APA Corp quarterly report, Q2 FY2023

APA Corporation — Q2 2023 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2023. APA is an independent oil and gas exploration and production company operating in the U.S., Egypt, and the North Sea, with exploration activity in Suriname. Amounts below are in U.S. dollars unless stated otherwise.

Financial performance and position

Metric	Q2 2023	Q2 2022	Six months 2023	Six months 2022
Total revenue	$1.796 billion	$3.047 billion	$3.804 billion	$5.716 billion
Net income attributable to common stock	$381 million	$926 million	$623 million	$2.809 billion
Diluted EPS	$1.23	$2.71	$2.01	$8.15
Cash from operating activities	Not stated for quarter	Not stated for quarter	$1.335 billion	$2.426 billion

• Q2 production revenue was $1.652 billion, down from $2.525 billion. Lower realized prices were the principal driver: oil prices averaged $76.38/bbl, down 33%; natural gas averaged $2.39/Mcf, down 58%; and NGLs averaged $18.69/bbl, down 54% year over year.
• Worldwide Q2 production averaged 398,930 boe/d, up 4% year over year. Oil production increased 9%, while natural gas production declined 3%.
• Q2 net income margin on total revenue was approximately 21%, versus 30% in Q2 2022. This simple ratio uses net income attributable to common stock divided by total revenue.
• Six-month operating cash flow declined 45% year over year, which management attributed mainly to lower commodity prices and revenue and working-capital timing. Cash flow less upstream property additions was approximately $216 million for the six months; this is a simple calculation, not a company-reported free-cash-flow measure.
• At June 30, cash was $142 million; total debt was $5.576 billion, including $762 million drawn on the U.S. revolving facility. Total equity was $1.696 billion and committed borrowing capacity was $2.194 billion. Cash was down from $245 million at year-end 2022; debt was up from $5.453 billion.
• Current assets were $2.599 billion and current liabilities $2.630 billion. The filing reports $168 million of interest paid and $476 million of income taxes paid, net of refunds, during the first half.

Material changes versus the prior period

• Q2 net income attributable to common stock fell to $381 million from $926 million, reflecting substantially lower realized commodity prices. Six-month earnings comparisons are also affected by 2022 divestiture gains, including the Altus/Kinetik deconsolidation and sale of Delaware Basin mineral rights.
• Oil production growth and U.S. property acquisitions partly offset natural declines and lower prices. U.S. natural gas pricing was especially weak, with the Q2 realized price down 82% year over year.
• Upstream capital additions were $1.119 billion in the first half, versus $741 million a year earlier. APA repurchased 5 million shares for $188 million and paid $155 million in common dividends, compared with $552 million of repurchases and $86 million of dividends in the prior-year period.
• APA recorded a $46 million inventory impairment after deciding to suspend North Sea drilling. Depreciation, depletion, and amortization increased to $367 million in Q2 from $278 million.

Outlook, management commentary, and risks

• Management reduced expected full-year 2023 upstream capital investment to approximately $1.9 billion. It said it would prioritize returns over production growth, manage costs, and direct cash flow beyond investment toward debt reduction and shareholder returns. APA’s stated capital-return framework targets returning 60% of cash flow over capital investment, subject to its plans and circumstances.
• APA deferred additional Alpine High drilling pending stronger Waha gas and NGL prices, and suspended new North Sea drilling because of rising costs and tax burdens. It plans to maintain North Sea base production and pursue well interventions. Egypt activity is weighted toward oil prospects; Suriname work included Krabdagu appraisal and evaluation of a potential Sapakara-Krabdagu development hub.
• The largest disclosed contingency concerns decommissioning of previously sold Gulf of Mexico assets. APA estimated potential remaining costs of $922 million to $1.1 billion, recorded a $922 million liability and a $507 million asset for expected recoveries from security, and has agreed to provide a standby loan of up to $400 million after other sources are exhausted. Assumptions or shortfalls in security and asset cash flows could increase APA’s ultimate cash exposure. Insurers sued to block draws on bonds and letters of credit; a court denied their temporary-injunction request in July 2023.
• Other disclosed matters include a $52 million accrual for probable and estimable legal contingencies, a proposed $7 million settlement of the Canadian employee class action subject to court approval, environmental enforcement matters, and multiple ongoing lawsuits. Management said it did not believe the other disclosed proceedings would materially affect financial position, results, or liquidity after recorded accruals, while noting some exposures cannot presently be estimated.
• Commodity-price volatility, production and reserve levels, inflation, interest rates, regulatory and tax changes, geopolitical events, and counterparty performance remain material risks. A U.K. tax-law change resulted in a $174 million deferred tax expense in Q1 2023. APA said a significant release of its U.S. deferred-tax valuation allowance could be possible within 12 months if sufficient positive evidence emerges; any release could materially reduce tax expense in the period recognized.
• Management stated available liquidity and financing alternatives should be adequate for operations, investment, debt maturities, dividends, repurchases, and contingencies. The filing cautions that actual results may differ from forward-looking statements. No material changes to previously disclosed risk factors or internal controls were reported.

Important facts for investors to verify

• Whether commodity prices and production trends support the $1.9 billion capital plan and the targeted balance between investment, debt reduction, and shareholder returns.
• The status, timing, and recoverability of Gulf of Mexico decommissioning security, including the insurer litigation, potential additional BSEE orders, and the possibility of costs exceeding the recorded liability.
• Liquidity and borrowing capacity after revolving-credit draws, letters of credit supporting decommissioning, and planned capital returns.
• Progress on Alpine High, North Sea, Egypt, and Suriname plans, including whether suspended drilling or appraisal activity resumes or changes.
• Future U.K. tax expense and any U.S. valuation-allowance release, as well as developments in material legal and environmental proceedings.