filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
67K characters. Original on sec.gov · Markdown
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, 2022.
Overview
APA is an independent energy company that owns consolidated subsidiaries that explore for, develop, and produce 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 the Dominican Republic and other international locations that may, over time, result in reportable discoveries and development opportunities. As a holding company, APA Corporation’s primary assets are its ownership interests in its subsidiaries. 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), 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 wants to be a part of the conversation and solution as society works to meet growing global demand for reliable and affordable energy. APA strives to meet those challenges while creating value for all its stakeholders.
Early in 2020, impacts of the coronavirus disease 2019 (COVID-19) pandemic and related governmental actions began to exert significant downward pressure on crude oil and natural gas prices. Since that time, commodity prices worldwide have largely rebounded; however, uncertainties in the global supply chain and financial markets, including the impact of inflation, rising interest rates, the conflict in Ukraine, and actions taken by foreign oil and gas producing nations, including OPEC+, continue to impact oil supply and demand and contribute to commodity price volatility. 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 shareholders. 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 first quarter of 2023, the Company reported net income attributable to common stock of $242 million, or $0.78 per diluted share, compared to a net income of $1.9 billion, or $5.43 per diluted share, in the first quarter of 2022. Results from the first quarter of 2022 included approximately $1.2 billion of transaction gains recognized for divesting certain non-core mineral rights in the Delaware Basin and completing the BCP Business Combination. In addition, net income for the first quarter of 2023 was impacted by lower revenues attributable to lower realized commodity prices when compared to the prior-year period.
The Company generated $335 million of cash from operating activities during the first three months of 2023, 62 percent lower than the first three months of 2022. APA’s lower operating cash flows for the first three months of 2023 were driven by lower commodity prices and associated revenues and the timing of working capital items. The Company also repurchased 3.7 million shares of its common stock for $142 million during the first three months of 2023. The Company had $154 million of cash on hand at March 31, 2023.
The Company remains committed to its capital return framework established in 2021 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 fourth quarter of 2021 from $0.0625 per share to $0.125 per share. The dividend was further increased in the third quarter of 2022 to $0.25 per share, representing a return to pre-COVID-19 dividend levels.
-
Beginning in the fourth quarter of 2021 and through the end of the first quarter of 2023, the Company has repurchased 71.1 million shares of the Company’s common stock. As of March 31, 2023, the Company had remaining authorization to repurchase up to 49 million shares under the Company’s share repurchase programs.
APA’s diverse asset portfolio and operational flexibility provide it the ability to timely respond to near-term price volatility and effectively manage its investment programs accordingly. In response to prevailing weakness in Waha natural gas prices, the Company is ramping down planned Alpine High activity over the remainder of the year. This will result in a reduction of the Company’s upstream capital investment of approximately $100 million, for a full-year capital investment totaling approximately $1.9 billion to $2.0 billion. The Company does not expect this capital reduction to have a material impact on the Company’s 2023 U.S. production guidance.
Operational Highlights
Key operational highlights for the quarter include:
United States
*•*Daily boe production from the Company’s U.S. assets accounted for 51 percent of its total production during the first quarter of 2023. The Company averaged five drilling rigs in the U.S. during the quarter, including two rigs in the Southern Midland Basin and three rigs in the Delaware Basin. The Company’s core Midland Basin development program and recently acquired properties in the Texas Delaware Basin continue to represent key growth areas for the U.S. assets.
International
-
In Egypt, the Company averaged 17 drilling rigs and drilled 19 new productive wells during the first quarter of 2023. First quarter 2023 gross equivalent production in the Company’s Egypt assets decreased 1 percent from the first quarter of 2022, and net production decreased 2 percent. The Company increased drilling and workover activity throughout the past year with a heavier focus on oil prospects. As a result, gross and net oil production for the first three months of 2023 increased approximately 5 percent and 3 percent, respectively, when compared to the first three months of 2022.
-
The Company averaged two rigs in the North Sea during the first quarter of 2023. Production increased at Beryl and Forties during the first quarter of 2023 following the completion of maintenance activities at the end of 2022 and improved facility operating efficiency compared to the prior year. The Company will release the Ocean Patriot semi-submersible drilling rig around mid-year 2023, once it completes its scheduled drilling campaign in the North Sea, and thereafter, the associated investment capital will be reallocated to other areas.
-
Suriname activity in the first half of 2023 is focused on appraising the Krabdagu discovery in Block 58. The first appraisal well was recently completed, and a second appraisal well is currently being drilled.
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 March 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||
| $ Value | % Contribution | $ Value | % Contribution | |||||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Oil Revenues: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| United States | $ | 486 | 35 | % | $ | 599 | 35 | % | ||||||||||||||||||||||||||||||||||||||||||
| Egypt(1) | 629 | 45 | % | 790 | 46 | % | ||||||||||||||||||||||||||||||||||||||||||||
| North Sea | 282 | 20 | % | 328 | 19 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total(1) | $ | 1,397 | 100 | % | $ | 1,717 | 100 | % | ||||||||||||||||||||||||||||||||||||||||||
| Natural Gas Revenues: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| United States | $ | 89 | 37 | % | $ | 183 | 48 | % | ||||||||||||||||||||||||||||||||||||||||||
| Egypt(1) | 93 | 38 | % | 98 | 26 | % | ||||||||||||||||||||||||||||||||||||||||||||
| North Sea | 60 | 25 | % | 99 | 26 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total(1) | $ | 242 | 100 | % | $ | 380 | 100 | % | ||||||||||||||||||||||||||||||||||||||||||
| NGL Revenues: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| United States | $ | 120 | 92 | % | $ | 204 | 91 | % | ||||||||||||||||||||||||||||||||||||||||||
| Egypt(1) | — | — | % | 3 | 2 | % | ||||||||||||||||||||||||||||||||||||||||||||
| North Sea | 10 | 8 | % | 16 | 7 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total(1) | $ | 130 | 100 | % | $ | 223 | 100 | % | ||||||||||||||||||||||||||||||||||||||||||
| Oil and Gas Revenues: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| United States | $ | 695 | 39 | % | $ | 986 | 43 | % | ||||||||||||||||||||||||||||||||||||||||||
| Egypt(1) | 722 | 41 | % | 891 | 38 | % | ||||||||||||||||||||||||||||||||||||||||||||
| North Sea | 352 | 20 | % | 443 | 19 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total(1) | $ | 1,769 | 100 | % | $ | 2,320 | 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 March 31, | ||||||||||||||||||||||||||||||||||||||
| 2023 | Increase (Decrease) | 2022 | ||||||||||||||||||||||||||||||||||||
| Oil Volume (b/d) | ||||||||||||||||||||||||||||||||||||||
| United States | 71,888 | 3% | 69,636 | |||||||||||||||||||||||||||||||||||
| Egypt(1)(2) | 87,795 | 3% | 85,018 | |||||||||||||||||||||||||||||||||||
| North Sea | 37,502 | 6% | 35,242 | |||||||||||||||||||||||||||||||||||
| Total | 197,185 | 4% | 189,896 | |||||||||||||||||||||||||||||||||||
| Natural Gas Volume (Mcf/d) | ||||||||||||||||||||||||||||||||||||||
| United States | 441,527 | (8)% | 477,637 | |||||||||||||||||||||||||||||||||||
| Egypt(1)(2) | 356,350 | (8)% | 386,577 | |||||||||||||||||||||||||||||||||||
| North Sea | 40,360 | 5% | 38,466 | |||||||||||||||||||||||||||||||||||
| Total | 838,237 | (7)% | 902,680 | |||||||||||||||||||||||||||||||||||
| NGL Volume (b/d) | ||||||||||||||||||||||||||||||||||||||
| United States | 56,103 | (9)% | 61,711 | |||||||||||||||||||||||||||||||||||
| Egypt(1)(2) | — | NM | 491 | |||||||||||||||||||||||||||||||||||
| North Sea | 1,255 | (16)% | 1,498 | |||||||||||||||||||||||||||||||||||
| Total | 57,358 | (10)% | 63,700 | |||||||||||||||||||||||||||||||||||
| BOE per day(3) | ||||||||||||||||||||||||||||||||||||||
| United States | 201,580 | (4)% | 210,953 | |||||||||||||||||||||||||||||||||||
| Egypt(1)(2) | 147,186 | (2)% | 149,938 | |||||||||||||||||||||||||||||||||||
| North Sea(4) | 45,483 | 5% | 43,151 | |||||||||||||||||||||||||||||||||||
| Total | 394,249 | (2)% | 404,042 |
(1) Gross oil, natural gas, and NGL production in Egypt were as follows:
| For the Quarter Ended March 31, | ||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||||||||||||||
| Oil (b/d) | 140,764 | 134,397 | ||||||||||||||||||||||||||||||||||||
| Natural Gas (Mcf/d) | 545,049 | 597,812 | ||||||||||||||||||||||||||||||||||||
| NGL (b/d) | — | 735 |
(2) Includes net production volumes per day attributable to a noncontrolling interest in Egypt of:
| For the Quarter Ended March 31, | ||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||||||||||||||
| Oil (b/d) | 29,294 | 28,328 | ||||||||||||||||||||||||||||||||||||
| Natural Gas (Mcf/d) | 118,903 | 128,764 | ||||||||||||||||||||||||||||||||||||
| NGL (b/d) | — | 164 |
(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 first quarters of 2023 and 2022 were 46,632 boe/d and 43,668 boe/d, respectively. Sales volumes may vary from production volumes as a result of the timing of liftings.
NM — Not Meaningful
Pricing
The Company’s average selling prices by country were as follows:
| For the Quarter Ended March 31, | ||||||||||||||||||||||||||||||||||||||
| 2023 | Increase (Decrease) | 2022 | ||||||||||||||||||||||||||||||||||||
| Average Oil Price – Per barrel | ||||||||||||||||||||||||||||||||||||||
| United States | $ | 75.17 | (21)% | $ | 95.58 | |||||||||||||||||||||||||||||||||
| Egypt | 79.58 | (23)% | 103.22 | |||||||||||||||||||||||||||||||||||
| North Sea | 81.57 | (20)% | 102.20 | |||||||||||||||||||||||||||||||||||
| Total | 78.37 | (22)% | 100.23 | |||||||||||||||||||||||||||||||||||
| Average Natural Gas Price – Per Mcf | ||||||||||||||||||||||||||||||||||||||
| United States | $ | 2.24 | (47)% | $ | 4.25 | |||||||||||||||||||||||||||||||||
| Egypt | 2.89 | 2% | 2.83 | |||||||||||||||||||||||||||||||||||
| North Sea | 17.58 | (46)% | 32.35 | |||||||||||||||||||||||||||||||||||
| Total | 3.22 | (31)% | 4.70 | |||||||||||||||||||||||||||||||||||
| Average NGL Price – Per barrel | ||||||||||||||||||||||||||||||||||||||
| United States | $ | 23.79 | (35)% | $ | 36.67 | |||||||||||||||||||||||||||||||||
| Egypt | — | NM | 77.81 | |||||||||||||||||||||||||||||||||||
| North Sea | 56.92 | (24)% | 74.64 | |||||||||||||||||||||||||||||||||||
| Total | 24.84 | (35)% | 38.33 |
NM — Not Meaningful
First-Quarter 2023 compared to First-Quarter 2022
Crude Oil Crude oil revenues for the first quarter of 2023 totaled $1.4 billion, a $320 million decrease from the comparative 2022 quarter. A 22 percent decrease in average realized prices decreased first-quarter 2023 oil revenues by $374 million compared to the prior-year quarter, while 4 percent higher average daily production increased revenues by $54 million. Crude oil revenues accounted for 79 percent of total oil and gas production revenues and 50 percent of worldwide production in the first quarter of 2023. Crude oil prices realized in the first quarter of 2023 averaged $78.37 per barrel, compared with $100.23 per barrel in the comparative prior-year quarter.
The Company’s worldwide oil production increased 7.3 Mb/d to 197.2 Mb/d during the first quarter of 2023 from the comparative prior-year period, primarily a result of property acquisitions in the U.S., increased drilling activity, and recompletions, partially offset by natural production decline across all assets.
Natural Gas Gas revenues for the first quarter of 2023 totaled $242 million, a $138 million decrease from the comparative 2022 quarter. A 31 percent decrease in average realized prices decreased first-quarter 2023 natural gas revenues by $120 million compared to the prior-year quarter, while 7 percent lower average daily production decreased revenues by $18 million. Natural gas revenues accounted for 14 percent of total oil and gas production revenues and 35 percent of worldwide production during the first quarter of 2023. The Company’s worldwide natural gas production decreased 64.4 MMcf/d to 838 MMcf/d during the first quarter of 2023 from the comparative prior-year period, primarily a result of natural production decline across all assets, partially offset by increased drilling activity and recompletions.
NGL NGL revenues for the first quarter of 2023 totaled $130 million, a $93 million decrease from the comparative 2022 quarter. A 35 percent decrease in average realized prices decreased first-quarter 2023 NGL revenues by $78 million compared to the prior-year quarter, while 10 percent lower average daily production decreased revenues by $15 million. NGL revenues accounted for 7 percent of total oil and gas production revenues and 15 percent of worldwide production during the first quarter of 2023. The Company’s worldwide NGL production decreased 6.3 Mb/d to 57.4 Mb/d during the first quarter of 2023 from the comparative prior-year period, primarily a result of natural production decline, partially offset by increased drilling activity and recompletions.
Altus Midstream Revenues
Prior to the BCP Business Combination and associated deconsolidation of Altus on February 22, 2022, Altus Midstream’s services revenues generated through its fee-based contractual arrangements with the Company totaled $16 million during the first quarter of 2022. 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 $239 million and $349 million during the first quarters of 2023 and 2022, respectively. Purchased oil and gas sales were offset by associated purchase costs of $216 million and $351 million during the first quarters of 2023 and 2022, respectively. Gross purchased oil and gas sales values were lower in the first quarter primarily due to lower average natural gas prices in the first quarter of 2023 compared to the prior-year period.
Operating Expenses
The Company’s operating expenses were as follows:
| For the Quarter Ended March 31, | ||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||
| Lease operating expenses | $ | 321 | $ | 344 | ||||||||||||||||||||||
| Gathering, processing, and transmission | 78 | 81 | ||||||||||||||||||||||||
| Purchased oil and gas costs | 216 | 351 | ||||||||||||||||||||||||
| Taxes other than income | 52 | 70 | ||||||||||||||||||||||||
| Exploration | 52 | 42 | ||||||||||||||||||||||||
| General and administrative | 65 | 156 | ||||||||||||||||||||||||
| Transaction, reorganization, and separation | 4 | 14 | ||||||||||||||||||||||||
| Depreciation, depletion, and amortization: | ||||||||||||||||||||||||||
| Oil and gas property and equipment | 325 | 278 | ||||||||||||||||||||||||
| Gathering, processing, and transmission assets | 2 | 5 | ||||||||||||||||||||||||
| Other assets | 5 | 8 | ||||||||||||||||||||||||
| Asset retirement obligation accretion | 28 | 29 | ||||||||||||||||||||||||
| Financing costs, net | 72 | 152 | ||||||||||||||||||||||||
| Total Operating Expenses | $ | 1,220 | $ | 1,530 |
Lease Operating Expenses (LOE)
LOE decreased $23 million in the first quarter of 2023 from the comparative prior-year period. On a per-unit basis, LOE decreased 5 percent in the first quarter of 2023 from the comparative prior-year period. The decrease was primarily driven by the impact from changes in foreign currency exchange rates against the US dollar and mark-to-market adjustments for cash-based stock compensation expense resulting from changes in the Company’s stock price. These decreases were partially offset by overall higher labor costs, chemical and other operating costs trending with global inflation and increased workover activity in the U.S.
Gathering, Processing, and Transmission (GPT)
The Company’s GPT expenses were as follows:
| For the Quarter Ended March 31, | ||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||
| Third-party processing and transmission costs | $ | 52 | $ | 66 | ||||||||||||||||||||||
| Midstream service costs – ALTM | — | 18 | ||||||||||||||||||||||||
| Midstream service costs – Kinetik | 26 | 10 | ||||||||||||||||||||||||
| Upstream processing and transmission costs | 78 | 94 | ||||||||||||||||||||||||
| Midstream operating expenses | — | 5 | ||||||||||||||||||||||||
| Intersegment eliminations | — | (18) | ||||||||||||||||||||||||
| Total Gathering, processing, and transmission | $ | 78 | $ | 81 |
GPT costs decreased $3 million in the first quarter of 2023 from the comparative prior-year period, the result of lower upstream processing and transmission costs, partially offset by impacts of the BCP Business Combination. Upstream processing and transmission costs decreased $16 million in the first quarter of 2023 from the comparative prior-year period, primarily driven by a decrease in production volumes when compared to the prior-year period. Costs for services provided by ALTM in the first quarter of 2022 and prior to the BCP Business Combination 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 $10 million in the first quarters of 2023 and 2022, respectively.
Purchased Oil and Gas Costs
Purchased oil and gas costs totaled $216 million during the first quarter of 2023 compared to $351 million during the first quarter of 2022. Purchased oil and gas costs were offset by associated purchase sales of $239 million during the first quarter of 2023 compared to $349 million during the first quarter of 2022, as discussed above.
Taxes Other Than Income
Taxes other than income decreased $18 million from the first quarter of 2022 primarily from lower severance taxes driven by lower commodity prices as compared to the prior-year period.
Exploration Expenses
The Company’s exploration expenses were as follows:
| For the Quarter Ended March 31, | ||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||
| Unproved leasehold impairments | $ | 5 | $ | 4 | ||||||||||||||||||||||
| Dry hole expense | 30 | 5 | ||||||||||||||||||||||||
| Geological and geophysical expense | 1 | 15 | ||||||||||||||||||||||||
| Exploration overhead and other | 16 | 18 | ||||||||||||||||||||||||
| Total Exploration | $ | 52 | $ | 42 |
Exploration expenses for the first quarter of 2023 increased $10 million from the first quarter of 2022 primarily the result of higher dry hole expenses in Egypt, partially offset by a decrease in geological and geophysical expense and exploration overhead.
General and Administrative (G&A) Expenses
G&A expenses decreased $91 million compared to the first quarter of 2022. The decrease in expenses for the first quarter of 2023 compared to the prior-year period was primarily driven by lower cash-based stock compensation expense resulting from changes in the Company’s stock price.
Transaction, Reorganization, and Separation (TRS) Costs
TRS costs decreased $10 million from the first quarter of 2022. The decrease in costs during the first quarter of 2023 compared to the prior-year period was primarily a result of transaction costs from the BCP Business Combination in the first quarter of 2022.
Depreciation, Depletion, and Amortization (DD&A)
DD&A expenses on the Company’s oil and gas properties increased $47 million from the first quarter of 2022. The Company’s DD&A rate on its oil and gas properties increased $1.49 per boe from the first quarter of 2022 driven by general cost inflation. The increase on an absolute basis was also impacted by an increase in capital investment activity in Egypt and acquisitions in the U.S. over the past year.
Financing Costs, Net
The Company’s Financing costs were as follows:
| For the Quarter Ended March 31, | ||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||
| Interest expense | $ | 88 | $ | 90 | ||||||||||||||||||||||
| Amortization of debt issuance costs | 1 | 2 | ||||||||||||||||||||||||
| Capitalized interest | (6) | (3) | ||||||||||||||||||||||||
| (Gain) loss on extinguishment of debt | (9) | 67 | ||||||||||||||||||||||||
| Interest income | (2) | (4) | ||||||||||||||||||||||||
| Total Financing costs, net | $ | 72 | $ | 152 |
Net financing costs decreased $80 million from the first quarter of 2022, primarily the result of losses incurred on the extinguishment of debt during the first quarter of 2022 and gains on extinguishment of debt in the first quarter of 2023.
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 first quarter of 2023, the Company’s effective income tax rate was primarily impacted by a deferred tax expense related to the remeasurement of taxes in the U.K. as a result of the enactment of Finance Act 2023 on January 10, 2023, and a decrease in the amount of valuation allowance against its U.S. deferred tax assets. During the first quarter of 2022, the Company’s 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.
On January 10, 2023, Finance Act 2023 was enacted, receiving Royal Assent, and included amendments to the Energy (Oil and Gas) Profits Levy Act of 2022, increasing the levy from a 25 percent rate to a 35 percent rate, effective for the period of January 1, 2023 through March 31, 2028. Under U.S. GAAP, the financial statement impact of new legislation is recorded in the period of enactment. Therefore, in the first quarter of 2023, the Company recorded a deferred tax expense of $174 million related to the remeasurement of the December 31, 2022 U.K. deferred tax liability.
On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022 (IRA). The IRA includes a new 15 percent corporate alternative minimum tax (Corporate AMT) on applicable corporations with an average annual financial statement income that exceeds $1 billion for any three consecutive years preceding the tax year at issue. The Corporate AMT is effective for tax years beginning after December 31, 2022. The Company is continuing to evaluate the provisions of the IRA and awaits further guidance from the U.S. Treasury Department to properly assess the impact of these provisions on the Company. Under the existing guidance, the Company does not believe the IRA will have a material impact for 2023.
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. However, given the Company’s current and anticipated future domestic earnings, the Company believes that there is a reasonable possibility that within the next 12 months sufficient positive evidence may become available to allow the Company to reach a conclusion that a significant portion of the U.S. valuation allowance will no longer be needed. A release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense, which could be material, for the period the release is recorded.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income or capital taxes in various states and foreign jurisdictions. The Company’s tax reserves are related to tax years that may be subject to examination by the relevant taxing authority.
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. These changes potentially impact the Company’s liquidity if costs do not trend with sustained decreases 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 expects its full-year estimated upstream capital investment to be approximately $2.0 billion and remains committed to its capital return framework established in 2021 for equity holders to participate more directly and materially in cash returns through dividends and share repurchases.
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.
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, 2022.
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 Three Months Ended March 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| (In millions) | ||||||||||||||
| Sources of Cash and Cash Equivalents: | ||||||||||||||
| Net cash provided by operating activities | $ | 335 | $ | 891 | ||||||||||
| Proceeds from revolving credit facilities, net | 417 | 338 | ||||||||||||
| Proceeds from asset divestitures | 21 | 767 | ||||||||||||
| Proceeds from sale of Kinetik shares | — | 224 | ||||||||||||
| Total Sources of Cash and Cash Equivalents | 773 | 2,220 | ||||||||||||
| Uses of Cash and Cash Equivalents: | ||||||||||||||
| Additions to upstream oil and gas property | $ | 543 | $ | 358 | ||||||||||
| Leasehold and property acquisitions | 6 | 20 | ||||||||||||
| Payments on Apache fixed-rate debt | 65 | 1,370 | ||||||||||||
| Dividends paid to APA common stockholders | 78 | 43 | ||||||||||||
| Distributions to noncontrolling interest - Egypt | 17 | 69 | ||||||||||||
| Treasury stock activity, net | 142 | 261 | ||||||||||||
| Deconsolidation of Altus cash and cash equivalents | — | 143 | ||||||||||||
| Other, net | 13 | 24 | ||||||||||||
| Total Uses of Cash and Cash Equivalents | 864 | 2,288 | ||||||||||||
| Decrease in cash and cash equivalents | $ | (91) | $ | (68) |
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 during the first three months of 2023 totaled $335 million, down $556 million from the first three months of 2022, primarily the result of lower commodity prices and associated revenues and timing of working capital items.
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 Revolving Credit Facilities, Net As of March 31, 2023, outstanding borrowings under the Company’s U.S. dollar denominated syndicated credit facility were $983 million, an increase of $417 million since December 31, 2022. As of March 31, 2022, outstanding borrowings under Apache’s former syndicated credit facility were $880 million, an increase of $338 million since December 31, 2021.
Proceeds from Asset Divestitures The Company received $21 million and $767 million in proceeds from the divestiture of certain non-core assets during the first three months of 2023 and 2022, respectively. The Company also received $224 million of cash proceeds from the sale of four million of its shares in Kinetik during the first three 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 $543 million and $358 million during the first three months of 2023 and 2022, respectively. The increase in capital investment is reflective of the increase in the Company’s capital program that has gradually increased over the past year, in-line with operating cash flows. The Company operated an average of 26 drilling rigs during the first quarter of 2023, compared to an average of 17 drilling rigs during the first quarter of 2022.
Leasehold and Property Acquisitions During the first three months of 2023 and 2022, the Company completed leasehold and property acquisitions, primarily in the Permian Basin, for total cash consideration of $6 million and $20 million, respectively.
Payments on Apache Fixed-Rate Debt During the quarter ended March 31, 2023, Apache purchased in the open market and canceled senior notes issued under its indentures in an aggregate principal amount of $74 million for an aggregate purchase price of $65 million in cash, including accrued interest and broker fees, reflecting a discount to par of an aggregate $10 million. The Company recognized a $9 million gain on these repurchases. The repurchases were partially financed by Apache’s borrowing under the Company’s US dollar-denominated 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. The repurchases were partially financed by borrowing under Apache’s former revolving credit facility.
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. The repurchases were partially financed by borrowing under Apache’s former revolving credit facility.
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 percent 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.
The Company expects that Apache will continue to reduce debt outstanding under its indentures from time to time.
Dividends Paid to APA Common Stockholders The Company paid $78 million and $43 million during the first three months of 2023 and 2022, 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. During the third quarter of 2022, the Company’s Board of Directors approved a further increase to its quarterly dividend to $0.25 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 $17 million and $69 million during the first three months of 2023 and 2022, respectively, in cash distributions to Sinopec.
Treasury Stock Activity, net In the first three months of 2023, the Company repurchased 3.7 million shares at an average price of $38.93 per share totaling $142 million, and as of March 31, 2023, the Company had remaining authorization to repurchase 49 million shares. In the first quarter of 2022, the Company repurchased 7.2 million shares at an average price of $36.08 per share totaling $261 million.
Liquidity
The following table presents a summary of the Company’s key financial indicators:
| March 31, 2023 | December 31, 2022 | |||||||||||||
| (In millions) | ||||||||||||||
| Cash and cash equivalents | $ | 154 | $ | 245 | ||||||||||
| Total debt – APA and Apache | 5,798 | 5,453 | ||||||||||||
| Total equity | 1,433 | 1,345 | ||||||||||||
| Available committed borrowing capacity under syndicated credit facilities | 1,919 | 2,238 |
Cash and Cash Equivalents As of March 31, 2023, the Company had $154 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 March 31, 2023, the Company had $5.8 billion in total debt outstanding, which consisted of notes and debentures of Apache, credit facility borrowings, and finance lease obligations. As of March 31, 2023, current debt included $2 million of finance lease obligations.
Committed Credit Facilities On April 29, 2022, the Company entered into two unsecured syndicated credit agreements for general corporate purposes that replaced and refinanced Apache’s 2018 unsecured syndicated credit agreement (the Former Facility).
-
One 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 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 March 31, 2023, there were $983 million of borrowings and a $20 million letter of credit outstanding under the USD Agreement, and an aggregate £590 million in letters of credit outstanding under the GBP Agreement. As of December 31, 2022, there were $566 million of borrowings and a $20 million letter of credit outstanding under the USD Agreement, and an aggregate £652 million in letters of credit outstanding under the GBP Agreement. 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 March 31, 2023 and December 31, 2022, there were no outstanding borrowings under these facilities. As of March 31, 2023 there were £261 million and $17 million in letters of credit outstanding under these facilities. As of December 31, 2022, there were £199 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, 2022. 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 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, and by subsequent letter dated March 1, 2023, GOM Shelf notified the Bureau of Safety and Environmental Enforcement (BSEE) that it was unable to fund the decommissioning obligations that it is currently obligated 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 notifications to BSEE. Apache expects to receive similar orders on the other Legacy GOM Assets included in GOM Shelf’s notification letters. Apache has also received orders to decommission other Legacy GOM Assets that were not included in GOM Shelf’s notification letters. 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.
As of March 31, 2023, Apache has incurred $291 million in decommissioning costs related to several Legacy GOM Assets. GOM Shelf did not, and has confirmed that it will not, reimburse Apache for these decommissioning costs. As a result, Apache has sought and will continue to seek reimbursement from its security for these costs, of which $195 million had been reimbursed from Trust A as of March 31, 2023. If GOM Shelf does not reimburse Apache for further decommissioning costs incurred with respect to Legacy GOM Assets, then Apache will continue to seek reimbursement from Trust A, to the extent of available funds, and thereafter, will seek reimbursement from the Bonds and the Letters of Credit until all 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 required to perform or fund, 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 March 31, 2023, Apache estimates that its potential liability to fund the remaining decommissioning of Legacy GOM Assets it may be ordered to perform or fund ranges from $1.1 billion to $1.3 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 $1.1 billion as of March 31, 2023, representing the estimated costs of decommissioning it may be required to perform or fund on Legacy GOM Assets. Of the total liability recorded, $656 million is reflected under the caption “Decommissioning contingency for sold Gulf of Mexico properties,” and $433 million is reflected under “Other current liabilities” in the Company’s consolidated balance sheet. 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.
As of March 31, 2023, the Company has also recorded a $582 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, $132 million is reflected under the caption “Decommissioning security for sold Gulf of Mexico properties,” and $450 million is reflected under “Other current 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, 2022. 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, 2022.
Previous: Item 1. FINANCIAL STATEMENTS · Next: Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK