APA Corp quarterly report, Q3 FY2021

Full document

APA Corporation — Q3 2021 Form 10-Q

Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2021. APA explores for and produces oil, natural gas, and NGLs in the U.S., Egypt, and North Sea; Altus operates Permian Basin midstream assets. APA completed its holding-company reorganization on March 1, 2021; comparative periods are presented on a combined basis.

Financial performance and liquidity

  • Q3 revenue: $2.059 billion, up from $1.120 billion a year earlier. Oil, gas, and NGL production revenue was $1.685 billion; purchased oil and gas sales were $374 million, substantially offset by $396 million of related costs.
  • Q3 earnings: Net loss attributable to common stock was $113 million, or $0.30 per diluted share, versus a $4 million loss, or $0.01 per diluted share, in Q3 2020. The quarter included a $446 million loss related to potential decommissioning of previously sold Gulf of Mexico properties. Income before taxes was $122 million; current tax provision was $183 million.
  • Q3 operating results: Segment operating income was $809 million, compared with $206 million in Q3 2020. The filing does not provide a single consolidated operating-margin measure.
  • First nine months: Revenue was $5.686 billion versus $3.216 billion; net income attributable to common stock was $591 million versus a $4.870 billion loss. The prior-year loss included $4.492 billion of impairments, compared with $18 million in 2021.
  • Cash flow and investment: Nine-month operating cash flow was $2.411 billion, up from $890 million. Investing cash flow used $542 million, including $790 million of upstream property additions; financing cash flow used $1.754 billion. Cash ended at $377 million, up from $262 million at year-end 2020.
  • Debt and liquidity: Total debt was $7.408 billion at September 30, down from $8.772 billion at December 31, 2020. Current debt was $215 million. Available committed borrowing capacity was $2.896 billion for Apache and $141 million for Altus. APA’s shareholders’ deficit was $1.095 billion; total equity deficit was $150 million.
  • Production: Worldwide production averaged 389 Mboe/d in Q3, down 13% from 445 Mboe/d. Higher realized prices more than offset lower volumes in production revenue: average oil price rose 75%, gas 104%, and NGLs 133% year over year.

Material changes versus the prior comparable period

  • Q3 production revenue increased as realized commodity prices recovered from 2020 levels, while production volumes declined across all three regions. North Sea output was particularly affected by compressor downtime, platform turnaround work, and third-party pipeline outages.
  • Q3 common-stock loss worsened mainly because of the new $446 million Gulf of Mexico decommissioning charge. The nine-month earnings comparison also reflects the prior year’s large impairment charges.
  • Apache repurchased $1.7 billion principal amount of notes in Q3, paying approximately $1.8 billion including premium and accrued interest; it recorded a $105 million debt-extinguishment loss. Debt declined by $1.4 billion from year-end.
  • Q3 operating expenses rose to $1.529 billion from $1.072 billion, including higher purchased oil and gas costs, lease operating expense, taxes, and financing costs. Financing costs included the debt-extinguishment loss.

Guidance, outlook, risks, and unusual items

  • Management maintained full-year 2021 upstream capital program guidance of approximately $1.1 billion: about $900 million for development and $200 million for exploration, predominantly in Suriname. It said Q3 capital investment was below the earlier planned budget but remained on track for full-year guidance.
  • With a constructive commodity-price environment, APA said it would gradually increase investment, primarily in Egypt and also in U.S. onshore, to sustain or slightly grow global production. Management stated a plan to return at least 60% of free cash flow to shareholders through dividends, buybacks, or both.
  • The quarterly dividend was increased from $0.025 to $0.0625 per share in Q3; a further increase to $0.125 was approved in Q4. In October, APA repurchased 14.7 million shares at an average $26.50 per share. These are post-quarter developments.
  • Gulf of Mexico contingency: Following Fieldwood’s bankruptcy and notifications that GOM Shelf could not fund certain decommissioning work, APA recorded a $1.186 billion liability and a $740 million reimbursement asset. Estimated undiscounted potential liability is $1.2–$1.4 billion. APA may be required to fund costs beyond available security and has a standby-loan commitment of up to $400 million; actual exposure could exceed the accrual.
  • Other risks: Results and cash flows remain sensitive to commodity prices, production and reserve levels, drilling and operating interruptions, inflation and service availability, foreign exchange, regulation, and COVID-19-related conditions. The filing also describes legal matters, environmental proceedings, and tax audits; management did not consider the disclosed legal contingencies, beyond recorded accruals, likely to materially affect financial position, results, or liquidity.
  • APA’s October 2021-disclosed Altus combination with BCP Raptor/EagleClaw is an all-stock transaction expected to close in Q1 2022, subject to approvals and other conditions; APA expected to own about 20% of the combined entity after closing.

Most important facts for investors to verify

  • Progress and cost exposure from Gulf of Mexico decommissioning, including the adequacy and collectability of the $740 million reimbursement security and the potential $400 million standby loan.
  • Whether higher commodity prices and planned capital increases can stabilize or grow production after the 13% year-over-year Q3 decline.
  • Execution of the $1.1 billion full-year capital plan and the sustainability of the minimum 60% free-cash-flow shareholder-return objective alongside debt reduction and contingencies.
  • Debt maturities and liquidity: the filing reports $215 million of current debt, but gives conflicting coupon descriptions for the 2022 senior notes (3.25% in the debt note and 3.625% in MD&A); verify the correct rate.
  • Approvals, closing terms, and resulting control/accounting treatment of the proposed Altus–BCP transaction.