APA Corp quarterly report, Q2 FY2021

APA Corporation — Q2 2021 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2021; unaudited. APA is an independent oil and gas producer with upstream operations in the U.S., Egypt and the North Sea, exploration activity in Suriname, and a midstream business operated by Altus. On March 1, 2021, APA completed a holding-company reorganization; comparative statements are presented on a combined, common-control basis.

Financial performance and liquidity

Metric	Q2 2021	Q2 2020	Six months 2021	Six months 2020
Total revenues	$1.756 billion	$752 million	$3.627 billion	$2.096 billion
Net income (loss) attributable to common stock	$316 million	$(386) million	$704 million	$(4.866) billion
Diluted earnings (loss) per share	$0.82	$(1.02)	$1.86	$(12.88)
Net cash provided by operating activities	Not separately presented	Not separately presented	$1.640 billion	$586 million
Cash capital spending on upstream properties	Not separately presented	Not separately presented	$558 million	$838 million

• Q2 oil, gas and NGL production revenue was $1.514 billion, versus $697 million a year earlier. Higher realized prices drove the improvement; production volumes were lower.
• Q2 average production was 395,186 boe/d, down 9% from 435,448 boe/d. First-half production averaged 388,829 boe/d, down 14% year over year.
• At June 30, cash and cash equivalents were $1.249 billion, total debt was $8.635 billion, and total equity was $76 million, compared with a $645 million deficit at year-end 2020. Current debt was $215 million; long-term debt was $8.420 billion.
• Committed borrowing capacity available was $3.204 billion at Apache and $141 million at Altus. Apache had no revolving-credit borrowings; Altus had $657 million outstanding under its facility. Both were in compliance with their credit agreements.
• Q2 operating costs included $311 million of lease operating expense, $351 million of depreciation, depletion and amortization, and $107 million of net financing costs. The filing does not provide a single consolidated operating-margin measure.

Changes versus prior comparable periods

• APA returned to quarterly and first-half profitability from losses in 2020. The improvement primarily reflected a recovery in commodity prices after the pandemic-related price collapse; Q2 2020 also included $20 million of impairments, while first-half 2020 included $4.492 billion of impairments.
• Q2 realized prices increased year over year: oil to $66.40/bbl from $25.77, natural gas to $2.99/Mcf from $1.68, and NGLs to $23.10/bbl from $8.28. Higher prices more than offset lower production in revenue comparisons.
• First-half operating cash flow increased by approximately $1.1 billion. Cash upstream investment declined to $558 million from $838 million, and cash dividends paid declined to $19 million from $104 million.
• Debt fell from $8.772 billion at December 31, 2020 to $8.635 billion at June 30, 2021. Cash increased from $262 million to $1.249 billion.

Outlook, commentary, risks and unusual items

• Management estimated a full-year 2021 upstream capital program of approximately $1.1 billion: about $900 million for development and $200 million for exploration, predominantly in Suriname. The company said it remained on track for this program despite Q2 investment being below its earlier plan.
• Management’s stated priorities included disciplined capital allocation, investing for long-term returns rather than production growth, generating cash flow above the capital program, and directing excess cash toward debt reduction. It said available liquidity and capital resources should fund operations, investment, debt maturities, dividends and contingencies.
• North Sea production was affected by compressor downtime, platform turnaround work and third-party pipeline outages; additional downtime and planned maintenance were expected in Q3. Egypt production was lower year over year following reduced prior-year drilling activity. APA was evaluating whether to add a third U.S. rig.
• APA reached an agreement in principle to modernize most Egyptian production-sharing contracts. Final approval by Egypt’s Parliament and President was still pending; management expected increased drilling and workover activity following ratification.
• In Suriname, APA reported a discovery at Keskesi and continued appraisal activity with TotalEnergies, which became operator on January 1, 2021. APA reported Sapakara South-1 drilling success in July 2021, after quarter-end.
• Q2 included a $65 million gain on the sale of non-core Permian assets. First-half 2021 derivative gains were $45 million, while Q2 recorded a net derivative loss of $113 million. The first half included a $147 million realized gain from February 2021 gas contracts associated with Winter Storm Uri price volatility.
• Key risks include volatile commodity prices, production decline and drilling execution, COVID-19 and market uncertainty, operational downtime, foreign-exchange exposure, regulatory and environmental matters, and counterparty risk. APA’s oil and gas derivatives were in a $62 million liability position at quarter-end; the filing describes material sensitivity to oil-price changes.
• APA reported approximately $71 million accrued for probable and estimable legal contingencies and a $2 million undiscounted environmental remediation reserve. It is defending multiple lawsuits, including Louisiana restoration claims, shareholder and derivative suits relating to Alpine High, and other disputes. The filing says management does not believe the described matters will materially affect financial position, results or liquidity after recorded accruals.
• Fieldwood Energy’s bankruptcy plan was confirmed in June 2021. APA may face legacy Gulf of Mexico decommissioning obligations if other sources prove insufficient and has agreed to provide a standby loan of up to $400 million for that work.

Important facts for investors to verify

• Whether the Egyptian contract modernization receives required approvals and how its revised terms affect cost recovery, production and cash flows.
• Whether North Sea downtime and planned maintenance resolve as expected, and whether declining production can be offset economically.
• Delivery against the $1.1 billion full-year upstream capital plan and management’s stated debt-reduction priority.
• Exposure from Fieldwood-related decommissioning, including adequacy of collateral and potential use of the standby loan or APA cash.
• Commodity-price and derivative sensitivity, including the effect of hedges on realized prices and cash flows.
• Developments in material litigation, environmental inquiries and the U.S. deferred-tax-asset valuation allowance.