APA Corporation (APA) — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are to Q1 2021 unless otherwise noted. 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. Altus midstream was deconsolidated in February 2022 following its combination with BCP; the combined company is Kinetik.
Financial results and liquidity
- Revenue: Production revenue was $2.320 billion, up 62% from $1.431 billion. Total revenue, including purchased oil and gas sales, was $2.669 billion versus $1.871 billion. The filing attributes higher production revenue principally to stronger commodity prices and increased net production in Egypt.
- Profit: Net income attributable to APA common stock was $1.883 billion, or $5.43 per diluted share, versus $388 million, or $1.02 per diluted share. Results included $1.176 billion in net divestiture gains, primarily from the Kinetik transaction and Delaware Basin mineral-rights sale. Net income before income taxes was $2.298 billion. The filing does not provide a clear consolidated margin measure.
- Cash flow: Operating cash flow was $891 million, up from $671 million. Investing activities provided $466 million, principally reflecting property and Kinetik share-sale proceeds. Financing activities used $1.425 billion, including $1.370 billion of fixed-rate debt payments, $261 million of net treasury-stock purchases, and $43 million of dividends. Cash ended the quarter at $234 million, down from $302 million at year-end 2021.
- Debt and liquidity: Total debt was $5.889 billion, compared with $7.510 billion at December 31, 2021; the change reflects debt retirement and Altus deconsolidation. APA reported $2.118 billion of available committed borrowing capacity at March 31. On April 29, 2022, it replaced its former facility with unsecured revolving facilities of $1.8 billion and £1.5 billion, each with a five-year maturity and two one-year extension options.
- Production and prices: Worldwide production averaged 404,042 boe/d, up 6%. Average realized oil, natural gas, and NGL prices rose 68%, 14%, and 61%, respectively. North Sea production declined 19%, with unplanned Forties Echo platform inspection downtime cited as a factor.
Material changes versus Q1 2021
- Production revenue rose substantially on higher realized prices and increased net production, particularly in Egypt under its new merged concession agreement. Worldwide oil, gas, and NGL production increased 4%, 8%, and 7%, respectively.
- Net income benefited from $1.176 billion of divestiture gains; Q1 2021 had only $2 million of such gains. Derivative results shifted to a $62 million loss from a $158 million gain in Q1 2021, which included a $147 million realized gain associated with Winter Storm Uri.
- Operating expenses were $1.530 billion versus $1.472 billion. Higher lease operating costs, gathering and transportation costs, taxes, and G&A were partly offset by lower purchased oil and gas costs and DD&A. G&A rose $73 million, primarily due to stock-based compensation and wage increases.
- APA repurchased 7.2 million shares for $261 million in Q1 2022; no shares were repurchased in Q1 2021. The quarterly dividend was $0.125 per share, up from $0.025 in Q1 2021.
Outlook, risks, and unusual items
- Management expects full-year 2022 upstream capital investment of approximately $1.7 billion, nearly 8% above prior guidance, primarily due to increased Suriname drilling. It expects current U.S. activity to support modest oil-production growth in the second half of 2022.
- Management reaffirmed its capital-return framework, targeting return of 60% of cash flow over capital investment through dividends and share repurchases, while also emphasizing balance-sheet strengthening and investment for long-term returns over production growth.
- The Kinetik combination generated an approximately $609 million deconsolidation gain. APA also sold Delaware Basin non-core mineral rights for approximately $759 million in cash proceeds and recognized an approximately $590 million gain. The filing says APA agreed to invest at least $100 million of Kinetik share-sale proceeds in Alpine High drilling and completion activity within 24 months.
- APA recorded a $1.2 billion contingent liability for potential decommissioning of previously sold Gulf of Mexico properties; its estimated undiscounted exposure was $1.2–$1.4 billion. It recorded $740 million of expected reimbursement assets. Apache may also be required to provide a secured standby loan of up to $400 million; costs and reimbursement shortfalls could exceed current estimates.
- Other key risks include volatile oil, gas, and NGL prices; the Ukraine conflict and broader market disruption; inflation and operating-cost pressures; production and drilling risks; regulatory and environmental matters; and counterparty credit risk. The filing reports a $73 million accrual for probable and estimable legal contingencies and a $2 million environmental remediation reserve.
- Management stated that liquidity should be adequate for operations, capital investment, debt maturities, dividends, and buybacks over the next twelve months and beyond. This outlook is subject to commodity prices, production, costs, and other uncertainties.
Important facts for investors to verify
- How much of reported earnings and future cash generation is attributable to recurring operations rather than the $1.176 billion of divestiture gains and other unusual items?
- Whether the $1.2–$1.4 billion Gulf of Mexico decommissioning exposure, $740 million of expected reimbursements, and potential $400 million standby loan change as BSEE orders and project costs develop.
- Whether the $1.7 billion capital plan, Suriname drilling program, and management’s second-half U.S. oil-growth expectation remain on track.
- How the new credit facilities, outstanding borrowings, and North Sea letters of credit affect available liquidity and refinancing needs.
- Whether higher operating costs, commodity-price volatility, North Sea downtime, and Egypt concession economics alter production, margins, or the planned shareholder-return framework.