APA Corporation — Third-Quarter 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. APA is an independent oil and gas exploration and production company, with operations in the U.S., Egypt, and the North Sea, and exploration activity in Suriname. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenues | $2,887 | $2,059 | $8,603 | $5,686 |
| Oil, gas and NGL production revenues | $2,302 | $1,685 | $7,147 | $4,630 |
| Income before income taxes | $1,172 | $122 | $4,932 | $1,237 |
| Net income (loss) attributable to common stock | $422 | $(113) | $3,231 | $591 |
| Diluted earnings (loss) per share | $1.28 | $(0.30) | $9.51 | $1.53 |
| Net cash provided by operating activities | Not provided for quarter | Not provided for quarter | $3,530 | $2,411 |
APA did not present a consolidated operating-margin measure in the supplied filing text. The company reported Q3 segment operating income of $1,335 million.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $268 million, versus $302 million at December 31, 2021. Nine-month cash flow from investing was $(894) million and from financing was $(2,670) million; cash decreased $34 million over the period.
- Total debt was $5,529 million, including $125 million current debt, versus $7,510 million at year-end 2021. APA attributes the reduction in part to debt retirement and Altus deconsolidation; the period comparison is therefore affected by a change in consolidation.
- Available committed borrowing capacity under syndicated credit facilities was reported as $2.1 billion. APA had $520 million borrowed under its U.S.-dollar facility and substantial letters of credit outstanding, including £748 million under its sterling facility.
- Operating cash flow rose 46% year over year for the first nine months, primarily from higher commodity prices and revenues, partly offset by working-capital changes. Interest paid was $274 million and income taxes paid, net of refunds, were $1,029 million.
Material changes versus the prior comparable period
- Q3 production revenues increased 37% year over year, mainly reflecting higher realized prices. Q3 average realized oil, natural gas and NGL prices rose 36%, 45% and 6%, respectively.
- Worldwide Q3 production was 381,934 boe/d, down 2% year over year. Higher net production in Egypt, following the merged concession agreement, was offset by North Sea downtime and natural declines; U.S. production also declined.
- Q3 common-stock earnings improved from a $113 million loss to $422 million income. For the first nine months, earnings benefited materially from a $609 million gain on Altus deconsolidation and a $560 million gain on the sale of Delaware Basin mineral rights, as well as stronger operating results.
- APA deconsolidated Altus in February 2022 following its combination with BCP; APA retained an approximately 13% interest in Kinetik at September 30, measured at $602 million.
- APA repurchased 24.0 million shares for $884 million during the first nine months of 2022. The quarterly dividend was increased to $0.25 per share in Q3.
Outlook, management commentary and risks
- Management expected full-year 2022 upstream capital investment of approximately $1.725 billion, nearly 8% above initial guidance, primarily due to increased Suriname activity. It said it did not anticipate significant changes to its three-year capital investment program or capital-return framework amid higher strip prices.
- APA’s stated capital-return framework targets returning 60% of cash flow over capital investment to shareholders, through dividends and share repurchases. Management said it believed liquidity and available capital resources were sufficient for operations, investment, debt maturities, dividends, buybacks and commitments.
- Management expected Egypt production growth in Q4 as new wells were connected and recompletions progressed. North Sea production was expected to improve after planned and unplanned maintenance at Beryl and Forties.
- APA reported an oil discovery at Baja-1 in Suriname’s Block 53, with evaluation ongoing; it holds a 45% interest and has options to extend the exploration period by up to four years.
- Exploration expense increased to $95 million in Q3 from $34 million, primarily due to higher dry-hole expense in Suriname and Egypt. Lease operating expenses also rose, reflecting higher labor and operating costs and inflation.
- The U.K. Energy Profits Levy enacted in July led to a $230 million deferred tax expense in Q3. APA was evaluating the U.S. Inflation Reduction Act, including its corporate alternative minimum tax and excise tax on stock repurchases.
- APA recorded a $1.2 billion contingent liability for potential decommissioning of previously sold Gulf of Mexico properties, against a recorded $726 million expected recovery from trust funds, bonds and letters of credit. Estimated potential liability was $1.2–$1.4 billion undiscounted; APA also agreed to provide a standby loan of up to $400 million after other funding sources are exhausted. Costs could exceed the accrual.
- Other risks include volatile commodity prices, inflation and supply-chain pressures, geopolitical developments, production interruptions, regulatory changes, climate and water-related requirements, and legal proceedings. APA noted that it could not reasonably estimate potential monetary sanctions in two EPA Clean Air Act enforcement matters.
Important facts for investors to verify
- How much of the earnings and cash-flow improvement reflects sustained operating performance versus higher commodity prices and one-time divestiture or deconsolidation gains.
- Whether the $1.725 billion 2022 capital-investment outlook and management’s production expectations were achieved, particularly in Suriname, Egypt and the North Sea.
- The status and funding sufficiency of Gulf of Mexico decommissioning protections, including potential BSEE orders, reimbursement sources and the standby-loan exposure.
- Debt repayment and refinancing progress, including the October 2022 redemption of the $123 million 2.625% notes and the effect of revolver borrowing and outstanding letters of credit on liquidity.
- The eventual effect of U.K. and U.S. tax legislation, possible valuation-allowance releases, and the impact of the new U.S. stock-repurchase excise tax.
- Production trends, realized prices, hedging positions and North Sea operating availability, which can materially affect results and cash flow.