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, 2023.

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 has oil and gas 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 Uruguay 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.

APA believes energy underpins global progress, and the Company wants to be a part of the 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.

Uncertainties in the global supply chain and financial markets, including the impact of ongoing international conflicts, inflation and rising interest rates, 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 invest for long-term returns in pursuit of moderate, sustainable production growth; (2) to strengthen the balance sheet to underpin the generation of 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; and (3) to responsibly manage its cost structure regardless of the oil price environment.

The Company closely monitors hydrocarbon pricing fundamentals to reallocate capital as part of its ongoing planning process. APA’s diversified asset portfolio and operational flexibility provide the Company the ability to timely respond to near-term price volatility and effectively manage its investment programs accordingly. For additional detail on the Company’s forward capital investment outlook, refer to “Capital Resources and Liquidity” below.

The Company remains committed to its capital return framework 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 of $0.25 per share.

  • Beginning in the fourth quarter of 2021 and through the end of the first quarter of 2024, the Company has repurchased 79.1 million shares of the Company’s common stock.

Financial and Operational Highlights

In the first quarter of 2024, the Company reported net income attributable to common stock of $132 million, or $0.44 per diluted share, compared to net income of $242 million, or $0.78 per diluted share, in the first quarter of 2023. Results for the first quarter of 2024 compared to the first quarter of 2023 were primarily impacted by higher DD&A and dry hole expense and an upward revision on decommissioning costs for its previously sold Gulf of Mexico assets in the current-year period, partially offset by lower deferred income tax expense.

The Company generated $368 million of cash from operating activities during the first three months of 2024, 10 percent higher than the first three months of 2023. APA’s higher operating cash flows for the first three months of 2024 were primarily driven by timing of working capital items. The Company repurchased 3.0 million shares of its common stock for $101 million and paid $76 million in dividends to APA common stockholders during the first three months of 2024.

On April 1, 2024, APA completed its acquisition of Callon Petroleum Company (Callon) in an all-stock transaction valued at approximately $4.5 billion, inclusive of Callon’s debt (the Callon acquisition). The transaction was approved by APA and Callon shareholders at special meetings held on March 27, 2024. The acquired assets include approximately 120,000 net acres in the Delaware Basin and 25,000 net acres in the Midland Basin. Callon’s fourth-quarter 2023 production was 103,000 BOE per day, comprising 58 percent oil and 80 percent liquids.

Subject to the terms of the merger agreement, each share of Callon common stock was converted into the right to receive 1.0425 shares of APA common stock, with cash in lieu of fractional shares. As a result, APA issued approximately 70 million shares of APA common stock in connection with the transaction, and following the acquisition, Callon common stock is no longer listed for trading on the NYSE.

Key operational highlights include:

United States

  • Daily boe production from the Company’s U.S. assets accounted for 55 percent of its total production during the first quarter of 2024 and increased 6 percent from the first quarter of 2023. Daily oil production from the Company’s U.S. assets increased 16 percent from the first quarter of 2023. During the first quarter of 2024, the Company averaged six drilling rigs in the U.S., including three rigs in the Southern Midland Basin and three rigs in the Delaware Basin, and drilled and brought online 12 operated wells in the quarter. The Company’s core Permian Basin development program continues to represent key growth areas for the U.S. assets.

  • The Company expects to average 10 drilling rigs in the U.S. for the remainder of 2024 as it integrates Callon operations, including contracting and logistics, well planning and design, drilling and completions, and facility construction.

International

  • In Egypt, the Company continued its drilling and workover activity with a focus on oil production. The Company averaged 17 drilling rigs and drilled 17 new productive wells during the first quarter of 2024. During the same period, the Company averaged 21 workover rigs as it continues to align its drilling and workover activity with a goal of driving improved capital efficiency. First quarter 2024 gross and net equivalent production in the Company’s Egypt assets decreased 8 percent from the first quarter of 2023, while daily oil production remained essentially flat.

  • The Company suspended all new drilling activity in the North Sea during the second quarter of 2023. The Company’s investment program in the North Sea is now directed toward safety, base production management, and asset maintenance and integrity.

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,
20242023
$ Value% Contribution$ Value% Contribution
($ in millions)
Oil Revenues:
United States$58841%$48635%
Egypt(1)65746%62945%
North Sea18713%28220%
Total(1)$1,432100%$1,397100%
Natural Gas Revenues:
United States$5732%$8937%
Egypt(1)7744%9338%
North Sea4224%6025%
Total(1)$176100%$242100%
NGL Revenues:
United States$13194%$12092%
North Sea96%108%
Total(1)$140100%$130100%
Oil and Gas Revenues:
United States$77644%$69539%
Egypt(1)73442%72241%
North Sea23814%35220%
Total(1)$1,748100%$1,769100%

(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,
2024Increase (Decrease)2023
Oil Volume (b/d)
United States83,52016%71,888
Egypt(1)(2)86,768(1)%87,795
North Sea29,795(21)%37,502
Total200,0831%197,185
Natural Gas Volume (Mcf/d)
United States443,7371%441,527
Egypt(1)(2)290,227(19)%356,350
North Sea52,60530%40,360
Total786,569(6)%838,237
NGL Volume (b/d)
United States56,5741%56,103
North Sea1,40512%1,255
Total57,9791%57,358
BOE per day(3)
United States214,0506%201,580
Egypt(1)(2)135,140(8)%147,186
North Sea(4)39,967(12)%45,483
Total389,157(1)%394,249

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

For the Quarter Ended March 31,
20242023
Oil (b/d)137,972140,764
Natural Gas (Mcf/d)457,248545,049

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

For the Quarter Ended March 31,
20242023
Oil (b/d)28,94329,294
Natural Gas (Mcf/d)96,814118,903

(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 2024 and 2023 were 35,078 boe/d and 46,632 boe/d, 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 March 31,
2024Increase (Decrease)2023
Average Oil Price – Per barrel
United States$77.373%$75.17
Egypt83.185%79.58
North Sea82.812%81.57
Total80.653%78.37
Average Natural Gas Price – Per Mcf
United States$1.42(37)%$2.24
Egypt2.931%2.89
North Sea9.23(47)%17.58
Total2.47(23)%3.22
Average NGL Price – Per barrel
United States$25.387%$23.79
North Sea49.37(13)%56.92
Total26.205%24.84

First-Quarter 2024 compared to First-Quarter 2023

Crude Oil Crude oil revenues for the first quarter of 2024 totaled $1.4 billion, a $35 million increase from the comparative 2023 quarter. A 3 percent increase in average realized prices primarily drove the increase in crude oil revenues compared to the first quarter of 2023. Crude oil revenues accounted for 82 percent of total oil and gas production revenues and 51 percent of worldwide production in the first quarter of 2024. Crude oil prices realized in the first quarter of 2024 averaged $80.65 per barrel, compared with $78.37 per barrel in the comparative prior-year quarter.

The Company’s worldwide oil production increased 2.9 Mb/d to 200.1 Mb/d during the first quarter of 2024 from the comparative prior-year period, primarily a result of increased drilling activity in the U.S., offset by natural production decline across all assets.

Natural Gas Gas revenues for the first quarter of 2024 totaled $176 million, a $66 million decrease from the comparative 2023 quarter. A 23 percent decrease in average realized prices decreased first-quarter 2024 natural gas revenues by $56 million compared to the prior-year quarter, while 6 percent lower average daily production decreased revenues by $10 million. Natural gas revenues accounted for 10 percent of total oil and gas production revenues and 34 percent of worldwide production during the first quarter of 2024. The Company’s worldwide natural gas production decreased 51.7 MMcf/d to 786.6 MMcf/d during the first quarter of 2024 from the comparative prior-year period, primarily a result of natural production decline across all assets, reduced gas-focused activity in Egypt, and curtailment of volumes at Alpine High in response to extreme Waha basis differentials. These decreases were partially offset by increased drilling activity and recompletions in the U.S.

NGL NGL revenues for the first quarter of 2024 totaled $140 million, a $10 million increase from the comparative 2023 quarter. A 5 percent increase in average realized prices increased first-quarter 2024 NGL revenues by $7 million compared to the prior-year quarter, while 1 percent higher average daily production increased revenues by $3 million. NGL revenues accounted for 8 percent of total oil and gas production revenues and 15 percent of worldwide production during the first quarter of 2024. The Company’s worldwide NGL production increased 0.6 Mb/d to 58.0 Mb/d during the first quarter of 2024 from the comparative prior-year period, primarily a result of increased drilling activity in the U.S.

Purchased Oil and Gas Sales

Purchased oil and gas sales represent volumes primarily attributable to U.S. domestic gas purchases that were sold by the Company to fulfill natural gas takeaway obligations and delivery commitments. Sales related to these purchased volumes totaled $203 million and $239 million during the first quarters of 2024 and 2023, respectively. Purchased oil and gas sales were offset by associated purchase costs of $163 million and $216 million during the first quarters of 2024 and 2023, respectively. Gross purchased oil and gas sales values were lower in the first quarter of 2024, primarily due to lower average natural gas prices during the first quarter of 2024, as compared to the first quarter of 2023.

Operating Expenses

The Company’s operating expenses were as follows and include costs attributable to a noncontrolling interest in Egypt:

For the Quarter Ended March 31,
20242023
(In millions)
Lease operating expenses$338$321
Gathering, processing, and transmission8478
Purchased oil and gas costs163216
Taxes other than income5752
Exploration14852
General and administrative9365
Transaction, reorganization, and separation274
Depreciation, depletion, and amortization:
Oil and gas property and equipment419325
Gathering, processing, and transmission assets22
Other assets95
Asset retirement obligation accretion4028
Financing costs, net7672
Total Operating Expenses$1,456$1,220

Lease Operating Expenses (LOE)

LOE increased $17 million compared to the first quarter of 2023. On a per-unit basis, LOE increased 7 percent in the first quarter of 2024 when compared to the first quarter of 2023. Overall higher labor costs and other operating costs trending with global inflation drove an increase in absolute LOE, partially offset by decreased workover activity primarily in the U.S. and changes in foreign currency exchange rates against the US dollar.

Gathering, Processing, and Transmission (GPT)

The Company’s GPT expenses were as follows:

For the Quarter Ended March 31,
20242023
(In millions)
Third-party processing and transmission costs$61$52
Midstream service costs – Kinetik2326
Total Gathering, processing, and transmission$84$78

GPT costs increased $6 million in the first quarter of 2024 when compared to the first quarter of 2023, primarily driven by a slight increase in natural gas production volumes in the U.S. when compared to the prior-year period.

Purchased Oil and Gas Costs

Purchased oil and gas costs decreased $53 million in the first quarter of 2024, to $163 million from $216 million in the first quarter of 2023. The decrease is a result of lower average natural gas prices in the first quarter of 2024 compared to the first quarter of 2023. Purchased oil and gas costs were more than offset by associated sales to fulfill natural gas takeaway obligations and delivery commitments totaling $203 million in the first quarter of 2024, as discussed above.

Taxes Other Than Income

Taxes other than income increased $5 million from the first quarter of 2023, primarily from higher severance taxes driven by increased production volumes and higher oil prices in the U.S. compared to the prior-year period.

Exploration Expenses

The Company’s exploration expenses were as follows:

For the Quarter Ended March 31,
20242023
(In millions)
Unproved leasehold impairments$10$5
Dry hole expense12330
Geological and geophysical expense11
Exploration overhead and other1416
Total Exploration$148$52

Exploration expenses increased $96 million from the first quarter of 2023, primarily the result of the completion of an initial drilling campaign in Alaska where two wells were unable to reach target objectives in the allotted seasonal time window.

General and Administrative (G&A) Expenses

G&A expenses increased $28 million compared to the first quarter of 2023. The increase in G&A expenses for the first quarter of 2024 compared to the first quarter of 2023 was primarily driven by higher overall labor costs across the Company and higher cash-based stock compensation expense resulting from changes in the Company’s stock price.

Transaction, Reorganization, and Separation (TRS) Costs

TRS costs increased $23 million from the first quarter of 2023. Higher TRS costs during the first quarter of 2024 were primarily a result of ongoing transaction costs related to the Callon acquisition coupled with separation costs in the North Sea. The Company expects to incur an additional $90 million of TSR costs related to the Callon merger. A majority of these costs will be incurred in the second quarter for professional services, departing Callon employees, and other closing costs.

Depreciation, Depletion, and Amortization (DD&A)

Total DD&A expenses increased $98 million from the first quarter of 2023, primarily driven by DD&A on the Company’s oil and gas properties. The Company’s DD&A rate on its oil and gas properties increased $2.86 per boe from the first quarter of 2023 driven primarily by price-related negative reserve revisions over the prior 12 months. The increase on an absolute basis was also impacted by higher oil and gas property balances resulting from capital investment activity 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,
20242023
(In millions)
Interest expense$85$88
Amortization of debt issuance costs11
Capitalized interest(7)(6)
Gain on extinguishment of debt—(9)
Interest income(3)(2)
Total Financing costs, net$76$72

Net financing costs increased $4 million from the first quarter of 2023. The increase in costs during the first quarter of 2024 was primarily a result of gains on extinguishment of debt recorded during the first quarter of 2023. The increase was partially offset by lower interest expense from lower average long-term debt balances during the first quarter of 2024 compared to the same prior year period.

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.

The Company’s effective income tax rate for the three months ended March 31, 2024 differed from the U.S. federal statutory income tax rate of 21 percent due to taxes on foreign operations. The Company’s effective income tax rate for the three months ended March 31, 2023 differed from the U.S. federal statutory income tax rate of 21 percent due to taxes on foreign operations, a deferred tax expense related to the remeasurement of taxes in the U.K. as a result of the enactment of Finance Act 2023, and a decrease in the amount of valuation allowance against its U.S. deferred tax assets.

In December 2021, the Organisation for Economic Co-operation and Development issued Pillar Two Model Rules introducing a new global minimum tax of 15 percent on a country-by-country basis, with certain aspects effective in certain jurisdictions on January 1, 2024. Although the Company continues to monitor enacted legislation to implement these rules in countries where the Company could be impacted, APA does not expect that the Pillar Two framework will have a material impact on its consolidated financial statements.

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.

Following the completion of the Callon acquisition the Company revised its full-year 2024 estimated upstream capital investment to approximately $2.7 billion and remains committed to its capital return framework 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, 2023.

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,
20242023
(In millions)
Sources of Cash and Cash Equivalents:
Net cash provided by operating activities$368$335
Proceeds from revolving credit facilities, net—417
Proceeds from asset divestitures2721
Proceeds from sale of Kinetik Shares428—
Total Sources of Cash and Cash Equivalents823773
Uses of Cash and Cash Equivalents:
Additions to upstream oil and gas property$467$543
Leasehold and property acquisitions636
Payments on commercial paper and revolving credit facilities, net2—
Payments on Apache fixed-rate debt—65
Dividends paid to APA common stockholders7678
Distributions to noncontrolling interest7017
Treasury stock activity, net101142
Other, net2913
Total Uses of Cash and Cash Equivalents808864
Increase (Decrease) in Cash and Cash Equivalents$15$(91)

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 accretion, and deferred income tax expense.

Net cash provided by operating activities during the first three months of 2024 totaled $368 million, up $33 million from the first three months of 2023, primarily the result of 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 Asset Divestitures The Company received $27 million and $21 million in proceeds from the divestiture of certain non-core assets during the first three months of 2024 and 2023, respectively. 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.

Proceeds from Sale of Kinetik Shares The Company received $428 million of cash proceeds from the sale of its remaining shares of Kinetik Class A Common Stock in March 2024. For more information regarding the Company’s equity method interests, refer to Note 6—Equity Method Interests in the Notes to Consolidated Financial Statements set forth 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 $467 million and $543 million during the first three months of 2024 and 2023, respectively. The decrease in capital investment is reflective of the Company’s strategy to continually assess drilling activity across its diverse portfolio and balance workover activity in Egypt. The Company operated an average of approximately 23 drilling rigs during the first three months of 2024, compared to an average of approximately 26 drilling rigs during the first three months of 2023.

Leasehold and Property Acquisitions During the first three months of 2024 and 2023, the Company completed leasehold and property acquisitions, primarily in the Permian Basin, for total cash consideration of $63 million and $6 million, respectively.

Payments on and proceeds from commercial paper and revolving credit facilities, net During the first three months of 2024, the Company made net payments of $2 million on its commercial paper and revolving credit facilities borrowings. 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.

Payments on Apache Fixed-Rate Debt During the three months 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. The Company recognized a $9 million gain on these repurchases.

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 $76 million and $78 million during the first three months of 2024 and 2023, respectively, for dividends on its common stock.

Distributions to Noncontrolling Interest 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 $70 million and $17 million during the first three months of 2024 and 2023, respectively, in cash distributions to Sinopec.

Treasury Stock Activity, net In the first three months of 2024, the Company repurchased 3.0 million shares at an average price of $33.27 per share and an aggregate purchase price of approximately $101 million, and as of March 31, 2024, the Company had remaining authorization to repurchase 40.9 million shares. In the first three months of 2023, the Company repurchased 3.7 million shares at an average price of $38.93 per share and an aggregate purchase price of approximately $142 million.

Liquidity

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

March 31, 2024December 31, 2023
(In millions)
Cash and cash equivalents$102$87
Total debt – APA and Apache5,1805,188
Total equity3,6533,691
Available committed borrowing capacity under syndicated credit facilities2,8842,894

Cash and Cash Equivalents As of March 31, 2024, the Company had $102 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, 2024, the Company had $5.2 billion in total debt outstanding, which consisted of notes and debentures of Apache, credit facility and commercial paper borrowings, and finance lease obligations. As of March 31, 2024, current debt included $2 million of finance lease obligations.

Committed 2022 Credit Facilities On April 29, 2022, the Company entered into two unsecured syndicated credit agreements for general corporate purposes.

  • 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.

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 of the USD Agreement and GBP Agreement effective until the aggregate principal amount of indebtedness under senior notes and debentures outstanding under Apache’s existing indentures first is less than US$1.0 billion.

As of March 31, 2024, there were $30 million of borrowings under the USD Agreement and an aggregate £348 million in letters of credit outstanding under the GBP Agreement. As of March 31, 2024, there were no letters of credit outstanding under the USD Agreement. As of December 31, 2023, there were $372 million of borrowings under the USD Agreement and an aggregate £348 million in letters of credit outstanding under the GBP Agreement. As of December 31, 2023, there were no letters of credit outstanding under the USD Agreement. The letters of credit denominated in pounds were issued to support North Sea decommissioning obligations, the terms of which require such support while Apache’s credit rating by Standard & Poor’s remains below BBB; on March 26, 2020, Standard & Poor’s reduced Apache’s rating from BBB to BB+, which was affirmed in 2023.

Uncommitted Credit Facilities Each of the Company and 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, 2024 and December 31, 2023, there were no outstanding borrowings under these facilities. At each of March 31, 2024 and December 31, 2023, there were £416 million and $2 million in letters of credit outstanding under these facilities.

Commercial Paper Program In December 2023, the Company established a commercial paper program under which it from time to time may issue in private placements exempt from registration under the Securities Act short-term unsecured promissory notes (CP Notes) up to a maximum aggregate face amount of $1.8 billion outstanding at any time. The maturities of CP Notes may vary but may not exceed 397 days from the date of issuance. Outstanding CP Notes are supported by available borrowing capacity under the Company’s committed $1.8 billion USD Agreement.

Payment of CP Notes has been unconditionally guaranteed on an unsecured basis by Apache, such guarantee effective until the first time that 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, 2024, there was $340 million in aggregate face amount of CP Notes outstanding, which is classified as long-term debt. As of December 31, 2023, there were no CP Notes outstanding.

Term Loan Credit Agreement On January 30, 2024, APA entered into a syndicated credit agreement under which the lenders committed an aggregate $2.0 billion for senior unsecured delayed-draw term loans to APA (Term Loan Credit Agreement), the proceeds of which could be used to refinance certain indebtedness of Callon only on the date of closing of transactions under the Merger Agreement. Refer to “Subsequent Events” for further detail. Apache has guaranteed obligations under the Term Loan Credit Agreement effective until the aggregate principal amount of indebtedness under senior notes and debentures outstanding under Apache’s existing indentures first is less than $1.0 billion.

Subsequent Events On April 1, 2024, APA closed the transactions under the Term Loan Credit Agreement. APA borrowed an aggregate $1.5 billion in senior unsecured term loans that mature April 1, 2027. Loan proceeds were used to refinance certain indebtedness of Callon upon the substantially simultaneous closing of APA’s acquisition of Callon pursuant to the Merger Agreement and to pay related fees and expenses. APA may at any time prepay loans under the Term Loan Credit Agreement.

The lenders under the Term Loan Credit Agreement committed an aggregate $2.0 billion for senior unsecured delayed-draw term loans to APA available for borrowing only once upon the date of the closings under the Merger Agreement and Term Loan Credit Agreement, of which $1.5 billion was for term loans that would mature three years after the date of such closings (3-Year Tranche Loans) and $500 million was for term loans that would mature 364 days after the date of such closings (364-Day Tranche Loans). APA elected to borrow only under the 3-Year Tranche Loans and to allow the lender commitments for the 364-Day Tranche Loans to expire.

Indebtedness of Callon that APA could refinance by borrowing under the Term Loan Credit Agreement included indebtedness outstanding under (i) the Amended and Restated Credit Agreement, dated October 19, 2022, among Callon, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto (Callon Credit Agreemen)t, (ii) Callon’s 6.375% Senior Notes due 2026 (Callon’s 2026 Notes), (iii) Callon’s 8.00% Senior Notes due 2028 (Callon’s 2028 Notes), and (iv) Callon’s 7.500% Senior Notes due 2030 (Callon’s 2030 Notes). As of April 1, 2024, all indebtedness under the Callon Credit Agreement and Callon’s 2026 Notes was repaid, and the aggregate principal balance remaining outstanding under Callon’s 2028 Notes and Callon’s 2030 Notes was reduced to $24 million. Given the aggregate principal balance remaining outstanding under Callon’s 2028 Notes and Callon’s 2030 Notes, no guarantee by Callon of APA’s obligations under the Term Loan Credit Agreement is required.

On April 1, 2024, the following Callon indebtedness was repaid by borrowings under the Term Loan Credit Agreement and USD Agreement:

  • Callon closed cash tender offers for Callon’s 2028 Notes and Callon’s 2030 Notes, accepting for purchase $1.2 billion aggregate principal amount of notes. Callon paid holders an aggregate $1.3 billion in cash, reflecting principal, premium to par, early tender consent fee, and accrued and unpaid interest.

  • Callon redeemed the outstanding $321 million principal amount of Callon’s 2026 Notes at a redemption price equal to 101.063% of their principal amount, plus accrued and unpaid interest to the redemption date.

  • Callon repaid the aggregate $472 million owed under the Callon Credit Agreement, including principal, accrued and unpaid interest, and certain fees.

On April 26, 2024, Callon notified holders of its election to fully redeem on May 6, 2024 the outstanding $8.3 million principal amount of Callon’s 2028 Notes at a redemption price equal to 101.588% of their principal amount and $15.6 million principal amount of Callon’s 2030 Notes at a redemption price equal to 102.803% of their principal amount, in each case, plus accrued and unpaid interest to the redemption date.

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, 2023. There have been no material changes to the contractual obligations described therein.

Potential Decommissioning Obligations on Sold Properties

In 2013, Apache sold its Gulf of Mexico (GOM) Shelf operations and properties and its GOM operating subsidiary, GOM Shelf LLC (GOM Shelf) to Fieldwood Energy LLC (Fieldwood). 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). On February 14, 2018, Fieldwood filed for (and subsequently emerged from) Chapter 11 bankruptcy protection. On August 3, 2020, Fieldwood filed for (and subsequently emerged from) Chapter 11 bankruptcy protection for a second time. Upon emergence from this second bankruptcy, 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 are to be used to fund the operation of GOM Shelf and the decommissioning of Legacy GOM Assets. Pursuant to the terms of the original transaction, as amended in the first bankruptcy, the securing of the asset retirement obligations for the Legacy GOM Assets as and when Apache is required to perform or pay for any such decommissioning was accomplished through the posting of letters of credit in favor of Apache (Letters of Credit), the provision of two bonds (Bonds) in favor of Apache, and the establishment of a trust account of which Apache was a beneficiary and which was funded by net profits interests (NPIs) depending on future oil prices. In addition, after such sources have been exhausted, Apache agreed upon resolution of GOM Shelf’s second bankruptcy to provide a standby loan to GOM Shelf of up to $400 million to perform decommissioning, with such standby loan secured by a first and prior lien on the Legacy GOM Assets.

By letter dated April 5, 2022 (replacing two earlier letters) 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 was 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 and demands from third parties to decommission certain of the Legacy GOM Assets included in GOM Shelf’s notifications to BSEE. Apache expects to receive similar orders and demands 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.

On June 21, 2023, two sureties that issued Bonds directly to Apache and two sureties that issued bonds to the issuing bank on the Letters of Credit filed suit against Apache in a case styled Zurich American Insurance Company, HCC International Insurance Company PLC, Philadelphia Indemnity Insurance Company and Everest Reinsurance Company (Insurers) v. Apache Corporation, Cause No. 2023-38238 in the 281st Judicial District Court, Harris County Texas. The sureties sought to prevent Apache from drawing on the Bonds and Letters of Credit and further alleged that they are discharged from their reimbursement obligations related to decommissioning costs and are entitled to other relief. On July 20, 2023, the 281st Judicial District Court denied the Insurers’ request for a temporary injunction. On July 26, 2023, Apache removed the suit to the United States Bankruptcy Court for the Southern District of Texas (Houston Division) which subsequently held that the sureties’ state court lawsuit violated the terms of the Bankruptcy Confirmation Order and is void. Since the time the sureties filed their state court lawsuit, Apache has drawn down the entirety of the Letters of Credit. Apache has also sought to draw down on the Bonds; however, the sureties refuse to pay such Bond draws. Apache is vigorously pursuing its claims against the sureties.

As of March 31, 2024, the Company has recorded a $186 million asset, which represents the remaining amount the Company expects to be reimbursed from security related to these decommissioning costs.

The Company has recorded contingent liabilities in the amounts of $847 million and $824 million as of March 31, 2024 and December 31, 2023, respectively, representing the estimated costs of decommissioning it may be required to perform on legacy GOM properties previously sold to Fieldwood and other GOM operators. During the first quarter of 2024, the Company recognized $66 million of “Loss on previously sold Gulf of Mexico properties,” which includes increases of $33 million related to orders received during the period from BSEE to decommission properties previously sold to Cox Operating LLC. The Company recognized no losses for decommissioning previously sold properties during the first quarter of 2023. There have been no other changes in estimates from December 31, 2023 that would have a material impact on the Company’s financial position, results of operations, or liquidity.

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, 2023. 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, 2023.

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