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APA CORPORATION

(APA)
  Report
Delayed Nasdaq  -  04:00 2022-09-29 pm EDT
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APACHE CORP MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS (form 10-Q)

08/04/2022 | 04:19pm EDT
The following discussion relates to Apache Corporation (Apache or the Company)
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 ended December 31, 2021.

On March 1, 2021, Apache Corporation consummated a holding company
reorganization (the Holding Company Reorganization), pursuant to which Apache
Corporation became a direct, wholly owned subsidiary of APA Corporation (APA),
and all of the Company's outstanding shares 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: the U.S., Egypt, and offshore the U.K. in the North Sea (North Sea). Prior to the BCP Business Combination defined below, the Company's midstream business was operated by Altus Midstream Company (ALTM) through its subsidiary Altus Midstream LP (collectively, Altus). Altus owned, developed, and operated a midstream energy asset network in the Permian Basin of West 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 conflict in Ukraine and coronavirus disease 2019 (COVID-19)
pandemic and related governmental actions. Uncertainties in the global supply
chain, commodity prices, and financial markets, including the impact of
inflation and rising interest rates, 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 upstream exploration, appraisal, and
development capital program that can be directed to debt reduction, share
repurchases, and other return of capital to its stakeholders. 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 second quarter of 2022, the Company reported net income of $903 million
compared to net income of $339 million in the second quarter of 2021. Net income
for the second quarter of 2022 benefited from higher revenues attributable to a
new merged concession agreement in Egypt and higher commodity prices. The
increase in realized prices was primarily driven by the effects of global
inflation, the conflict in Ukraine on global commodity prices, and uncertainties
around spare capacity and energy security globally.

The Company generated $2.4 billion of cash from operating activities during the
first six months of 2022, a 47 percent increase from the first six months of
2021, driven by higher oil and gas revenues. Since year-end 2021, the Company
has reduced its total outstanding debt and redeemable preferred interests by
$2.3 billion and $712 million, respectively, through the deconsolidation of ALTM
and the retirement of outstanding notes and debentures. The Company had $228
million of cash on hand at June 30, 2022.
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Operational Highlights

Key operational highlights for the quarter include:

United States


•Daily boe production from the Company's U.S. assets accounted for 52 percent of
its total production during the second quarter of 2022. The Company's initial
delineation program in its Austin Chalk area had mixed results, prompting a
pause in planned drilling and completion activity.

International


•In Egypt, the Company averaged 12 drilling rigs and drilled 11 new productive
wells during the second quarter of 2022. Second quarter 2022 gross equivalent
production in the Company's Egypt assets increased 1 percent from the second
quarter of 2021, while net production increased 25 percent, primarily a function
of improved cost recovery under the new merged concession agreement ratified at
the end of 2021. The Company continues to build and enhance its drilling
inventory in Egypt, supplemented with recent seismic acquisitions and new play
concept evaluations on both new and existing acreage. The Company continues to
increase drilling and workover activity as a result of the merged concession
agreement.

•The Company averaged two rigs in the North Sea during the second quarter of
2022. Production was impacted by downtime from maintenance turnaround at Forties
during the first half of 2022. North Sea production in the second half of 2022
is expected to benefit from completion of maintenance activities and production
commencing on the Garten-3 development well.


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Results of Operations

Oil, Natural Gas, and Natural Gas Liquids Production Revenues

Revenue

The Company's production revenues and respective contribution to total revenues by country were as follows:

                                                                For the Quarter Ended                                                                     For the Six Months Ended
                                                                       June 30,                                                                                   June 30,
                                                   2022                                           2021                                         2022                                         2021
                                                                 %                                          %                      $                       %                    $                     %
                                     $ Value               Contribution            $ Value            Contribution               Value               Contribution             Value             Contribution

                                                                                                                ($ in millions)
Oil Revenues:
United States                   $      654                            35  %       $   493                        43  %       $     1,253                        35  %       $   841                        39  %
Egypt(1)                               902                            48  %           432                        38  %             1,692                        47  %           834                        39  %
North Sea                              307                            17  %           216                        19  %               635                        18  %           457                        22  %
Total(1)                        $    1,863                           100  %       $ 1,141                       100  %       $     3,580                       100  %       $ 2,132                       100  %

Natural Gas Revenues:
United States                   $      281                            65  %       $   134                        59  %       $       464                        57  %       $   345                        64  %
Egypt(1)                                88                            20  %            65                        29  %               186                        23  %           135                        25  %
North Sea                               64                            15  %            27                        12  %               163                        20  %            58                        11  %
Total(1)                        $      433                           100  %       $   226                       100  %       $       813                       100  %       $   538                       100  %

NGL Revenues:
United States                   $      214                            93  %       $   141                        96  %       $       418                        92  %       $   261                        95  %
Egypt(1)                                 3                             1  %             2                         1  %                 6                         2  %             4                         1  %
North Sea                               12                             6  %             4                         3  %                28                         6  %            10                         4  %
Total(1)                        $      229                           100  %       $   147                       100  %       $       452                       100  %       $   275                       100  %

Oil and Gas Revenues:
United States                   $    1,149                            46  %       $   768                        51  %       $     2,135                        44  %       $ 1,447                        49  %
Egypt(1)                               993                            39  %           499                        33  %             1,884                        39  %           973                        33  %
North Sea                              383                            15  %           247                        16  %               826                        17  %           525                        18  %
Total(1)                        $    2,525                           100  %       $ 1,514                       100  %       $     4,845                       100  %       $ 2,945                       100  %


(1)  Includes revenues attributable to a noncontrolling interest in Egypt.


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Production

The Company's production volumes by country were as follows:

                                                                For the Quarter Ended                                                   For the Six Months Ended,
                                                                      June 30,                                                                   June 30,
                                                                        Increase                                                                Increase
                                              2022                     (Decrease)                  2021                 2022                   (Decrease)                   2021
Oil Volume (b/d)
United States                                 64,759                     (22)%                     82,852               67,184                   (11)%                        75,313
Egypt(1)(2)                                   85,502                      20%                      71,182               85,261                    19%                         71,673
North Sea                                     32,493                       2%                      31,992               33,860                   (10)%                        37,726
Total                                        182,754                      (2)%                    186,026              186,305                     1%                        184,712

Natural Gas Volume (Mcf/d)
United States                                457,459                     (15)%                    541,088              467,493                   (11)%                       524,396
Egypt(1)(2)                                  346,424                      35%                     256,262              366,390                    37%                        267,145
North Sea                                     42,802                      16%                      36,769               40,645                    (6)%                        43,268
Total                                        846,685                       2%                     834,119              874,528                     5%                        834,809

NGL Volume (b/d)
United States                                 59,267                     (13)%                     68,492               60,482                    (4)%                        63,183
Egypt(1)(2)                                      297                     (46)%                        553                  394                   (31)%                           568
North Sea                                      1,195                       9%                       1,095                1,345                     9%                          1,231
Total                                         60,759                     (13)%                     70,140               62,221                    (4)%                        64,982

BOE per day(3)
United States                                200,269                     (17)%                    241,525              205,582                    (9)%                       225,895
Egypt(1)(2)                                  143,536                      25%                     114,445              146,720                    26%                        116,765
North Sea(4)                                  40,822                       4%                      39,216               41,979                    (9)%                        46,169
Total                                        384,627                      (3)%                    395,186              394,281                     1%                        388,829

(1) Gross oil, natural gas, and NGL production in Egypt were as follows:

                                                     For the Quarter Ended June 30,                                        For the Six Months Ended June 30,
                                           2022                                           2021                  2022                                                 2021
Oil (b/d)                                 141,432                                       135,494                137,934                                              135,408
Natural Gas (Mcf/d)                       555,694                                       578,380                576,637                                              590,756
NGL (b/d)                                     464                                           866                    599                                                  881


(2)  Includes net production volumes per day attributable to noncontrolling
interests in Egypt of:

                                                    For the Quarter Ended June 30,                                        For the Six Months Ended June 30,
                                          2022                                           2021                  2022                                                2021
Oil (b/d)                                 45,616                                        23,759                45,475                                               23,923
Natural Gas (Mcf/d)                      184,819                                        85,574               195,390                                               89,235
NGL (b/d)                                    158                                           184                   210                                                  189

(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 second quarters of 2022
and 2021 were 38,029 boe/d and 41,941 boe/d, respectively, and 40,833 boe/d and
48,208 boe/d for the first six months of 2022 and 2021, respectively. Sales
volumes may vary from production volumes as a result of the timing of liftings.


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Pricing

The Company's average selling prices by country were as follows:

                                                        For the Quarter Ended                                           For the Six Months Ended,
                                                               June 30,                                                         June 30,
                                                                    Increase                                                        Increase
                                             2022                  (Decrease)             2021                2022                 (Decrease)             2021
Average Oil Price - Per barrel
United States                        $     110.98                     70%              $ 65.32          $       103.05                67%              $ 61.68
Egypt                                      115.97                     74%                66.70                  109.65                71%                64.30
North Sea                                  113.77                     66%                68.34                  107.47                69%                63.48
Total                                      113.79                     71%                66.40                  106.87                69%                63.06

Average Natural Gas Price -
Per Mcf
United States                        $       6.75                     147%             $  2.73          $         5.48                51%              $  3.63
Egypt                                        2.78                     (1)%                2.80                    2.80                 -                  2.80
North Sea                                   18.15                     124%                8.10                   24.72                233%                7.43
Total                                        5.65                     89%                 2.99                    5.16                45%                 3.56

Average NGL Price - Per barrel
United States                        $      39.79                     75%              $ 22.72          $        38.20                67%              $ 22.84
Egypt                                       75.14                     97%                38.10                   76.80                85%                41.49
North Sea                                   71.71                     85%                38.79                   73.29                66%                44.21
Total                                       40.97                     77%                23.10                   39.63                69%                23.41

Second-Quarter 2022 compared to Second-Quarter 2021


Crude Oil Crude oil revenues for the second quarter of 2022 totaled $1.9
billion, a $722 million increase from the comparative 2021 quarter. A 71 percent
increase in average realized prices increased second-quarter 2022 oil revenues
by $814 million compared to the prior-year quarter, while 2 percent lower
average daily production decreased revenues by $92 million. Crude oil revenues
accounted for 74 percent of total oil and gas production revenues and 48 percent
of worldwide production in the second quarter of 2022. The Company's worldwide
oil production decreased 3.3 Mb/d to 182.8 Mb/d during the second quarter of
2022 from the comparative prior-year period, primarily a result of natural
production decline across all assets, offset by an increased net production in
Egypt resulting from improved cost recovery under the merged concession
agreement ratified at the end of 2021.

Natural Gas Gas revenues for the second quarter of 2022 totaled $433 million, a
$207 million increase from the comparative 2021 quarter. An 89 percent increase
in average realized prices increased second-quarter 2022 natural gas revenues by
$202 million compared to the prior-year quarter, while 2 percent higher average
daily production increased revenues by $5 million. Natural gas revenues
accounted for 17 percent of total oil and gas production revenues and 37 percent
of worldwide production during the second quarter of 2022. The Company's
worldwide natural gas production increased 12.6 MMcf/d to 847 MMcf/d during the
second quarter of 2022 from the comparative prior-year period, primarily a
result of increased net production in Egypt resulting from improved cost
recovery under the merged concession agreement ratified at the end of 2021 and
increased production in the North Sea due to lower operational downtime as
compared to the second quarter of 2021. These increases were partially offset by
natural production decline across all assets and the Company's divestiture of
non-core assets in the Permian Basin during the first quarter of 2022.

NGL NGL revenues for the second quarter of 2022 totaled $229 million, a $82
million increase from the comparative 2021 quarter. A 77 percent increase in
average realized prices increased second-quarter 2022 NGL revenues by $114
million compared to the prior-year quarter, while 13 percent lower average daily
production decreased revenues by $32 million. NGL revenues accounted for 9
percent of total oil and gas production revenues and 15 percent of worldwide
production during the second quarter of 2022. The Company's worldwide NGL
production decreased 9.4 Mb/d to 60.8 Mb/d during the second quarter of 2022
from the comparative prior-year period, primarily a result of natural production
decline across all assets and the Company's divestiture of non-core assets in
the Permian Basin during the first quarter of 2022.
                                       35
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Year-to-Date 2022 compared to Year-to-Date 2021


Crude Oil Crude oil revenues for the first six months of 2022 totaled $3.6
billion, a $1.4 billion increase from the comparative 2021 period. A 69 percent
increase in average realized prices increased oil revenues for the 2022 period
by $1.4 billion compared to the prior-year period, while the change in average
daily production was insignificant compared to the prior-year period. Crude oil
revenues accounted for 74 percent of total oil and gas production revenues and
47 percent of worldwide production for the first six months of 2022. Crude oil
prices realized during the first six months of 2022 averaged $106.87 per barrel,
compared to $63.06 per barrel in the comparative prior-year period. The
Company's worldwide oil production increased 1.6 Mb/d to 186.3 Mb/d in the first
six months of 2022 compared to the prior-year period, primarily a function of
improved cost recovery under the merged concession agreement in Egypt ratified
at the end of 2021, offset by operational downtime in the North Sea and natural
production decline across all assets.

Natural Gas Gas revenues for the first six months of 2022 totaled $813 million,
a $275 million increase from the comparative 2021 period. A 45 percent increase
in average realized prices increased natural gas revenues for the 2022 period by
$241 million compared to the prior-year period, while 5 percent higher average
daily production increased revenues by $34 million compared to the prior-year
period. Natural gas revenues accounted for 17 percent of total oil and gas
production revenues and 37 percent of worldwide production for the first six
months of 2022. Natural gas prices realized during the first six months of 2022
averaged $5.16 per Mcf, compared to $3.56 per Mcf in the comparative prior-year
period. The Company's worldwide natural gas production increased 40 MMcf/d to
875 MMcf/d in the first six months of 2022 compared to the prior-year period,
primarily a result of increased net production in Egypt resulting from improved
cost recovery under the merged concession agreement ratified at the end of 2021,
offset by natural production decline across all assets.

NGL NGL revenues for the first six months of 2022 totaled $452 million, a $177
million increase from the comparative 2021 period. A 69 percent increase in
average realized prices increased NGL revenues for the 2022 period by $191
million compared to the prior-year period, while 4 percent lower average daily
production decreased revenues by $14 million compared to the prior-year period.
NGL revenues accounted for 9 percent of total oil and gas production revenues
and 16 percent of worldwide production for the first six months of 2022. NGL
prices realized during the first six months of 2022 averaged $39.63 per barrel,
compared to $23.41 per barrel in the comparative prior-year period. The
Company's worldwide NGL production decreased 2.8 Mb/d to 62.2 Mb/d in the first
six months of 2022 compared to the prior-year period, primarily a result of
natural production decline across all countries.

Altus Midstream Revenues

Prior to the deconsolidation of Altus on February 22, 2022, Altus Midstream services revenues generated through its fee-based contractual arrangements with the Company totaled $32 million during the second quarter of 2021 and $16 million and $64 million during the first six months of 2022 and 2021, respectively. These revenues were eliminated upon consolidation.

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 $522 million and $242 million during the second
quarters of 2022 and 2021, respectively, and $871 million and $682 million
during the first six months of 2022 and 2021, respectively. Purchased oil and
gas sales were offset by associated purchase costs of $528 million and
$262 million during the second quarters of 2022 and 2021, respectively, and
$879 million and $756 million during the first six months of 2022 and 2021,
respectively. Gross purchased oil and gas sales values were higher in the second
quarter and first six months of 2022 primarily due to higher average natural gas
prices during the 2022 periods.
                                       36
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Operating Expenses

The Company's operating expenses were as follows:

                                                            For the Quarter Ended                   For the Six Months Ended
                                                                  June 30,                                  June 30,
                                                           2022                2021                 2022                 2021

                                                                                     (In millions)
Lease operating expenses                              $       359          

$ 311 $ 703 $ 575 Gathering, processing, and transmission

                        94                 61                    175                 119
Purchased oil and gas costs                                   528                262                    879                 756
Taxes other than income                                        78                 51                    148                  95
Exploration                                                    15                 19                     40                  65
General and administrative                                     83                 79                    234                 162
Transaction, reorganization, and separation                     3                  4                     17                   4
Depreciation, depletion, and amortization:
Oil and gas property and equipment                            269                322                    547                 634
Gathering, processing, and transmission assets                  1                 19                      6                  38
Other assets                                                    8                 10                     16                  21
Asset retirement obligation accretion                          29                 28                     58                  56

Financing costs, net                                           62                 94                    202                 201
Total Operating Expenses                              $     1,529          $   1,260          $       3,025          $    2,726

Lease Operating Expenses (LOE)


LOE increased $48 million and $128 million in the second quarter and the first
six months of 2022, respectively, from the comparative prior-year periods. On a
per-unit basis, LOE increased 20 percent and 22 percent in the second quarter
and the first six months of 2022, respectively, from the comparative prior-year
periods. The increase was driven by overall higher labor costs and operating
costs trending with higher oil and gas prices and global inflation. These
increases were coupled with higher workover activity in the U.S. and in the
North Sea in the second quarter and the first six months of 2022. LOE costs for
the first six months of 2022 were also impacted by mark-to-market adjustments
for cash-based stock compensation expense resulting from an increase in the
Company's stock price and anticipated achievement of performance and financial
objectives as defined in the stock award plans.
                                       37
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Gathering, Processing, and Transmission (GPT)

The Company's GPT expenses were as follows:

                                                    For the Quarter Ended                  For the Six Months Ended,
                                                          June 30,                                  June 30,
                                                   2022                2021                 2022                 2021

                                                                             (In millions)
Third-party processing and transmission
costs                                         $        68          $      53          $         134          $      104
Midstream service costs - ALTM                          -                 32                     18                  63
Midstream service costs - Kinetik                      26                  -                     36                   -
Upstream processing and transmission
costs                                                  94                 85                    188                 167
Midstream operating expenses                            -                  8                      5                  15
Intersegment eliminations                               -                (32)                   (18)                (63)
Total Gathering, processing, and
transmission                                  $        94          $      

61 $ 175 $ 119



GPT costs increased $33 million and $56 million in the second quarter and the
first six months of 2022, respectively, from the comparative prior-year periods.
Third-party processing and transmission costs increased $15 million and $30
million in the second quarter and the first six months of 2022, respectively,
from the comparative prior-year periods. The increase in third-party costs for
the second quarter and the first six months of 2022 was primarily driven by an
increase in average transportation rates during the year. Costs for services
provided by ALTM in the first quarter of 2022 and prior to the BCP Business
Combination (as defined in the Notes to the Company's Consolidated Financial
Statements set forth in Part I, Item 1-Financial Statements of this Quarterly
Report on Form 10-Q) totaling $18 million were eliminated in the Company's
consolidated financial statements and reflected as "Intersegment eliminations"
in the table above. Subsequent to the BCP Business Combination and the Company's
deconsolidation of Altus on February 22, 2022, these midstream services continue
to be provided by Kinetik Holdings Inc. (Kinetik) but are no longer eliminated.
Midstream services provided by Kinetik totaled $26 million and $36 million in
the second quarter and the first six months of 2022, respectively, and will
continue to result in higher GPT costs in future periods as compared to periods
preceding the ALTM deconsolidation.

Purchased Oil and Gas Costs


Purchased oil and gas costs totaled $528 million and $879 million during the
second quarter and the first six months of 2022, respectively, compared to
$262 million and $756 million during the second quarter and the first six months
of 2021, respectively. Purchased oil and gas costs were offset by associated
purchase sales of $522 million and $871 million during the second quarter and
the first six months of 2022, respectively, compared to $242 million and $682
million during the second quarter and the first six months of 2021,
respectively, as further discussed above.

Taxes Other Than Income


Taxes other than income increased $27 million and $53 million from the second
quarter and the first six months of 2021, 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 Six Months Ended,
                                                          June 30,                                  June 30,
                                                   2022                2021                 2022                  2021

                                                                              (In millions)
Unproved leasehold impairments                $         2          $       3          $            6          $       21
Dry hole expense                                        4                  6                       9                  25
Geological and geophysical expense                      1                  1                       2                   3
Exploration overhead and other                          8                  9                      23                  16
Total Exploration                             $        15          $      19          $           40          $       65


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Exploration expenses decreased $4 million and $25 million from the second
quarter and the first six months of 2021, respectively, primarily the result of
lower unproved leasehold impairments and lower dry hole expenses as compared to
the same prior-year periods. These decreases were offset by higher exploration
activities and related labor costs compared to the prior year.

General and Administrative (G&A) Expenses


G&A expenses increased $4 million and $72 million from the second quarter and
the first six months of 2021, respectively. The year-over-year increase was
primarily driven by higher cash-based stock compensation expense resulting from
an increase in the Company's stock price and anticipated achievement of
performance and financial objectives as defined in the stock award plans. Higher
overall wages across the Company also impacted G&A expenses compared to the
prior-year period.

Transaction, Reorganization, and Separation (TRS) Costs


TRS costs decreased $1 million and increased $13 million from the second quarter
and the first six months of 2021, respectively. The increase in costs during the
first six months of 2022 compared to the same prior-year period was primarily a
result of transaction costs from the BCP Business Combination.

Depreciation, Depletion, and Amortization (DD&A)


DD&A expenses on the Company's oil and gas properties decreased $53 million and
$87 million from the second quarter and the first six months of 2021,
respectively. The Company's DD&A rate on its oil and gas properties decreased
$1.16 per boe and $1.28 per boe from the second quarter and the first six months
of 2021, respectively. The decrease on an absolute basis was driven by lower
depletion rates in Egypt, partially offset by higher production volumes.

Financing Costs, Net

The Company's Financing costs were as follows:

                                                           For the Quarter Ended                  For the Six Months Ended,
                                                                 June 30,                                  June 30,
                                                          2022                2021                 2022                 2021
                                                                                    (In millions)
Interest expense                                     $        75          $

110 $ 165 $ 222 Amortization of debt issuance costs

                            4                  3                      6                   5
Capitalized interest                                          (1)                 -                     (1)                  -
(Gain) loss on extinguishment of debt                          -                 (1)                    67                  (1)
Interest income                                               (1)                (3)                    (5)                 (5)
Interest income from APA Corporation, net                    (15)               (15)                   (30)                (20)
Total Financing costs, net                           $        62          $ 

94 $ 202 $ 201



Net financing costs decreased $32 million and increased $1 million from the
second quarter and the first six months of 2021, respectively. The lower overall
interest expense was a result of the reduction of fixed-rate debt during 2021
and the first quarter of 2022. During the first six months of 2022, the lower
interest expense was more than offset by a $67 million loss on extinguishment of
debt recognized in the first quarter of 2022.

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 second quarter of 2022, the Company's effective income tax rate was
primarily impacted by a decrease in the amount of valuation allowance against
its U.S. deferred tax assets. The Company's 2022 year-to-date effective income
tax rate was primarily impacted by the gain associated with deconsolidation of
Altus, the gain on sale of certain non-core mineral rights in the Delaware
Basin, and a decrease in the amount of valuation allowance against its U.S.
deferred tax assets. During the second quarter and the first six months of 2021,
the Company's effective income tax rate was primarily impacted by a decrease in
the amount of valuation allowance against its U.S. deferred tax assets.
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On May 26, 2022, the U.K. Chancellor announced a new tax on the profits of oil
and gas companies operating in the U.K. and the U.K. Continental Shelf. On June
21, 2022, the U.K. Government published draft legislation concerning this new
tax and on July 14, 2022, the Energy (Oil and Gas) Profits Levy Act 2022 was
enacted, receiving Royal Assent. Under the new law, an additional levy is
assessed at a 25 percent tax rate and will be effective for the period of May
26, 2022, through December 31, 2025. Under U.S. GAAP, the financial statement
impact of new legislation will be recorded in the period of enactment.
Therefore, in the third quarter of 2022, the Company expects to record a
deferred tax expense of approximately $230 million to $250 million related to
the remeasurement of the June 30, 2022 U.K. deferred tax liability.

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.

Critical Accounting Estimates


The Company prepares its financial statements and accompanying notes in
conformity with accounting principles generally accepted in the U.S., which
require management to make estimates and assumptions about future events that
affect reported amounts in the financial statements and the accompanying notes.
The Company identifies certain accounting policies involving estimation as
critical accounting estimates based on, among other things, their 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
their 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 estimate. For a discussion of the Company's most
critical accounting estimates, please see the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2021. Some of the more significant
estimates include reserve estimates, oil and gas exploration costs, offshore
decommissioning contingency, long-lived asset impairments, asset retirement
obligations, and income taxes.

New Accounting Pronouncements

There were no material changes in recently issued or adopted accounting standards from those disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

© Edgar Online, source Glimpses

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