cash provided by operating activities	$	2,426	$	1,640

Proceeds from Altus credit facility, net	—		33
Proceeds from asset divestitures	751		181
Proceeds from sale of Kinetik shares	224		—


Total Sources of Cash and Cash Equivalents	3,401		1,854
Uses of Cash and Cash Equivalents:
Additions to upstream oil and gas property	$	741	$	558

Leasehold and property acquisitions	26		3

Payments on revolving credit facilities, net	267		150
Payments on fixed-rate debt	1,370		20
Dividends paid to APA common stockholders	86		19
Distributions to noncontrolling interest - Egypt	159		60
Distributions to Altus Preferred Unit limited partners	11		23

Treasury stock activity, net	552		—
Deconsolidation of Altus cash and cash equivalents	143		—
Other	66		34
Total Uses of Cash and Cash Equivalents	3,421		867
Increase (decrease) in cash and cash equivalents	$	(20)	$	987

Sources of Cash and Cash Equivalents

Net Cash Provided by Operating Activities Operating cash flows are the Company’s primary source of capital and liquidity and are impacted, both in the short term and the long term, by volatile commodity prices. The factors that determine operating cash flows are largely the same as those that affect net earnings, with the exception of non-cash expenses such as DD&A, exploratory dry hole expense, asset impairments, asset retirement obligation (ARO) accretion, and deferred income tax expense.

Net cash provided by operating activities increased $786 million from the first six months of 2021, primarily due to higher commodity prices and associated revenues, partially offset by changes in working capital.

For a detailed discussion of commodity prices, production, and operating expenses, refer to “Results of Operations” in this Item 2. For additional detail on the changes in operating assets and liabilities and the non-cash expenses that do not impact net cash provided by operating activities, refer to the statement of consolidated cash flows in the Consolidated Financial Statements set forth in Part I, Item 1, Financial Statements of this Quarterly Report on Form 10-Q.

Proceeds from Altus Credit Facility, Net The construction of Altus’ gathering and processing assets and the associated equity method pipelines in early 2021 required capital expenditures in excess of Altus’ cash on hand and operational cash flows. During the first six months of 2021, Altus Midstream LP borrowed $33 million under its revolving credit facility to meet this shortfall. Prior to the deconsolidation of Altus on February 22, 2022, there were no additional borrowings under this facility in 2022.

Proceeds from Asset Divestitures The Company received $751 million and $181 million of proceeds from the divestiture of certain non-core assets during the first six months of 2022 and 2021, respectively. The Company also received $224 million of cash proceeds from the sale of four million of its shares in Kinetik during the first six months of 2022. For more information regarding the Company’s acquisitions and divestitures, refer to Note 2—Acquisitions and Divestitures in the Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Uses of Cash and Cash Equivalents

Additions to Upstream Oil & Gas Property Exploration and development cash expenditures were $741 million and $558 million during the first six months of 2022 and 2021, respectively. The increase in capital investment is reflective of the increase in the Company’s capital program. The Company operated an average of 20 drilling rigs during the second quarter of 2022, compared to an average of 10 drilling rigs during the second quarter of 2021.

Leasehold and Property Acquisitions During the first six months of 2022 and 2021, the Company completed leasehold and property acquisitions, primarily in the Permian Basin, for total cash consideration of $26 million and $3 million, respectively.

Payments on Revolving Credit Facilities APA and Apache paid down a net of $267 million and $150 million during the first six months of 2022 and 2021, respectively, on its revolving credit facilities.

Payments on Fixed-Rate Debt On January 18, 2022, Apache redeemed the outstanding $213 million principal amount of 3.25% senior notes due April 15, 2022 at a redemption price equal to 100% of their principal amount, plus accrued and unpaid interest to the redemption date. The redemption was financed by borrowing under Apache’s former revolving credit facility.

During the quarter ended March 31, 2022, Apache closed cash tender offers for certain outstanding notes issued under its indentures, accepting for purchase $1.1 billion aggregate principal amount of notes. Apache paid holders an aggregate $1.2 billion in cash, reflecting principal, premium to par, and accrued and unpaid interest. The Company recognized a $66 million loss on extinguishment of debt, including $11 million of unamortized debt discount and issuance costs in connection with the note purchases.

During the quarter ended March 31, 2022, Apache purchased in the open market and canceled senior notes issued under its indentures in an aggregate principal amount of $15 million for an aggregate purchase price of $16 million in cash, including accrued interest and broker fees, reflecting a premium to par of an aggregate $1 million. The Company recognized a $1 million loss on these repurchases.

During the first six months of 2021, Apache purchased in the open market and canceled senior notes issued under its indentures in an aggregate principal amount of $22 million for an aggregate purchase price of $20 million in cash, including accrued interest and broker fees, reflecting a discount to par of an aggregate $2 million. The Company recognized a $1 million net gain on extinguishment of debt as part of these transactions.

The Company expects that Apache intends to reduce debt outstanding under its indentures from time to time.

Dividends The Company paid $86 million and $19 million during the first six months of 2022 and 2021, respectively, for dividends on its common stock. During the third quarter of 2021, the Company’s Board of Directors approved an increase in its quarterly dividend per share from $0.025 to $0.0625 and, in the fourth quarter of 2021, a further increase to $0.125 per share.

Distributions to Noncontrolling Interest - Egypt Sinopec International Petroleum Exploration and Production Corporation (Sinopec) holds a one-third minority participation interest in the Company’s oil and gas operations in Egypt. The Company paid $159 million and $60 million during the first six months of 2022 and 2021, respectively, in cash distributions to Sinopec.

Distributions to Altus Preferred Units limited partners Prior to the deconsolidation of Altus on February 22, 2022, Altus Midstream LP paid $11 million and $23 million in cash distributions to its limited partners holding Preferred Units during the first six months of 2022 and 2021. For more information regarding the Preferred Units, refer to Note 12—Redeemable Noncontrolling Interest - Altus in the Notes to Consolidated Financial Statements set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Treasury Stock Activity, net In the first six months of 2022, the Company repurchased 14.2 million shares at an average price of $38.79 per share totaling $552 million, and as of June 30, 2022, the Company had remaining authorization to repurchase 34.6 million shares. No shares were repurchased during the six months ended June 30, 2021.

Liquidity

The following table presents a summary of the Company’s key financial indicators:


	June 30, 2022		December 31, 2021

	(In millions)
Cash and cash equivalents	$	282	$	302
Total debt - Apache	5,285		6,853
Total debt - Altus	—		657
Total equity (deficit)	1,505		(717)
Available committed borrowing capacity under syndicated credit facilities	2,421		2,426
Available committed borrowing capacity - Altus	—		141

Cash and Cash Equivalents As of June 30, 2022, the Company had $282 million in cash and cash equivalents. The majority of the Company’s cash is invested in highly liquid, investment-grade instruments with maturities of three months or less at the time of purchase.

Debt As of June 30, 2022, the Company had $5.3 billion in total debt outstanding, which consisted of notes and debentures of Apache, credit facility borrowings, and finance lease obligations. As of June 30, 2022, current debt included $123 million, carrying value, of Apache’s 2.625% senior notes due January 15, 2023 and $2 million of finance lease obligations.

Committed Credit Facilities On April 29, 2022, the Company entered into two syndicated credit agreements for general corporate purposes that replaced and refinanced Apache’s 2018 syndicated credit agreement (the Former Facility).

One new agreement is denominated in US dollars (the USD Agreement) and provides for an unsecured five-year revolving credit facility, with aggregate commitments of US$1.8 billion (including a letter of credit subfacility of up to US$750 million, of which US$150 million currently is committed). The Company may increase commitments up to an aggregate US$2.3 billion by adding new lenders or obtaining the consent of any increasing existing lenders. This facility matures in April 2027, subject to the Company’s two, one-year extension options.
The second new agreement is denominated in pounds sterling (the GBP Agreement) and provides for an unsecured five-year revolving credit facility, with aggregate commitments of £1.5 billion for loans and letters of credit. This facility matures in April 2027, subject to the Company’s two, one-year extension options.

In connection with the Company’s entry into the USD Agreement and the GBP Agreement (each, a New Agreement), Apache terminated US$4.0 billion of commitments under the Former Facility, borrowings then outstanding under the Former Facility were deemed outstanding under the USD Agreement, and letters of credit then outstanding under the Former Facility were deemed outstanding under a New Agreement, depending upon whether denominated in US dollars or pounds sterling. Apache may borrow under the USD Agreement up to an aggregate principal amount of US$300 million outstanding at any given time. Apache has guaranteed obligations under each New Agreement effective until the aggregate principal amount of indebtedness under senior notes and debentures outstanding under Apache’s existing indentures is less than US$1.0 billion.

As of June 30, 2022, there were $275 million of borrowings and a $20 million letter of credit outstanding under the USD Agreement, and an aggregate £748 million in letters of credit outstanding under the GBP Agreement. As of December 31, 2021, there were $542 million of borrowings and an aggregate £748 million and $20 million in letters of credit outstanding under the Former Facility. The letters of credit denominated in pounds were issued to support North Sea decommissioning obligations, the terms of which required such support after Standard & Poor’s reduced Apache’s credit rating from BBB to BB+ on March 26, 2020.

Uncommitted Credit Facilities Apache, from time to time, has and uses uncommitted credit and letter of credit facilities for working capital and credit support purposes. As of June 30, 2022, there were no borrowings and £117 million and $17 million in letters of credit outstanding under these facilities. As of December 31, 2021, there were no borrowings and £117 million and $17 million in letters of credit outstanding under these facilities.

Off-Balance Sheet Arrangements The Company enters into customary agreements in the oil and gas industry for drilling rig commitments, firm transportation agreements, and other obligations that may not be recorded on the Company’s consolidated balance sheet. For more information regarding these and other contractual arrangements, please refer to “Contractual Obligations” in Part II, Item 7 of APA’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021. There have been no material changes to the contractual obligations described therein.

Potential Decommissioning Obligations on Sold Properties

The Company’s subsidiaries have potential exposure to future obligations related to divested properties. The Company has divested various leases, wells, and facilities located in the Gulf of Mexico (GOM) where the purchasers typically assume all obligations to plug, abandon, and decommission the associated wells, structures, and facilities acquired. One or more of the counterparties in these transactions could, either as a result of the severe decline in oil and natural gas prices or other factors related to the historical or future operations of their respective businesses, face financial problems that may have a significant impact on their solvency and ability to continue as a going concern. If a purchaser of such GOM assets becomes the subject of a case or proceeding under relevant insolvency laws or otherwise fails to perform required abandonment obligations, APA’s subsidiaries could be required to perform such actions under applicable federal laws and regulations. In such event, such subsidiaries may be forced to use available cash to cover the costs of such liabilities and obligations should they arise.

In 2013, Apache sold its GOM Shelf operations and properties and its GOM operating subsidiary, GOM Shelf LLC (GOM Shelf) to Fieldwood Energy LLC (Fieldwood). Under the terms of the purchase agreement, Apache received cash consideration of $3.75 billion and Fieldwood assumed the obligation to decommission the properties held by GOM Shelf and the properties acquired from Apache and its other subsidiaries (collectively, the Legacy GOM Assets). In respect of such abandonment obligations, Fieldwood posted letters of credit in favor of Apache (Letters of Credit) and established trust accounts (Trust A and Trust B) of which Apache was a beneficiary and which were funded by two net profits interests (NPIs) depending on future oil prices. On February 14, 2018, Fieldwood filed for protection under Chapter 11 of the U.S. Bankruptcy Code. In connection with the 2018 bankruptcy, Fieldwood confirmed a plan under which Apache agreed, inter alia, to (i) accept bonds in exchange for certain of the Letters of Credit and (ii) amend the Trust A trust agreement and one of the NPIs to consolidate the trusts into a single Trust (Trust A) funded by both remaining NPIs. Currently, Apache holds two bonds (Bonds) and five Letters of Credit backed by investment-grade counterparties to secure Fieldwood’s asset retirement obligations on the Legacy GOM Assets as and when Apache is required to perform or pay for decommissioning any Legacy GOM Asset over the remaining life of the Legacy GOM Assets.

On August 3, 2020, Fieldwood again filed for protection under Chapter 11 of the U.S. Bankruptcy Code. On June 25, 2021, the United States Bankruptcy Court for the Southern District of Texas (Houston Division) entered an order confirming Fieldwood’s bankruptcy plan. On August 27, 2021, Fieldwood’s bankruptcy plan became effective. Pursuant to the plan, the Legacy GOM Assets were separated into a standalone company, which was subsequently merged into GOM Shelf. Under GOM Shelf’s limited liability company agreement, the proceeds of production of the Legacy GOM Assets will be used to fund decommissioning of Legacy GOM Assets.

By letter dated April 5, 2022, replacing two prior letters dated September 8, 2021 and February 22, 2022, respectively, GOM Shelf notified the Bureau of Safety and Environmental Enforcement (BSEE) that it was unable to fund the decommissioning obligations that it is currently required to perform on certain of the Legacy GOM Assets. As a result, Apache and other current and former owners in these assets have received orders from BSEE to decommission certain of the Legacy GOM Assets included in GOM Shelf’s notification to BSEE. Apache expects to receive such orders on the other Legacy GOM Assets included in GOM Shelf’s notification letter. Further, Apache anticipates that GOM Shelf may send additional such notices to BSEE in the future and that it may receive additional orders from BSEE requiring it to decommission other Legacy GOM Assets.

If Apache incurs costs to decommission any Legacy GOM Asset and GOM Shelf does not reimburse Apache for such costs, then Apache expects to obtain reimbursement from Trust A, the Bonds, and the Letters of Credit until such funds and securities are fully utilized. In addition, after such sources have been exhausted, Apache has agreed to provide a standby loan to GOM Shelf of up to $400 million to perform decommissioning (Standby Loan Agreement), with such standby loan secured by a first and prior lien on the Legacy GOM Assets.

If the combination of GOM Shelf’s net cash flow from its producing properties, the Trust A funds, the Bonds, and the remaining Letters of Credit are insufficient to fully fund decommissioning of any Legacy GOM Assets that Apache may be ordered by BSEE to perform, or if GOM Shelf’s net cash flow from its remaining producing properties after the Trust A funds, Bonds, and Letters of Credit are exhausted is insufficient to repay any loans made by Apache under the Standby Loan Agreement, then Apache may be forced to effectively use its available cash to fund the deficit.

As of June 30, 2022, Apache estimates that its potential liability to fund decommissioning of Legacy GOM Assets it may be ordered to perform ranges from $1.2 billion to $1.4 billion on an undiscounted basis. Management does not believe any specific estimate within this range is a better estimate than any other. Accordingly, the Company has recorded a contingent liability of $1.2 billion as of June 30, 2022, representing the estimated costs of decommissioning it may be required to perform on Legacy GOM Assets. Of the total liability recorded, $825 million is reflected under the caption “Decommissioning contingency for sold Gulf of Mexico properties,” and $350 million is reflected under “Other current liabilities” in the Company’s consolidated balance sheet. The Company has also recorded a $733 million asset, which represents the amount the Company expects to be reimbursed from the Trust A funds, the Bonds, and the Letters of Credit for decommissioning it may be required to perform on Legacy GOM Assets. Of the total asset recorded, $383 million is reflected under the caption “Decommissioning security for sold Gulf of Mexico properties,” and $350 million is reflected under “Other current assets.” Changes in significant assumptions impacting Apache’s estimated liability, including expected decommissioning rig spread rates, lift boat rates, and planned abandonment logistics could result in a liability in excess of the amount accrued. In addition, significant changes in the market price of oil, gas, and NGLs could further impact Apache’s estimate of its contingent liability to decommission Legacy GOM Assets.

Critical Accounting Estimates

The Company prepares its financial statements and accompanying notes in conformity with accounting principles generally accepted in the U.S., which require management to make estimates and assumptions about future events that affect reported amounts in the financial statements and the accompanying notes. The Company identifies certain accounting policies involving estimation as critical accounting estimates based on, among other things, their impact on the portrayal of the Company’s financial condition, results of operations, or liquidity, as well as the degree of difficulty, subjectivity, and complexity in their deployment. Critical accounting estimates address accounting matters that are inherently uncertain due to unknown future resolution of such matters. Management routinely discusses the development, selection, and disclosure of each critical accounting estimate. For a discussion of the Company’s most critical accounting estimates, please see the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Some of the more significant estimates include reserve estimates, oil and gas exploration costs, offshore decommissioning contingency, long-lived asset impairments, asset retirement obligations, and income taxes.

New Accounting Pronouncements

There were no material changes in recently issued or adopted accounting standards from those disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

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