APA CORPORATION and its consolidated subsidiaries and should be read together with the Company's Consolidated Financial Statements and accompanying notes included in Part I,
Item 1-Financial Statements of this Quarterly Report on Form 10-Q, as well as related information set forth in the Company's Consolidated Financial Statements, accompanying Notes to Consolidated Financial Statements, and Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . OnJanuary 4, 2021 , the Company announced plans to implement a holding company reorganization (the Holding Company Reorganization), which was thereafter completed onMarch 1, 2021 . In connection with the Holding Company Reorganization, the Company became a direct, wholly-owned subsidiary ofAPA Corporation (APA), and all of the Company's outstanding shares were automatically converted into equivalent corresponding shares of APA. Pursuant to the Holding Company Reorganization, APA became the successor issuer to the Company pursuant to Rule 12g-3(a) under the Exchange Act and replaced the Company as the public company trading on the Nasdaq Global Select Market under the ticker symbol "APA." The Holding Company Reorganization modernized the Company's operating and legal structure making it more consistent with other companies that have affiliates operating around the globe. Refer to Note 2-Transactions with Parent Affiliate for more detail. Overview Apache, a direct, wholly-owned subsidiary of APA, is an independent energy company that explores for, develops, and produces natural gas, crude oil, and natural gas liquids (NGLs). The Company's upstream business currently has exploration and production operations in three geographic areas: theU.S. ,Egypt , and offshore theU.K. in theNorth Sea (North Sea ). The Company's midstream business is operated byAltus Midstream Company (Nasdaq: ALTM) through its subsidiaryAltus Midstream LP (collectively, Altus). Altus owns, develops, and operates a midstream energy asset network in thePermian Basin ofWest Texas . The Company's mission is to grow in an innovative, safe, environmentally responsible, and profitable manner for the long-term benefit of its stakeholders. The Company is focused on rigorous portfolio management, disciplined financial structure, and optimization of returns. The global economy and the energy industry have been deeply impacted by the effects of the coronavirus disease 2019 (COVID-19) pandemic and related governmental actions. Uncertainty in the commodity and financial markets during 2020 and 2021 continue to impact oil supply and demand. Despite these uncertainties, the Company remains committed to its longer-term objectives: (1) to maintain a balanced asset portfolio; (2) to invest for long-term returns over production growth; and (3) to budget conservatively to generate cash flow in excess of its capital program that can be directed on a priority basis to debt reduction. The Company continues to aggressively manage its cost structure regardless of the oil price environment and closely monitors hydrocarbon pricing fundamentals to reallocate capital as part of its ongoing planning process. In the third quarter of 2021, the Company reported a net loss of$83 million compared to a net loss of$4 million in the third quarter of 2020. The increase in net loss compared to the prior-year period is primarily the result of a non-cash$446 million loss on previously soldGulf of Mexico properties, which represents the Company's estimate of decommissioning Apache may be required to perform or pay for on assets sold toFieldwood in 2013 in excess of securities available to the Company to recover costs incurred with respect to such decommissioning. For additional details of this loss, please refer to Note 12-Commitments and Contingencies in the Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. Absent this charge, the quarter benefited from significantly improved commodity prices that had collapsed in the prior year when the COVID-19 pandemic negatively affected economic activity and the oil markets. In response to lower commodity prices, the Company materially reduced its upstream capital investment budget and drilling activity during 2020. Daily production decreased 13 percent from an average of 445 Mboe/d in the third quarter of 2020 to an average of 389 Mboe/d in the third quarter of 2021. The Company generated$2.4 billion of cash from operating activities during the first nine months of 2021, a 172 percent increase from the first nine months of 2020, driven by higher commodity prices and associated revenues. Since year-end the Company reduced its outstanding debt by$1.1 billion , and it had$348 million of cash at the end of the third quarter of 2021. Following this progress and considering the ongoing constructive price environment, the Company has adjusted its cash allocation approach. The capital investment program will be increased to a level intended to sustain or slightly grow global production volumes. This will be primarily accomplished through a gradual ramp in activity over the next few quarters, primarily inEgypt , but also in theU.S. Onshore. 30 -------------------------------------------------------------------------------- Operational Highlights Key operational highlights for the quarter include:United States •Equivalent production from the Company'sU.S. assets accounted for 61 percent of its total production during the third quarter of 2021. After halting all drilling and completion activity for most of 2020, in early 2021 the Company re-activated one rig in thePermian Basin and one rig in the Austin Chalk. A second rig was added in thePermian Basin in lateJune 2021 . The Company was also active in completing its backlog of Permian wells previously drilled but not completed. During the third quarter, the Company placed nine wells online in thePermian Basin . One additional well was drilled in the Austin Chalk, where the results are continuing to be evaluated, and a drilling rig was recently added to advance the characterization of the Company's acreage position in the play. •OnOctober 11, 2021 , APA announced that it has ended routine flaring in itsU.S. onshore operations, achieving one of its announced 2021 environmental, social and governance (ESG) goals, three months ahead of schedule. •OnOctober 21, 2021 , ALTM announced that it will combine with privately-ownedBCP Raptor Holdco LP (BCP) in an all-stock transaction. As consideration for the transaction, ALTM will issue 50 million Class C common shares (and its subsidiary,Altus Midstream LP , will issue corresponding common units) to BCP's unitholders, which are principally funds affiliated withBlackstone andI Squared Capital . Upon closing of the transaction, APA will own approximately 20 percent of the issued and outstanding common stock of the combined entity. The transaction is expected to close during the first quarter of 2022 following completion of customary closing conditions, including ALTM shareholder approval and regulatory reviews. International •InMay 2021 , the Company reached an agreement in principle with theEgyptian Ministry of Petroleum and theEgyptian General Petroleum Corporation (EGPC) to modernize the terms of the majority of the production-sharing contracts. The changes simplify the contractual relationship with EGPC and include provisions to create a single cost recovery pool, adjust cost oil and gas and profit oil and gas participation, facilitate recovery of prior investment, update day-to-day operational governance, and refresh the term length of both exploration and development leases. The Apache entity that will become the sole contractor is owned two-thirds by Apache and one-third by Sinopec. The final draft of this agreement has been completed and is scheduled to move to the Egyptian Parliament and President in the fall for approvals to complete the process. •In Egypt, the Company averaged 8 drilling rigs and completed 12 wells during the third quarter of 2021. Third-quarter gross equivalent production in the Company'sEgypt assets decreased 15 percent from the third quarter of 2020, given reduced drilling activity over the preceding year. The Company continues to build and enhance its drilling inventory inEgypt , supplemented with recent seismic acquisitions and new play concept evaluations on both new and existing acreage. Upon ratification of the new agreement referenced above, the Company expects to further increase drilling and workover activity. •The Company averaged two rigs in theNorth Sea during the third quarter of 2021. Production was significantly impacted by compressor downtime, extended platform turnaround work, and third-party pipeline outages during the first nine months of the year. 31 -------------------------------------------------------------------------------- Results of Operations Oil and Gas Production Revenues Revenue The Company's oil and gas production revenues and respective contribution to total revenues by country were as follows: For the Quarter Ended
For the Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
% % $ % $ %
$ Value Contribution $ Value Contribution Value Contribution Value Contribution
($ in millions)
Oil Revenues:
United States $ 484 41 % $ 303 39 % $ 1,325 40 % $ 929 40 %
Egypt (1) 465 39 % 303 38 % 1,299 39 % 823 35 %
North Sea 233 20 % 179 23 % 690 21 % 578 25 %
Total(1) $ 1,182 100 % $ 785 100 % $ 3,314 100 % $ 2,330 100 %
Natural Gas Revenues:
United States $ 188 64 % $ 77 47 % $ 533 64 % $ 169 41 %
Egypt (1) 63 22 % 74 45 % 198 24 % 209 50 %
North Sea 42 14 % 13 8 % 100 12 % 39 9 %
Total(1) $ 293 100 % $ 164 100 % $ 831 100 % $ 417 100 %
NGL Revenues:
United States $ 202 96 % $ 90 93 % $ 463 95 % $ 211 91 %
Egypt (1) 2 1 % 2 2 % 6 1 % 6 3 %
North Sea 6 3 % 5 5 % 16 4 % 15 6 %
Total(1) $ 210 100 % $ 97 100 % $ 485 100 % $ 232 100 %
Oil and Gas Revenues:
United States $ 874 52 % $ 470 45 % $ 2,321 50 % $ 1,309 44 %
Egypt (1) 530 31 % 379 36 % 1,503 33 % 1,038 35 %
North Sea 281 17 % 197 19 % 806 17 % 632 21 %
Total(1) $ 1,685 100 % $ 1,046 100 % $ 4,630 100 % $ 2,979 100 %
(1) Includes revenues attributable to a noncontrolling interest in Egypt .
32
--------------------------------------------------------------------------------Production
The Company's production volumes by country were as follows:
For the Quarter Ended For the Nine Months Ended,
September 30, September 30,
Increase Increase
2021 (Decrease) 2020 2021 (Decrease) 2020
Oil Volume (b/d)
United States 75,526 (9)% 83,178 75,384 (19)% 93,051
Egypt(1)(2) 69,830 (12)% 79,194 71,052 (8)% 77,410
North Sea 33,783 (31)% 48,755 36,398 (28)% 50,339
Total 179,139 (15)% 211,127 182,834 (17)% 220,800
Natural Gas Volume (Mcf/d)
United States 546,058 (9)% 597,686 531,695 (7)% 571,325
Egypt(1)(2) 243,294 (15)% 286,744 259,108 (5)% 273,676
North Sea 33,752 (36)% 53,137 40,061 (31)% 57,659
Total 823,104 (12)% 937,567 830,864 (8)% 902,660
NGL Volume (b/d)
United States 70,962 (6)% 75,266 65,805 (13)% 75,468
Egypt(1)(2) 496 (19)% 611 544 (33)% 812
North Sea 1,200 (39)% 1,976 1,220 (37)% 1,948
Total 72,658 (7)% 77,853 67,569 (14)% 78,228
BOE per day(3)
United States 237,498 (8)% 258,058 229,805 (13)% 263,740
Egypt(1)(2) 110,875 (13)% 127,595 114,780 (7)% 123,834
North Sea(4) 40,608 (32)% 59,588 44,295 (28)% 61,897
Total 388,981 (13)% 445,241 388,880 (13)% 449,471
(1) Gross oil, natural gas, and NGL production in Egypt were as follows:
For the Quarter Ended September 30, For the Nine Months Ended September 30,
2021 2020 2021 2020
Oil (b/d) 134,128 159,941 134,976 171,778
Natural Gas (Mcf/d) 564,354 649,566 581,859 648,995
NGL (b/d) 776 1,175 846 1,534
(2) Includes net production volumes per day attributable to a noncontrolling
interest in Egypt of:
For the Quarter Ended September 30, For the Nine Months Ended September 30,
2021 2020 2021 2020
Oil (b/d) 23,309 26,459 23,716 25,891
Natural Gas (Mcf/d) 81,309 95,776 86,564 91,374
NGL (b/d) 165 204 181 271
(3) The table shows production on a boe basis in which natural gas is converted
to an equivalent barrel of oil based on a 6:1 energy equivalent ratio. This
ratio is not reflective of the price ratio between the two products.
(4) Average sales volumes from the North Sea for the third quarter of 2021 and
2020 were 40,581 boe/d and 57,099 boe/d, respectively, and 45,637 boe/d and
61,771 boe/d for the first nine months of 2021 and 2020, respectively. Sales
volumes may vary from production volumes as a result of the timing of liftings
in the Beryl field.
33
--------------------------------------------------------------------------------Pricing
The Company's average selling prices by country were as follows:
For the Quarter Ended For the Nine Months Ended,
September 30, September 30,
Increase Increase
2021 (Decrease) 2020 2021 (Decrease) 2020
Average Oil Price - Per barrel
United States $ 69.69 76% $ 39.60 $ 64.38 77% $ 36.45
Egypt 72.37 74% 41.51 66.97 73% 38.79
North Sea 74.94 78% 42.10 66.93 59% 41.99
Total 71.72 75% 40.88 65.90 71% 38.53
Average Natural Gas Price -
Per Mcf
United States $ 3.75 168% $ 1.40 $ 3.67 240% $ 1.08
Egypt 2.82 -% 2.82 2.80 -% 2.79
North Sea 13.40 419% 2.58 9.13 271% 2.46
Total 3.87 104% 1.90 3.66 117% 1.69
Average NGL Price - Per barrel
United States $ 30.85 136% $ 13.06 $ 25.75 152% $ 10.20
Egypt 52.02 101% 25.88 44.73 70% 26.24
North Sea 56.64 109% 27.08 48.32 69% 28.54
Total 31.42 133% 13.51 26.32 143% 10.83
Third-Quarter 2021 compared to Third-Quarter 2020
Crude Oil Crude oil revenues for the third quarter of 2021 totaled $1.2 billion ,
a $397 million increase from the comparative 2020 quarter. A 75 percent increase
in average realized prices increased third-quarter 2021 oil revenues by $592
million compared to the prior-year quarter, while 15 percent lower average daily
production decreased revenues by $195 million . Crude oil revenues accounted for
70 percent of total oil and gas production revenues and 46 percent of worldwide
production in the third quarter of 2021. The Company's worldwide oil production
decreased 32.0 Mb/d to 179.1 Mb/d during the third quarter of 2021 from the
comparative prior-year period, primarily a result of natural production decline
across all countries and extended operational downtime and platform turnaround
work in the North Sea .
Natural Gas Gas revenues for the third quarter of 2021 totaled $293 million , a
$129 million increase from the comparative 2020 quarter. A 104 percent increase
in average realized prices increased third-quarter 2021 natural gas revenues by
$170 million compared to the prior-year quarter, while 12 percent lower average
daily production decreased revenues by $41 million . Natural gas revenues
accounted for 17 percent of total oil and gas production revenues and 35 percent
of worldwide production during the third quarter of 2021. The Company's
worldwide natural gas production decreased 114.5 MMcf/d to 823 MMcf/d during the
third quarter of 2021 from the comparative prior-year period, primarily a result
of production decline across all countries and extended operational downtime in
the North Sea , offset by increased completion activity in the U.S.
NGL NGL revenues for the third quarter of 2021 totaled $210 million , a $113
million increase from the comparative 2020 quarter. A 133 percent increase in
average realized prices increased third-quarter 2021 NGL revenues by $128
million compared to the prior-year quarter, while 7 percent lower average daily
production decreased revenues by $15 million . NGL revenues accounted for 13
percent of total oil and gas production revenues and 19 percent of worldwide
production during the third quarter of 2021. The Company's worldwide NGL
production decreased 5.2 Mb/d to 72.7 Mb/d during the third quarter of 2021 from
the comparative prior-year period, primarily a result of production decline
across all countries.
34
--------------------------------------------------------------------------------
Year-to-Date 2021 compared to Year-to-Date 2020
Crude Oil Crude oil revenues for the first nine months of 2021 totaled $3.3
billion , a $1.0 billion increase from the comparative 2020 period. A 71 percent
increase in average realized prices increased oil revenues for the 2021 period
by $1.7 billion compared to the prior-year period, while 17 percent lower
average daily production decreased revenues by $671 million compared to the
prior-year period. Crude oil revenues accounted for 72 percent of total oil and
gas production revenues and 47 percent of worldwide production for the first
nine months of 2021. Crude oil prices realized during the first nine months of
2021 averaged $65.90 per barrel, compared to $38.53 per barrel in the
comparative prior-year period. The Company's worldwide oil production decreased
38.0 Mb/d to 182.8 Mb/d in the first nine months of 2021 compared to the
prior-year period, primarily a result of production decline across all
countries, and extended operational downtime and platform turnaround work in the
North Sea .
Natural Gas Gas revenues for the first nine months of 2021 totaled $831 million ,
a $414 million increase from the comparative 2020 period. A 117 percent increase
in average realized prices increased natural gas revenues for the 2021 period by
$489 million compared to the prior-year period, while 8 percent lower average
daily production decreased revenues by $75 million compared to the prior-year
period. Natural gas revenues accounted for 18 percent of total oil and gas
production revenues and 36 percent of worldwide production for the first nine
months of 2021. Natural gas prices realized during the first nine months of 2021
averaged $3.66 per Mcf, compared to $1.69 per Mcf in the comparative prior-year
period. Gas prices for the U.S. during the first nine months of 2021 also
reflect the extreme price volatility during the month of February due to the
Texas freeze event. The Company's worldwide natural gas production decreased 72
MMcf/d to 831 MMcf/d in the first nine months of 2021 compared to the prior-year
period, primarily a result of production decline across all countries, impacts
of winter storms in the U.S. , and extended operational downtime and platform
turnaround work in the North Sea .
NGL NGL revenues for the first nine months of 2021 totaled $485 million , a $253
million increase from the comparative 2020 period. A 143 percent increase in
average realized prices increased NGL revenues for the 2021 period by $332
million compared to the prior-year period, while 14 percent lower average daily
production decreased revenues by $79 million compared to the prior-year period.
NGL revenues accounted for 10 percent of total oil and gas production revenues
and 17 percent of worldwide production for the first nine months of 2021. NGL
prices realized during the first nine months of 2021 averaged $26.32 per barrel,
compared to $10.83 per barrel in the comparative prior-year period. The
Company's worldwide NGL production decreased 10.7 Mb/d to 67.6 Mb/d in the first
nine months of 2021 compared to the prior-year period, primarily a result of
production decline across all countries and the impacts of winter storms in the
U.S.
Altus Midstream Revenues
Altus Midstream services revenues generated through its fee-based contractual
arrangements with the Company totaled $35 million and $39 million during the
third quarters of 2021 and 2020, respectively, and $99 million and $111 million
during the first nine months of 2021 and 2020, respectively. These affiliated
revenues are eliminated upon consolidation. Changes in revenue compared to the
prior periods were primarily driven by lower natural gas throughput volumes
processed by Altus for the Company's Alpine High production.
Purchased Oil and Gas Sales
Purchased oil and gas sales represent volumes primarily attributable to
transport, fuel, and physical in-basin gas purchases that were sold by the
Company to fulfill natural gas takeaway obligations. Sales related to these
purchased volumes totaled $374 million and $74 million during the third quarters
of 2021 and 2020, respectively, and $1.1 billion and $237 million during the
first nine months of 2021 and 2020, respectively. Purchased oil and gas sales
were offset by associated purchase costs of $396 million and $75 million during
the third quarters of 2021 and 2020, respectively, and $1.2 billion and
$207 million during the first nine months of 2021 and 2020, respectively. When
compared to the prior-year periods, gross purchased oil and gas sales values and
the associated net losses in the third quarter and first nine months of 2021
increased as a result of production shortfalls following reduced capital
investment and drilling activity in 2020. The year-to-date net loss was
exacerbated by extreme price volatility during the month of February due to
Winter Storm Uri in Texas .
35
--------------------------------------------------------------------------------
Operating Expenses
The Company's operating expenses were as follows:
For the Quarter Ended For the Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(In millions)
Lease operating expenses $ 316
68 63 187 206
Purchased oil and gas costs 396 75 1,152 207
Taxes other than income 54 34 149 90
Exploration 21 58 86 187
General and administrative 64 52 226 214
Transaction, reorganization, and separation 4 7 8 44
Depreciation, depletion, and amortization:
Oil and gas property and equipment 306 366 940 1,284
Gathering, processing, and transmission assets 18 19 56 58
Other assets 11 13 32 40
Asset retirement obligation accretion 29 27 85 81
Impairments 18 - 18 4,492
Financing costs, net 192 99 393 168
Total Operating Expenses $ 1,497 $ 1,072 $ 4,223 $ 7,929
Lease Operating Expenses (LOE)
LOE increased $57 million and $33 million in the third quarter and the first
nine months of 2021, respectively, from the comparative prior-year periods. On a
per-unit basis, LOE increased 39 percent and 20 percent in the third quarter and
the first nine months of 2021, respectively, from the comparative prior-year
periods. The increase was driven by higher turnaround and maintenance costs in
the North Sea , strengthening foreign exchange rates against the U.S. dollar,
increased workover activity in the U.S. in the third quarter of 2021, and
per-unit operating costs trending with higher oil and gas prices.
Gathering, Processing, and Transmission (GPT)
The Company's GPT expenses were as follows:
For the Quarter Ended For the Nine Months Ended,
September 30, September 30,
2021 2020 2021 2020
(In millions)
Third-party processing and transmission
costs $ 59 $ 54 $ 163 $ 177
Midstream service affiliate costs 35 38 98 110
Upstream processing and transmission
costs 94 92 261 287
Midstream operating expenses 9 9 24 29
Intersegment eliminations (35) (38) (98) (110)
Total Gathering, processing, and
transmission $ 68 $
63 $ 187
GPT costs increased$5 million and decreased$19 million in the third quarter and the first nine months 2021, respectively, from the comparative prior-year periods. Third-party processing and transmission costs increased$5 million and decreased$14 million in the third quarter and the first nine months of 2021, respectively, from the comparative prior-year periods. The increase in third-party costs for the third quarter of 2021 was primarily driven by an increase in average transportation rates during the quarter. The overall decrease in third-party costs for the first nine months of 2021 was primarily driven by a decrease in contracted pricing and lower processed volumes. Midstream service affiliate costs decreased$3 million and$12 million in the third quarter and the first nine months of 2021, respectively, from the comparative prior-year periods. The overall decrease in the first nine months of 2021 was primarily driven by lower throughput of rich natural gas volumes atAlpine High . Midstream operating expenses, primarily incurred byAltus Midstream , remained flat in the third quarter of 2021 and decreased$5 million in the first nine months of 2021, compared to the respective prior-year periods, driven by increased operational efficiency and continued cost cutting efforts. 36 -------------------------------------------------------------------------------- Purchased Oil and Gas Costs Purchased oil and gas costs totaled$396 million and$1.2 billion during the third quarter and the first nine months of 2021, respectively, compared to$75 million and$207 million during the third quarter and the first nine months of 2020, respectively. Purchased oil and gas costs were offset by associated purchase sales of$374 million and$1.1 billion during the third quarter and the first nine months of 2021, respectively, compared to$74 million and$237 million during the third quarter and the first nine months of 2020, respectively, as further discussed above. Taxes Other Than Income Taxes other than income increased$20 million and$59 million from the third quarter and the first nine months of 2020, respectively, primarily from higher severance taxes driven by higher commodity prices as compared to the same prior-year periods. Exploration Expenses The Company's exploration expenses were as follows: For the Quarter Ended For the Nine Months Ended, September 30, September 30, 2021 2020 2021 2020 (In millions) Unproved leasehold impairments $ 5$ 36 $ 26$ 86 Dry hole expense 6 5 31 52 Geological and geophysical expense 4 7 6 14 Exploration overhead and other 6 10 23 35 Total Exploration$ 21 $ 58 $ 86$ 187 Exploration expenses decreased$37 million and$101 million from the third quarter and the first nine months of 2020, respectively, primarily the result of higher unproved leasehold impairments during the prior-year periods, due to lower oil and gas prices in the comparative periods. For the first nine months of 2021, the Company also had lower overhead and dry hole expenses resulting from decreased exploration activities compared to the prior year. General and Administrative (G&A) Expenses G&A expenses increased$12 million from the third quarter and the first nine months of 2020, primarily driven by higher cash-based stock compensation expense resulting from an increase in APA's stock price, partially offset by lower overhead driven by organizational redesign efforts during 2019 and 2020. Transaction, Reorganization, and Separation (TRS) Costs TRS costs decreased$3 million and$36 million from the third quarter and the first nine months of 2020, respectively, driven by costs associated with the Company's reorganization efforts incurred primarily in the prior year. In recent years, the Company has streamlined its portfolio through strategic divestitures and centralized certain operational activities in an effort to capture greater efficiencies and cost savings through shared services. During the second half of 2019, management initiated a comprehensive redesign of the Company's organizational structure and operations that it believes will better position the Company to be competitive for the long-term and further reduce recurring costs. Reorganization efforts were substantially completed during 2020. Depreciation, Depletion, and Amortization (DD&A) DD&A expenses on the Company's oil and gas properties decreased$60 million and$344 million from the third quarter and the first nine months of 2020, respectively. The Company's DD&A rate on its oil and gas properties decreased$0.45 per boe and$1.61 per boe from the third quarter and the first nine months of 2020, respectively. The decrease on an absolute basis was driven by lower production volumes and lower asset property balances associated with proved property impairments recorded during the first quarter of 2020. DD&A expense on the Company's GPT assets remained essentially flat compared to the third quarter and the first nine months of 2020. 37 --------------------------------------------------------------------------------
Impairments
During the third quarter and first nine months of 2021, the Company recorded$18 million of asset impairments in connection with inventory valuations and expected equipment dispositions in theNorth Sea . The Company recognized$4.5 billion in asset impairments in connection with fair value assessments during the first nine months of 2020. During the first half of 2020, the Company recognized impairments totaling$4.3 billion related to proved oil and gas properties in theU.S. ,Egypt , and theNorth Sea ,$68 million related to GPT facilities inEgypt ,$87 million related to goodwill valuations inEgypt , and$18 million related to inventory and other miscellaneous assets, including charges for the early termination of drilling rig leases. Financing Costs, Net The Company's Financing costs were as follows: For the Quarter Ended For the Nine Months Ended, September 30, September 30, 2021 2020 2021 2020 (In millions) Interest expense$ 102
1 2 6 6
Capitalized interest - (3) - (9)
Loss (gain) on extinguishment of debt 105 (12) 104 (152)
Interest income (1) (1) (6) (4)
Interest income from APA Corporation, net (15) - (35) -
Total Financing costs, net $ 192 $ 99 $ 393 $ 168
Net financing costs increased $93 million and $225 million from the third
quarter and the first nine months of 2020, respectively, primarily driven by a
$105 million loss on extinguishment of debt recognized in the third quarter of
2021, and a $152 million gain on extinguishment of debt during the first nine
months of 2020. This increase was partially offset by interest income from APA
Corporation as a result of the note receivable from APA related to the Holding
Company Reorganization. Refer to Note 2-Transactions with Parent Affiliate
in the Notes to Consolidated Financial Statements in Part I, Item 1 of this
Quarterly Report on Form 10-Q for further information.
Provision for Income Taxes
The Company estimates its annual effective income tax rate in recording its
quarterly provision for income taxes in the various jurisdictions in which the
Company operates. Non-cash impairments on the carrying value of the Company's
oil and gas properties, gains and losses on the sale of assets, statutory tax
rate changes, and other significant or unusual items are recognized as discrete
items in the quarter in which they occur.
During the third quarter of 2021, the Company's effective income tax rate was
primarily impacted by a loss on offshore decommissioning contingency and an
increase in the amount of valuation allowance against its U.S. deferred tax
assets. During the third quarter of 2020, the Company's effective income tax
rate was primarily impacted by an increase in the amount of valuation allowance
against its U.S. deferred tax assets. The Company's 2021 year-to-date effective
income tax rate was primarily impacted by a loss contingency in connection with
decommissioning of previously sold Gulf of Mexico properties and a decrease in
the amount of valuation allowance against its U.S. deferred tax assets. The
Company's 2020 year-to-date effective income tax rate was primarily impacted by
oil and gas asset impairments, a goodwill impairment, and an increase in the
amount of valuation allowance against its U.S. deferred tax assets.
The Company recorded a full valuation allowance against its U.S. net deferred
tax assets. The Company will continue to maintain a full valuation allowance on
its U.S. net deferred tax assets until there is sufficient evidence to support
the reversal of all or some portion of this allowance.
The Company is subject to U.S. federal income tax as well as income or capital
taxes in various state and foreign jurisdictions. The Company's tax reserves are
related to tax years that may be subject to examination by the relevant taxing
authority. The Company is currently under audit by the Internal Revenue Service
for the 2014-2017 tax years and is also under audit in various states and
foreign jurisdictions as part of its normal course of business.
38--------------------------------------------------------------------------------
Critical Accounting Estimates The Company prepares its financial statements and accompanying notes in conformity with accounting principles generally accepted inthe United States of America , which require management to make estimates and assumptions about future events that affect reported amounts. Estimations are considered critical accounting estimates based on, among other things, its impact on the portrayal of the Company's financial condition, results of operations, or liquidity, as well as the degree of difficulty, subjectivity, and complexity in its deployment. Critical accounting estimates address accounting matters that are inherently uncertain due to unknown future resolution of such matters. Management routinely discusses the development, selection, and disclosure of each critical accounting estimates. With the exception of the critical accounting estimate listed below, there have been no significant changes to the Company's estimates and assumptions during the nine months endedSeptember 30, 2021 and 2020. Offshore Decommissioning Contingency The Company has potential exposure to future obligations related to divested properties. For information regarding a potential obligation to decommission sold properties estimated and recorded in the third quarter of 2021, please refer to "Potential Obligation to Decommission Sold Properties" within Note 1 2 - Commitments and Contingencies in the Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. Changes in significant assumptions impacting the Company's estimated liability, including expected decommissioning rig spread rates, lift boat rates, and planned abandonment logistics could result in a liability in excess of the amount accrued. In addition, significant changes in the market price of oil, gas, and natural gas liquids could further impact Apache's estimate of its contingent liability to decommission GOM Legacy Assets.
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