APA Corporation (APA) — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited consolidated results include upstream operations in the U.S., Egypt, and the North Sea. APA deconsolidated Altus on February 22, 2022, following its combination with BCP; this affects comparability with prior periods.
Financial performance and liquidity
Dollar amounts are in millions except per-share, production, and price data.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $3,047 | $1,756 | $5,716 | $3,627 |
| Net income attributable to common stock | $926 | $316 | $2,809 | $704 |
| Diluted EPS | $2.71 | $0.82 | $8.15 | $1.86 |
| Cash from operating activities | Not separately stated here | Not separately stated here | $2,426 | $1,640 |
- Q2 attributable net income was about 30% of total revenue, versus about 18% in Q2 2021; this simple ratio is not a measure of underlying operating margin. Six-month earnings benefited materially from divestiture gains.
- Q2 production revenue was $2,525, up from $1,514. Realized prices rose year over year: oil 71% to $113.79/bbl, natural gas 89% to $5.65/Mcf, and NGLs 77% to $40.97/bbl. Worldwide Q2 production fell 3% to 384,627 boe/d.
- Six-month operating cash flow increased 48%, primarily on higher commodity prices and revenues, partly offset by working-capital movements. Upstream property additions were $741, versus $558 a year earlier.
- Cash was $282 at June 30, 2022, versus $302 at year-end 2021. Total debt was $5,285, down from $7,510; total equity was $1,505, compared with a $717 deficit. Committed borrowing capacity was reported as $2,421.
- Current assets of $3,083 and current liabilities of $2,813 imply a current ratio of about 1.10. The balance sheet also includes $5,160 of long-term debt and $125 of current debt.
- Six-month investing cash flow was positive $16, including $751 of property-sale proceeds and $224 from Kinetik share sales. Financing cash outflow was $2,462, including $1,370 of fixed-rate debt payments, $552 of net treasury-stock activity, and $86 of dividends.
Material changes and notable transactions
- Higher realized commodity prices were the principal driver of higher revenue and earnings. Egypt net production and revenue also benefited from improved cost recovery under the merged concession agreement ratified in late 2021. Q2 U.S. production was down 17% year over year; Egypt production rose 25% and North Sea production rose 4% on a boe basis.
- Six-month results included a $609 gain on Altus deconsolidation and a $563 gain from selling Delaware Basin mineral rights; the income statement reported a total net gain on divestitures of $1,149 for the six months. These gains make reported earnings less directly comparable with operating performance.
- APA recognized a $67 loss on extinguishment of debt in the first half after tendering, repurchasing, and redeeming notes. Debt reduction also reflects Altus deconsolidation. APA repurchased 14.2 million shares for $552 in the first half; 6.9 million additional shares were repurchased in July.
- APA completed a Delaware Basin acquisition on July 29, after quarter-end, for a total cost of $555, including adjustments; it was funded primarily through revolving-credit borrowings. The company expected acquired production to average 12,000–14,000 boe/d for the remaining five months of 2022.
Outlook, risks, and contingencies
- Management estimated full-year 2022 upstream capital spending of approximately $1.725 billion, nearly 8% above initial guidance, primarily due to increased Suriname drilling. Q2 capital investment was below guidance as some activity shifted later in the year.
- Management reaffirmed its capital-return framework targeting 60% of cash flow over capital investment for shareholder returns, and said it did not anticipate significant changes to its three-year investment program or capital-return framework. It cited investment for long-term returns over production growth and budget discipline.
- North Sea production was affected by first-half Forties maintenance; management expected second-half production to benefit from completed maintenance and the Garten-3 development well. Suriname appraisal and exploration continued; appraisal is needed to confirm the Krabdagu discovery’s resources and development locations.
- The U.K. Energy Profits Levy was enacted July 14, 2022. APA expected a third-quarter deferred tax expense of approximately $230–$250 from remeasuring its U.K. deferred tax liability.
- APA recorded a $1.2 billion contingent liability for potential decommissioning of sold Gulf of Mexico assets, with estimated exposure ranging from $1.2–$1.4 billion undiscounted. It recorded $733 million of expected reimbursement security. Funding could be pressured if security and producing-asset cash flows prove insufficient; APA also agreed to a standby loan of up to $400 million to GOM Shelf.
- Other risks include volatile commodity prices, inflation and supply constraints, production decline and drilling outcomes, interest and currency exposure, and legal, regulatory, environmental, climate-policy, and decommissioning matters. Legal contingencies deemed probable and estimable were accrued at approximately $48 million. APA reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How much of reported earnings and cash generation is sustainable at changing commodity prices, excluding the major divestiture and deconsolidation gains?
- Whether the $1.2–$1.4 billion Gulf of Mexico decommissioning estimate and $733 million of expected security remain adequate as obligations, costs, and counterparties evolve.
- Execution and funding of the $1.725 billion upstream capital plan, the post-quarter Delaware acquisition, and Suriname appraisal activity.
- Actual production and cost trends, especially U.S. declines, North Sea maintenance recovery, and Egypt cost-recovery performance.
- Impact of the U.K. levy, debt maturities and borrowing capacity, and continued share repurchases and dividends on liquidity and balance-sheet priorities.