APA CORPORATION The following discussion relates toApache Corporation (Apache or the Company) and its consolidated subsidiaries and should be read in conjunction with the Company's consolidated financial statements and accompanying notes included under Part I, Item 1, "Financial Statements" of this Quarterly Report on Form 10-Q, as well as the Company's consolidated financial statements, accompanying notes 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, 2019 . OverviewApache Corporation , aDelaware corporation formed in 1954, 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 United States (U.S. ),Egypt , and offshore theUnited Kingdom (U.K. ) in theNorth Sea (North Sea ). Apache also has exploration interests in Suriname and other international locations that may, over time, result in reportable discoveries and development opportunities. Apache's midstream business is operated by Altus Midstream Company through its subsidiaryAltus Midstream LP (collectively, Altus). Altus owns, develops, and operates a midstream energy asset network in thePermian Basin ofWest Texas . Apache's mission is to grow in an innovative, safe, environmentally responsible, and profitable manner for the long-term benefit of its stakeholders. Apache 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 oil markets and the negative demand implications of the COVID-19 pandemic continue to impact oil supply and demand. As with previous changes in a volatile price environment, Apache has continued to respond quickly and decisively, taking the following actions: • Establishing and implementing a wide range of fit-for-purpose protocols
and procedures to ensure a safe and productive work environment across the
Company's diversified global onshore and offshore operations.
• Executing planned activity reductions on schedule and delivering upstream
capital investment for the first half of 2020 of
percent reduction from the comparative prior-year period. This reduction
included eliminating nearly all
• Implementing an organizational redesign, which will achieve a combined
overhead and LOE (as defined below) cost savings of more than
annually, with estimated cash savings, net of severance and restructuring
costs, of $225 million in 2020.
• Decreasing the Company's dividend by 90 percent beginning in the first
quarter of 2020, preserving approximately $340 million of cash flow on an
annualized basis and strengthening liquidity.
• Further protecting cash flows from downside price dislocation by entering
into a substantial hedge position, primarily surrounding second-half 2020
production, as the Company believes there will be higher volatility risk
during this period.
• Conducting, on a continuous basis, thorough price sensitivity analyses and
operational evaluations of producing wells across the Company's portfolio
that allows for a methodical and integrated approach to production
shut-ins and curtailments with a focus on preserving cash flows in a
distressed price environment and protecting the Company's assets.
The Company remains committed to its longer-term objectives, which still hold
true despite the current environment, to maintain a balanced asset portfolio,
invest for long-term returns over production growth, and budget conservatively
to generate free cash flow that can be directed on a priority basis to debt
reduction. Apache closely monitors hydrocarbon pricing fundamentals and will
reallocate capital as part of its ongoing planning process. For additional
detail on the Company's forward capital investment outlook, refer to "Capital
and Operational Outlook" below.
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Given the recent economic downturn and continued commodity price volatility,
Apache reported a second quarter loss of $386 million , or $1.02 per common
share, compared to a loss of $360 million , or $0.96 per common share, in the
second quarter of 2019. Daily production in the second quarter of 2020 averaged
435 Mboe/d, a decrease of four percent from the comparative prior-year quarter
driven primarily by the Company's divestiture of non-core, gas-weighted assets
in the Oklahoma and Texas panhandle areas, natural decline in the U.S. , and
production curtailments in the U.S. and North Sea in response to substantially
lower commodity prices. The Company generated $586 million of cash from
operating activities during the quarter, a decrease of 60 percent from the
second quarter of 2019 driven by lower revenues. Apache ended the quarter with
$135 million of cash.
Operational Highlights
Key operational highlights for the quarter include:
United States
• Second quarter equivalent production from Apache's U.S. assets decreased
five percent from the second quarter of 2019 as a result of reduced
activity in response to commodity price weakness. The Company averaged 2
rigs in the
rigs in the prior-year quarter. As of the end of the quarter, the Company
had eliminated all
International
•
3 percent from the second quarter of 2019, primarily a result of natural
decline and fewer wells brought on-line during the period. The Company
continues to build and enhance its robust drilling inventory in the
country, supplemented with recent seismic acquisitions and new play
concept evaluations on both new and existing acreage.
• The North Sea averaged 2 rigs and completed 1 gross development well
during the second quarter of 2020. The Company's daily production in the
the result of natural decline and production curtailments.
• In April 2020 , Apache announced a significant oil discovery at the
Sapakara West-1 well drilled offshore Suriname on Block 58. Sapakara
West-1 was drilled to a depth of approximately 6,300 meters (20,700 feet)
and successfully tested for the presence of hydrocarbons in multiple
stacked targets in the upper Cretaceous-aged Campanian and Santonian
intervals. This follows the January 2020 announcement of a discovery at
the Maka Central-1 well, for which the Company submitted a plan ofappraisal during the quarter. Apache holds a 50 percent working interest
in Block 58.
• In
well drilled offshore Suriname on Block 58. Kwaskwasi-1 was drilled to a
depth of approximately 6,645 meters (21,800 feet) and successfully tested
for the presence of hydrocarbons in multiple stacked targets in the upper
Cretaceous-aged Campanian and Santonian intervals. This is the third
consecutive oil discovery offshore Suriname. The Company will drill a
fourth exploration well in the block at the Keskesi prospect immediately
following conclusion of operations at the Kwaskwasi-1 well, after which
Apache will transition operatorship of the block to its partner Total S.A.
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Results of Operations
Oil and Gas Revenues
Apache's oil and gas revenues and respective contribution to revenues by country
are as follows:
For the Quarter Ended June 30, For the Six Months Ended June 30,
2020 2019 2020 2019
$ % $ % $ % $ %
Value Contribution Value Contribution Value Contribution Value Contribution
($ in millions)
Oil Revenues:
United States $ 198 39 % $ 537 38 % $ 626 41 % $ 1,033 38 %
Egypt(1) 187 36 % 523 38 % 520 33 % 1,037 38 %
North Sea 128 25 % 337 24 % 399 26 % 637 24 %
Total(1) $ 513 100 % $ 1,397 100 % $ 1,545 100 % $ 2,707 100 %
Natural Gas
Revenues:
United States $ 53 41 % $ 30 25 % $ 92 36 % $ 153 43 %
Egypt(1) 70 54 % 70 60 % 135 54 % 151 43 %
North Sea 7 5 % 18 15 % 26 10 % 50 14 %
Total(1) $ 130 100 % $ 118 100 % $ 253 100 % $ 354 100 %
Natural Gas
Liquids (NGL)
Revenues:
United States $ 50 93 % $ 75 90 % $ 121 90 % $ 173 91 %
Egypt(1) 1 2 % 3 4 % 4 3 % 7 3 %
North Sea 3 5 % 5 6 % 10 7 % 11 6 %
Total(1) $ 54 100 % $ 83 100 % $ 135 100 % $ 191 100 %
Oil and Gas
Revenues:
United States $ 301 43 % $ 642 40 % $ 839 43 % $ 1,359 42 %
Egypt(1) 258 37 % 596 37 % 659 34 % 1,195 37 %
North Sea 138 20 % 360 23 % 435 23 % 698 21 %
Total(1) $ 697 100 % $ 1,598 100 % $ 1,933 100 % $ 3,252 100 %
(1) Includes revenues attributable to a noncontrolling interest in
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The following table presents production volumes by country:
For the Quarter Ended June 30 , For
the Six Months Ended
Increase Increase
2020 (Decrease) 2019 2020 (Decrease) 2019
Oil Volume - b/d
United States 94,471 (8 )% 103,010 98,042 (7 )% 105,878
Egypt(1)(2) 79,839 (5 )% 83,761 76,509 (13 )% 87,667
North Sea 47,016 (6 )% 50,055 51,139 (2 )% 52,279
Total 221,326 (7 )% 236,826 225,690 (8 )% 245,824
Natural Gas Volume -
Mcf/d
United States 518,156 (13 )% 594,238 557,999 (17 )% 668,858
Egypt(1)(2) 279,561 1 % 277,552 267,070 (10 )% 296,425
North Sea 52,612 5 % 50,121 59,945 12 % 53,488
Total 850,329 (8 )% 921,911 885,014 (13 )% 1,018,771
NGL Volume - b/d
United States 69,759 13 % 61,974 75,570 25 % 60,428
Egypt(1)(2) 909 1 % 898 914 (11 )% 1,023
North Sea 1,733 4 % 1,673 1,934 11 % 1,748
Total 72,401 12 % 64,545 78,418 24 % 63,199
BOE per day(3)
United States 250,589 (5 )% 264,024 266,612 (4 )% 277,782
Egypt(1)(2) 127,342 (3 )% 130,917 121,934 (12 )% 138,094
North Sea(4) 57,517 (4 )% 60,082 63,064 - 62,942
Total 435,448 (4 )% 455,023 451,610 (6 )% 478,818
(1) Gross oil, natural gas, and NGL production in
For the Six Months Ended June
For the Quarter Ended June 30, 30,
2020 2019 2020 2019
Oil (b/d) 171,897 198,534 177,762 201,245
Natural Gas (Mcf/d) 642,003 729,378 648,706 742,474
NGL (b/d) 1,649 1,840 1,715 1,952
(2) Includes net production volumes per day attributable to a noncontrolling
interest in
For the Six Months Ended June
For the Quarter Ended June 30, 30,
2020 2019 2020 2019
Oil (b/d) 26,609 27,939 25,604 29,239
Natural Gas (Mcf/d) 92,625 92,639 89,148 98,990
NGL (b/d) 303 299 304 341
(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
2019 were 54,996 boe/d and 64,156 boe/d, respectively, and 64,133 boe/d and
63,669 boe/d for the first six months of 2020 and 2019, respectively. Sales
volumes may vary from production volumes as a result of the timing of
liftings in the Beryl field.
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Pricing
The following table presents pricing information by country:
For the Quarter Ended June 30 ,
For the Six Months Ended
Increase Increase
2020 (Decrease) 2019 2020 (Decrease) 2019
Average Oil Price -
Per barrel
United States $ 23.02 (60 )% $ 57.25 $ 35.09 (35 )% $ 53.90
Egypt 25.80 (62 )% 68.60 37.36 (43 )% 65.36
North Sea 31.55 (54 )% 68.43 41.94 (37 )% 66.35
Total 25.77 (60 )% 63.71 37.44 (38 )% 60.65
Average Natural Gas
Price - Per Mcf
United States $ 1.13 105 % $ 0.55 $ 0.90 (29 )% $ 1.26
Egypt 2.73 (2 )% 2.80 2.78 (1 )% 2.82
North Sea 1.43 (64 )% 3.99 2.41 (53 )% 5.18
Total 1.68 19 % 1.41 1.57 (18 )% 1.92
Average NGL Price -
Per barrel
United States $ 7.81 (42 )% $ 13.57 $ 8.77 (45 )% $ 15.96
Egypt 20.97 (36 )% 32.90 26.36 (26 )% 35.56
North Sea 20.35 (40 )% 33.67 29.29 (21 )% 37.27
Total 8.28 (42 )% 14.37 9.48 (44 )% 16.87
Second-Quarter 2020 compared to Second-Quarter 2019
Crude Oil Revenues Crude oil revenues for the second quarter of 2020 totaled
$513 million , an $884 million decrease from the comparative 2019 quarter. A 60
percent decrease in average realized prices reduced second-quarter 2020 revenues
by $832 million compared to the prior-year quarter, while 7 percent lower
average daily production decreased revenues by $52 million . Crude oil accounted
for 74 percent of oil and gas production revenues and 51 percent of the
Company's worldwide production in the second quarter of 2020. Crude oil prices
realized in the second quarter of 2020 averaged $25.77 per barrel, compared with
$63.71 per barrel in the comparative prior-year quarter.
The Company's worldwide oil production decreased 15.5 Mb/d to 221.3 Mb/d in the
second quarter of 2020 from the comparative prior-year period, primarily a
result of lower gross production due to the sale of the Company's Woodford-SCOOP
and STACK plays and western Anadarko Basin assets in the U.S. Additionally,
given the increased volatility of oil, natural gas, and natural gas liquids
prices, Apache elected to curtail production in the United States and the North
Sea during the second quarter of 2020. The majority of the Company's curtailed
volumes were returned to production by the end of the second quarter of 2020,
with approximately 4 Mb/d remaining curtailed in the Permian as of the date of
this filing.
Natural Gas Revenues Gas revenues for the second quarter of 2020 totaled $130
million , a $12 million increase from the comparative 2019 quarter. A 19 percent
increase in average realized prices increased second-quarter 2020 revenues by
$23 million compared to the prior-year quarter, while 8 percent lower average
daily production decreased revenues by $11 million . Natural gas accounted for 19
percent of Apache's oil and gas production revenues and 33 percent of its
equivalent production during the second quarter of 2020.
The Company's worldwide natural gas production decreased 72 MMcf/d to 850 MMcf/d
in the second quarter of 2020 from the comparative prior-year period, primarily
a result of the sale of the Company's Woodford-SCOOP and STACK plays and western
Anadarko Basin assets in the U.S. and impacts from Apache's production
curtailment program. Virtually all of the Company's North Sea and Alpine High
volumes have been returned to production.
NGL Revenues NGL revenues for the second quarter of 2020 totaled $54 million , a
$29 million decrease from the comparative 2019 quarter. A 42 percent decrease in
average realized prices reduced second-quarter 2020 revenues by $35 million
compared to the prior-year quarter, while 12 percent higher average daily
production increased revenues by $6 million . NGLs accounted for 7 percent of
Apache's oil and gas production revenues and 16 percent of its equivalent
production during the second quarter of 2020.
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The Company's worldwide production of NGLs increased 7.9 Mb/d to 72.4 Mb/d in
the second quarter of 2020 from the comparative prior-year period, primarily a
result of the Alpine High development and cryogenic processing capacity
commencing during the second half of 2019, partially offset by a decrease from
the sale of the Company's Woodford-SCOOP and STACK plays and western Anadarko
Basin assets in the U.S.
Year-to-Date 2020 compared to Year-to-Date 2019
Crude Oil Revenues Crude oil revenues for the first six months of 2020 totaled
$1.5 billion , a $1.2 billion decrease from the comparative 2019 period. A 38
percent decrease in average realized prices reduced 2020 oil revenues by $1.0
billion compared to the prior-year period, while 8 percent lower average daily
production reduced revenues by $126 million . Crude oil accounted for 80 percent
of oil and gas production revenues and 50 percent of worldwide production for
the first six months of 2020, compared to 83 percent and 51 percent,
respectively, for the 2019 period. Crude oil prices realized in the first six
months of 2020 averaged $37.44 per barrel, compared with $60.65 per barrel in
the comparative prior-year period.
The Company's worldwide oil production decreased 20.1 Mb/d to 225.7 Mb/d in the
first six months of 2020 from the comparative prior-year period, primarily a
result of lower gross production in Egypt due to natural decline, the sale of
the Company's Woodford-SCOOP and STACK plays and western Anadarko Basin assets
in the U.S. , and the Company's production curtailment program during the second
quarter of 2020.
Natural Gas Revenues Gas revenues for the first six months of 2020 totaled $253
million , a $101 million decrease from the comparative 2019 period. An 18 percent
decrease in average realized prices reduced 2020 natural gas revenues by $64
million compared to the prior-year period, while 13 percent lower average daily
production decreased revenues by $37 million . Natural gas accounted for 13
percent of Apache's oil and gas production revenues and 33 percent of its
equivalent production for the first six months of 2020, compared to 11 percent
and 35 percent, respectively, for the 2019 period.
The Company's worldwide natural gas production decreased 133.8 MMcf/d to 885.0
MMcf/d in the first six months of 2020 from the comparative prior-year period,
primarily a result of the sale of the Company's Woodford-SCOOP and STACK plays
and western Anadarko Basin assets in the U.S. , lower gross production in Egypt
due to natural decline, and the Company's production curtailment program during
the second quarter of 2020.
NGL Revenues NGL revenues for the first six months of 2020 totaled $135 million ,
a $56 million decrease from the comparative 2019 period. A 44 percent decrease
in average realized prices decreased 2020 NGL revenues by $84 million compared
to the prior-year period, while 24 percent higher average daily production
increased revenues by $28 million . NGLs accounted for nearly 7 percent of oil
and gas production revenues and 17 percent of its equivalent production for the
first six months of 2020, compared to 6 percent and 14 percent, respectively,
for the 2019 period.
The Company's worldwide production of NGLs increased 15.2 Mb/d to 78.4 Mb/d in
the first six months of 2020 from the comparative prior-year period, primarily a
result of the Alpine High development partially offset by the sale of the
Company's Woodford-SCOOP and STACK plays and western Anadarko Basin assets in
the U.S.
Altus Midstream Revenues
Altus Midstream services revenues generated through Altus' fee-based contractual
arrangements with Apache totaled $31 million and $24 million during the second
quarters of 2020 and 2019, respectively, and $72 million and $58 million during
the first six months of 2020 and 2019, respectively. These affiliated revenues
are eliminated upon consolidation. The increases compared to the prior-year
periods were primarily driven by higher throughput of rich natural gas volumes
at Alpine High due to increased capacity as a result of three cryogenic
processing trains coming on-line during 2019.
Purchased Oil and Gas Sales
Purchased oil and gas sales for the second quarter and first six months of 2020
totaled $55 million and $163 million , respectively, a $37 million and $121
million increase from the prior-year periods, respectively, and were primarily
offset by associated costs totaling $46 million and $132 million in the second
quarter and first six months of 2020, respectively.
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Operating Expenses
The table below presents a comparison of the Company's operating expenses. All
operating expenses include costs attributable to a noncontrolling interest in
Egypt and Altus.
For the Quarter Ended June 30, For the Six Months Ended June 30,
2020 2019 2020 2019
(In millions)
Lease operating expenses $ 264 $ 389 $ 599 $ 754
Gathering, processing, and
transmission 72 76 143 164
Purchased oil and gas costs 46 15 132 37
Taxes other than income 23 46 56 97
Exploration 72 95 129 164
General and administrative 94 102 162 225
Transaction, reorganization, and
separation 10 6 37 10
Depreciation, depletion, and
amortization:
Oil and gas property and equipment 387 562 918 1,169
GPT assets 19 25 39 48
Other assets 12 15 27 31
Asset retirement obligation accretion 27 26 54 53
Impairments 20 240 4,492 240
Financing costs, net (34 ) 173 69 270
Lease Operating Expenses (LOE) LOE decreased $125 million , or 32 percent, and
$155 million , or 21 percent, for the second quarter and first six months of
2020, respectively, on an absolute dollar basis relative to the comparable
periods of 2019. On a per-unit basis, LOE decreased 28 percent and 16 percent
for the second quarter and first six months of 2020, respectively, compared to
the prior-year periods. The decrease in absolute dollar costs was driven by
reduced activity, labor costs, and fuel costs associated with lower commodity
prices, the Company's organizational redesign and other cost cutting efforts. In
addition, absolute dollar costs are lower in the current year as a result of the
mid-2019 divestitures of the Company's Woodford-SCOOP and STACK plays and
western Anadarko Basin assets in the U.S.
Gathering, Processing, and Transmission (GPT) GPT expenses include processing
and transmission costs paid to third-party carriers and to Altus for Apache's
upstream natural gas production associated with its Alpine High play. GPT
expenses also include midstream operating costs incurred by Altus. The following
table presents a summary of these expenses:
For the Quarter Ended June 30, For the Six Months Ended June 30,
2020 2019 2020 2019
(In millions)
Third-party processing and
transmission costs $ 62 $ 62 $ 123 $ 134
Midstream service affiliate costs 32 23 72 56
Upstream processing and transmission
costs 94 85 195 190
Midstream operating expenses 10 14 20 30
Intersegment eliminations (32 ) (23 ) (72 ) (56 )
Total Gathering, processing, and
transmission $ 72 $ 76 $ 143 $ 164
GPT costs decreased$4 million and$21 million from the second quarter and first six months of 2019. Third-party processing and transmission costs remained flat compared to the second quarter of 2019 and decreased$11 million compared to the first six months of 2019. The year-to-date decrease is primarily driven by a decrease in contracted pricing and the Company's sale of non-core assets inOklahoma andTexas . Midstream operating expenses decreased$4 million and$10 million from the second quarter and first six months of 2019, primarily driven by increased operational efficiency as a result of transitioning from mechanical refrigeration units to Altus' centralized Diamond cryogenic complex starting in the second quarter of 2019. The transition resulted in decreases in employee-related costs, contract labor, lower supplies expenses, and lower equipment rentals. 35 -------------------------------------------------------------------------------- Midstream service affiliate costs increased$9 million and$16 million from the second quarter and first six months of 2019, primarily driven by higher throughput of rich natural gas volumes atAlpine High . Purchased Oil and Gas Costs Purchased oil and gas costs for the second quarter and first six months of 2020 totaled$46 million and$132 million , respectively, an increase of$31 million and$95 million , respectively, from the prior-year periods, and were more than offset by associated sales totaling$55 million and$163 million in the second quarter and first six months of 2020, respectively. Taxes other than Income Taxes other than income decreased$23 million and$41 million from the second quarter and first six months of 2019, respectively, primarily the result of a decrease in severance taxes on lower commodity prices and the divestiture of the Company's non-core assets inOklahoma andTexas . Exploration Expenses Exploration expenses include unproved leasehold impairments, exploration dry hole expense, geological and geophysical expenses, and the costs of maintaining and retaining unproved leasehold properties. The following table presents a summary of exploration expenses: For the Six Months Ended June For the Quarter Ended June 30, 30, 2020 2019 2020 2019 (In
millions)
Unproved leasehold impairments $ 31$ 39 $ 50$ 62 Dry hole expense 23 18 47 28 Geological and geophysical expense 4 18 7 36 Exploration overhead and other 14 20 25 38 Total Exploration $ 72$ 95 $ 129$ 164 Exploration expenses in the second quarter and first six months of 2020 decreased$23 million and$35 million , respectively, compared to the prior-year periods. Geological and geophysical expense decreased$14 million and$29 million in the second quarter and first six months of 2020, respectively, and exploration overhead and other decreased$6 million and$13 million in the second quarter and first six months of 2020, respectively. The 2019 periods reflect large-scale seismic surveys inEgypt and higher delay rentals in theU.S. Dry hole expense increased$5 million and$19 million in the second quarter and first six months of 2020, respectively, primarily related to onshore exploration wells in theU.S. andEgypt and a Beryl exploration well in theNorth Sea . Unproved impairments decreased$8 million and$12 million in the second quarter and first six months of 2020, respectively. Higher leasehold impairments in the 2019 period were associated with relinquishing offshoreGulf of Mexico leasehold acreage. General and Administrative (G&A) Expenses G&A expense for the second quarter and first six months of 2020 decreased$8 million and$63 million , respectively, compared to the prior-year periods, primarily related to cost-cutting measures associated with the Company's organizational redesign efforts. The first half of 2020 also reflects lower cash-based stock compensation expense resulting from a decrease in the Company's stock price. Transaction, Reorganization, and Separation (TRS) Costs TRS costs for the second quarter and first six months of 2020 totaled$10 million and$37 million , respectively, an increase of$4 million and$27 million from the prior-year periods, respectively. The increase was related to severance costs associated with the Company's reorganization efforts announced during the fourth quarter of 2019. 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 ofApache'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. OnApril 1, 2020 , the Company announced annual cost reduction targets for this initiative were increased from$150 million to$300 million in response to oil demand implications stemming from the COVID-19 global pandemic and related governmental actions. Reorganization efforts were substantially completed during the first half of 2020. The Company expects to incur an estimated$5 million to$10 million of additional expenses associated with this reorganization throughout the remainder of 2020 for anticipated severance, relocation, and similar costs. 36 -------------------------------------------------------------------------------- Depreciation, Depletion, and Amortization (DD&A) Oil and gas property DD&A expense decreased$175 million and$251 million compared to the second quarter and first six months of 2019, respectively. The Company's oil and gas property DD&A rate decreased$3.63 per boe and$2.32 per boe in the second quarter and first six months of 2020, respectively, from the prior-year periods. The decreases are primarily the result of lower production volumes and lower asset property balances associated with proved property impairments recorded in the first quarter of 2020 and fourth quarter of 2019. GPT depreciation decreased$6 million and$9 million from the second quarter and first six months of 2019, respectively, primarily the result of impairments recorded to the carrying value of the Altus GPT facilities in the fourth quarter of 2019. ImpairmentsThe Company recorded asset impairments in connection with fair value assessments in the second quarter and first six months of 2020 totaling$20 million and$4.5 billion , respectively. The Company recorded a$20 million proved property impairment inEgypt in the second quarter of 2020. In the first quarter of 2020, the Company recorded impairments of$4.3 billion for oil and gas proved properties in theU.S. ,Egypt , andNorth Sea ,$68 million for GPT facilities inEgypt ,$87 million for goodwill inEgypt , and$18 million for inventory and other miscellaneous assets, including charges for the early termination of drilling rig leases. The Company recorded asset impairments totaling$240 million for each of the second quarter and first six months of 2019 on assets held-for-sale in the westernAnadarko Basin inOklahoma andTexas . For more information regarding asset impairments, please refer to "Fair Value Measurements," "Oil and Gas Property," and "Gathering, Processing, and Transmission Facilities" within Note 1-Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. Financing Costs, Net Financing costs incurred during the periods comprised the following: For the Quarter Ended June 30, For the Six Months Ended June 30, 2020 2019 2020 2019 (In millions) Interest expense $ 107 $ 109 $ 214 $ 216 Amortization of debt issuance costs 2 1 4 3 Capitalized interest (2 ) (9 ) (6 ) (17 ) Loss (gain) on extinguishment of debt (140 ) 75 (140 ) 75 Interest income (1 ) (3 ) (3 ) (7 ) Financing costs, net $ (34 ) $ 173 $ 69 $ 270 Net financing costs decreased$207 million and$201 million compared with the second quarter and first six months of 2019, respectively, primarily a result of a$140 million gain on extinguishment of debt in the second quarter of 2020 compared to a$75 million loss on extinguishment of debt in the prior-year period. Provision for Income TaxesThe 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 of 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 quarters of 2020 and 2019,Apache's effective income tax rate was primarily impacted by an increase in the amount of valuation allowance against itsU.S. deferred tax assets.Apache'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 itsU.S. deferred tax assets.Apache's 2019 year-to-date effective income tax rate was primarily impacted by an increase in the amount of valuation allowance against the Company'sU.S. deferred tax assets.Apache recorded a full valuation allowance against itsU.S. net deferred tax assets.Apache will continue to maintain a full valuation allowance on itsU.S. net deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of this allowance.Apache and its subsidiaries are subject toU.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 underIRS audit 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. 37 -------------------------------------------------------------------------------- Capital and Operational Outlook The Company continues to prudently manage its capital program against a volatile price environment and the prolonged effects of the COVID-19 pandemic. In response to the current crises,Apache's immediate course of action was to actively reduce its cost structure, protect its balance sheet, and manage operations to preserve cash flow. Under a reduced capital budget for 2020, these actions include: • continuing to advance exploratory and appraisal programs in Suriname under the terms of the Company's joint venture with Total S.A.; • allocating a portion of the reduced capital spending toEgypt and the
provide better returns than onshore
• eliminating virtually all
Apache's diversified global portfolio provides the ability to quickly optimize capital allocation as market conditions change. The current crisis, however, is still evolving and may become more severe and complex. As a result, the COVID-19 pandemic may still materially and adversely affectApache's results in a manner that is either not currently known or that the Company does not currently consider to be a significant risk to its business. For additional information about the business risks relating to the COVID-19 pandemic and related governmental actions, please refer to Part II, Item 1A-Risk Factors of this Current Report on Form 10-Q. Capital Resources and Liquidity Operating cash flows are the Company's primary source of liquidity.Apache's operating cash flows, both in the short-term and the long-term, are impacted by highly volatile oil and natural gas prices, as well as costs and sales volumes. Significant changes in commodity prices impactApache's revenues, earnings, and cash flows. These changes potentially impactApache's liquidity if costs do not trend with changes in commodity prices. Historically, costs have trended with commodity prices, albeit on a lag. Sales volumes also impact cash flows; however, they have a less volatile impact in the short term.Apache's long-term operating cash flows are dependent on reserve replacement and the level of costs required for ongoing operations. Cash investments are required to fund activity necessary to offset the inherent declines in production and proved crude oil and natural gas reserves. Future success in maintaining and growing reserves and production is highly dependent on the success ofApache's drilling program and its ability to add reserves economically. Changes in commodity prices also impact estimated quantities of proved reserves. In the first six months of 2020,Apache recognized negative reserve revisions of approximately 8 percent of its year-end 2019 estimated proved reserves as a result of lower prices. If prices for the remainder of 2020 were to approximate commodity future prices as ofJune 30, 2020 ,Apache would likely report additional negative revisions when calculated on a basis consistent with previous reserve disclosures. However, as a result of the substantial uncertainty surrounding economic conditions, such as worldwide supply and demand, future service costs, and other prolonged effects of the COVID-19 pandemic, the Company is unable to estimate any future revisions at this time. Combined with proactive measures to adjust its capital budget, decrease its dividend, protect further downside price risk through entering into new hedge positions, and reduce its operating cost structure in the current volatile commodity price environment,Apache believes the liquidity and capital resource alternatives available to the Company will be adequate to fund its operations and provide flexibility until commodity prices and industry conditions improve. This includes supportingApache's capital development program, repayment of debt maturities, payment of dividends, and any amount that may ultimately be paid in connection with commitments and contingencies. The Company may also elect to utilize available cash on hand, committed borrowing capacity, access to both debt and equity capital markets, or proceeds from the sale of nonstrategic assets for all other liquidity and capital resource needs. For additional information, please see Part I, Items 1 and 2, "Business and Properties," and Item 1A, "Risk Factors," in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 . 38 -------------------------------------------------------------------------------- Sources and Uses of Cash The following table presents the sources and uses of the Company's cash and cash equivalents for the periods presented. For the Six Months Ended June 30, 2020 2019 (In millions) Sources of Cash and Cash Equivalents: Net cash provided by operating activities $ 586 $ 1,454 Proceeds from Apache credit facility, net 565 - Proceeds from Altus credit facility, net 97 - Proceeds from sale of oil and gas properties 126 247 Fixed-rate debt borrowings - 989
Redeemable noncontrolling interest - Altus Preferred Unit limited partners
- 611
1,374 3,301
Uses of Cash and Cash Equivalents:
Additions to oil and gas property(1) $ 838 $ 1,386
Additions to Altus gathering, processing, and
transmission facilities(1) 25 246
Leasehold and property acquisitions 3 34
Altus equity method interests 154 438
Payments on fixed-rate debt 264 1,000
Dividends paid 104 188
Distributions to noncontrolling interest - Egypt 40 164
Other 58 10
1,486 3,466
Decrease in cash and cash equivalents $ (112 ) $ (165 )
(1) The table presents capital expenditures on a cash basis; therefore, the
amounts may differ from those discussed elsewhere in this Quarterly Report on
Form 10-Q, which include accruals.
Sources of Cash and Cash Equivalents Net Cash Provided by Operating Activities Operating cash flows areApache's primary source of capital and liquidity and are impacted, both in the short term and the long term, by volatile oil and natural gas prices. The factors that determine operating cash flows are largely the same as those that affect net earnings, with the exception of non-cash expenses such as DD&A, exploratory dry hole expense, asset impairments, asset retirement obligation (ARO) accretion, and deferred income tax expense. Net cash provided by operating activities for the first six months of 2020 totaled$586 million , a decrease of$868 million from the first six months of 2019. The decrease primarily reflects lower commodity prices compared to the prior-year period. For a detailed discussion of commodity prices, production, and expenses, refer to the " Results of Operations " of this Item 2. For additional detail on the changes in operating assets and liabilities and the non-cash expenses that do not impact net cash provided by operating activities, please see the Statement of Consolidated Cash Flows in Part I, Item 1, Financial Statements of this Quarterly Report on Form 10-Q. Proceeds from Apache Credit Facility,Net During the first six months of 2020,Apache borrowed$565 million under its credit facility, which is classified as long-term debt as ofJune 30, 2020 . The Company had no borrowings under the revolver during the first six months of 2019. Proceeds from Altus Credit Facility, Net The construction of Altus' gathering and processing assets and the exercise of its options for equity interests in fourPermian Basin long-haul pipeline entities required capital expenditures in excess of Altus' cash on hand and operational cash flows. During the first six months of 2020,Altus Midstream LP borrowed$97 million under its revolving credit facility. With Shin Oak NGL Pipeline,Gulf Coast Express Pipeline Project , and EPIC crude oil pipeline already in service, the Company anticipatesAltus Midstream LP's existing capital resources will be sufficient to fund Altus Midstream LP's continuing obligations, primarily related to the remaining construction of the Permian Highway Pipeline. 39 -------------------------------------------------------------------------------- Asset DivestituresThe Company recorded proceeds from non-core asset divestitures totaling$126 million and$247 million in the first six months of 2020 and 2019, respectively. For more information regarding the Company's acquisitions and divestitures, please see Note 2-Acquisitions and Divestitures in the Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. Fixed-Rate Debt Borrowings OnJune 19, 2019 ,Apache closed offerings of$1.0 billion in aggregate principal amount of senior unsecured notes, comprised of$600 million in aggregate principal amount of 4.250% notes dueJanuary 15, 2030 (2030 notes) and$400 million in aggregate principal amount of 5.350% notes dueJuly 1, 2049 (2049 notes). The notes are redeemable at any time, in whole or in part, atApache's option, subject to a make-whole premium. The aggregate net proceeds of$989 million from the sale of the notes, comprised of net proceeds from the sale of the 2030 notes of$595 million and the 2049 notes of$394 million , were used to purchase certain outstanding notes in cash tender offers and for general corporate purposes. Redeemable Noncontrolling Interest - Altus Preferred Unit Limited Partners OnJune 12, 2019 ,Altus Midstream LP , an indirectly controlled subsidiary ofApache , issued and sold Series A Cumulative Redeemable Preferred Units for an aggregate issue price of$625 million in a private offering.Altus Midstream LP received approximately$611 million in cash proceeds from the sale after deducting transaction costs and discounts to certain purchasers. For more information, please refer to Note 12-Redeemable Noncontrolling Interest - Altus in the Notes to Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q. Uses of Cash and Cash Equivalents Additions to Oil & Gas Property During the first six months of 2020, exploration and development cash expenditures totaled$838 million , compared to$1.4 billion for the first six months of 2019, a reflection of the Company's reduced capital program. A majority of the expenditures shifted fromApache's Permian Basin assets to itsEgypt assets over the first half of 2020 as the Company eliminated nearly all drilling and completion activities in theU.S. byMay 2020 .Apache operated an average of 12 drilling rigs during the second quarter of 2020 compared to 22 drilling rigs in the prior-year quarter. Additions to Altus GPT Facilities Apache's cash expenditures in GPT facilities totaled$25 million and$246 million in the first six months of 2020 and 2019, respectively, nearly all comprising midstream infrastructure expenditures incurred by Altus, which were substantially completed as ofDecember 31, 2019 . Altus management believes its existing gathering, processing, and transmission infrastructure capacity is capable of fulfilling its midstream contracts to serviceApache's production fromAlpine High and any potential third-party customers. As such, Altus expects capital requirements for its existing infrastructure assets for the remainder of 2020 to be primarily related to maintenance of these assets. Altus Equity Method Interests Altus made acquisitions and contributions of$154 million and$438 million in the first six months of 2020 and 2019, respectively, for equity interests in fourPermian Basin long-haul pipeline entities and received distributions of$42 million in the first six months of 2020 that are included in net cash provided by operating activities. The Company received no distributions from its equity method interests in the first six months of 2019. For more information regarding the Company's equity method interests, please see Note 6-Equity Method Interests in the Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. Payments on Fixed-Rate Debt During the quarter endedJune 30, 2020 , the Company purchased in the open market and canceled senior notes issued under its indentures in an aggregate principal amount of$410 million for an aggregate purchase price of$267 million in cash, including accrued interest and broker fees, reflecting a discount to par of an aggregate$147 million . These repurchases resulted in a$140 million net gain on extinguishment of debt, which is included in "Financing costs, net" in the Company's statement of consolidated operations. The net gain includes an acceleration of related discount and debt issuance costs. The repurchases were financed by borrowings under the Company's revolving credit facility. OnJune 21, 2019 , the Company closed cash tender offers for certain outstanding notes.Apache accepted for purchase$932 million aggregate principal amount of notes for approximately$1.0 billion , which included principal, the net premium to par, and an early tender premium totaling$28 million , as well as accrued and unpaid interest of$14 million . The Company recorded a net loss of$75 million on extinguishment of debt, including$7 million of unamortized debt issuance costs and discounts, in connection with the note purchases. Dividends For each of the six-month periods endedJune 30, 2020 and 2019, the Company paid$104 million and$188 million , respectively, in dividends on its common stock. In the first quarter of 2020,Apache's Board of Directors approved a reduction in the Company's quarterly dividend per share from$0.25 to$0.025 , effective for all dividends payable afterMarch 12, 2020 . 40 --------------------------------------------------------------------------------Egypt Noncontrolling Interest Sinopec International Petroleum Exploration and Production Corporation (Sinopec) holds a one-third minority participation interest inApache's oil and gas business inEgypt .Apache made cash distributions totaling$40 million and$164 million to Sinopec in the first six months of 2020 and 2019, respectively. Liquidity The following table presents a summary of the Company's key financial indicators at the dates presented: June 30, 2020 December 31, 2019 (In millions) Cash and cash equivalents $ 135 $ 247 Total debt - Apache 8,324 8,170 Total debt - Altus 493 396 Equity (deficit) (636 ) 4,465 Available committed borrowing capacity - Apache 2,640 4,000 Available committed borrowing capacity - Altus 307 404 Cash and Cash EquivalentsThe Company had$135 million in cash and cash equivalents as ofJune 30, 2020 , of which approximately$2 million was held by Altus. The majority of the cash is invested in highly liquid, investment grade instruments with maturities of three months or less at the time of purchase. Debt As ofJune 30, 2020 , outstanding debt, which consisted of notes, debentures, credit facility borrowings, and finance lease obligations, totaled$8.8 billion . As ofJune 30, 2020 , current debt included$292 million , net of discount, of 3.625% senior notes dueFebruary 1, 2021 and$2 million of finance lease obligations. During the quarter endedJune 30, 2020 , the Company purchased in the open market and canceled senior notes issued under its indentures in an aggregate principal amount of$410 million for an aggregate purchase price of$267 million in cash, including accrued interest and broker fees, reflecting a discount to par of an aggregate$147 million .Apache intends to reduce debt outstanding under its indentures from time to time. InMarch 2018 , the Company entered into a revolving credit facility with commitments totaling$4.0 billion . InMarch 2019 , the term of this facility was extended by one year toMarch 2024 (subject toApache's remaining one-year extension option) pursuant toApache's exercise of an extension option. The Company can increase commitments up to$5.0 billion by adding new lenders or obtaining the consent of any increasing existing lenders. The facility includes a letter of credit subfacility of up to$3.0 billion , of which$2.08 billion was committed as ofJune 30, 2020 . The facility is for general corporate purposes, and available committed borrowing capacity supportsApache's commercial paper program. The facility has no collateral requirements, is not subject to borrowing base redetermination, and has no drawdown restrictions or prepayment obligations in the event of a decline in credit ratings. As ofJune 30, 2020 , there were$565 million of borrowings and aggregate £641 million in letters of credit outstanding under this facility. As ofDecember 31, 2019 , there were no borrowings or letters of credit outstanding under this facility. The outstanding letters of credit were issued to supportNorth Sea decommissioning obligations, the terms of which required such support afterStandard & Poor's reduced the Company's credit rating from BBB to BB+ onMarch 26, 2020 . InNovember 2018 ,Altus Midstream LP entered into a revolving credit facility for general corporate purposes that matures inNovember 2023 (subject to Altus Midstream LP's two, one-year extension options). The agreement for this facility, as amended, provides aggregate commitments from a syndicate of banks of$800 million . All aggregate commitments include a letter of credit subfacility of up to$100 million and a swingline loan subfacility of up to$100 million .Altus Midstream LP may increase commitments up to an aggregate$1.5 billion by adding new lenders or obtaining the consent of any increasing existing lenders. As ofJune 30, 2020 andDecember 31, 2019 , there were$493 million and$396 million , respectively, of borrowings outstanding under this facility. As ofJune 30, 2020 andDecember 31, 2019 , there were no letters of credit outstanding under this facility.The Altus Midstream LP credit facility is unsecured and is not guaranteed byApache or any ofApache's other subsidiaries. The Company was in compliance with the terms of its credit facilities as ofJune 30, 2020 . The Company's$3.5 billion commercial paper program, which is subject to market availability, facilitatesApache borrowing funds for up to 270 days. As a result of recent downgrades inApache's credit ratings, the Company does not expect that its commercial paper program will be cost competitive with its other financing alternatives and does not anticipate using it under such circumstances. As ofJune 30, 2020 andDecember 31, 2019 , the Company had no commercial paper outstanding. 41
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Off-Balance Sheet Arrangements Apache enters into customary agreements in the oil and gas industry for drilling rig commitments, firm transportation agreements, and other obligations as described in "Contractual Obligations" in Part II, Item 7 of the Form 10-K for the year endedDecember 31, 2019 . There have been no material changes to the contractual obligations described therein. Potential Asset Retirement Obligations In 2013,Apache sold its Gulf of Mexico Shelf operations and properties (Transferred Assets) toFieldwood Energy LLC (Fieldwood ). Under the terms of the purchase agreement (Agreement),Apache received cash consideration of$3.75 billion andFieldwood assumed$1.5 billion of discounted asset abandonment liabilities. In respect of such abandonment liabilities,Fieldwood posted letters of credit in favor ofApache (Letters of Credit) and established a trust account (Trust A), which is funded by a 10 percent net profits interest depending on future oil prices and of whichApache is the beneficiary. OnFebruary 14, 2018 ,Fieldwood filed for protection under Chapter 11 of theU.S. Bankruptcy Code. In connection with the 2018 bankruptcy,Fieldwood confirmed a plan under whichApache agreed, inter alia, to accept bonds in exchange for certain of the Letters of Credit. Currently,Apache holds two bonds (Bonds) and the remaining Letters of Credit to secureFieldwood's asset retirement obligations (AROs) on the Transferred Assets as and when such abandonment and decommissioning obligations are required to be performed over the remaining life of the Transferred Assets. Given the current commodity price environment, decreased demand for oil and gas, and recent media reports,Fieldwood may be experiencing financial distress. IfFieldwood is in financial distress, thenApache does not know if, or to what extent,Fieldwood will be able to continue to perform its AROs with respect to the Transferred Assets. IfFieldwood fails to perform any of its AROs with respect to the Transferred Assets, thenApache's remedy would be a claim for damages againstFieldwood for breach of its contractual obligations under the Agreement. IfFieldwood fails to perform any of its AROs on the Transferred Assets, thenApache would expect the relevant governmental authorities to requireApache to perform, and holdApache financially responsible for, such AROs to the extent not performed byFieldwood . Pending resolution of any claim byApache for breach of the Agreement,Apache may be forced to use available cash to cover the costs it incurs for performing such AROs. WhileApache anticipates that all, or a portion, of such costs would be reimbursable toApache under the remaining Letters of Credit, the Bonds and Trust A, it is possible that such decommissioning security may not be sufficient to cover all of the costs and expenses incurred byApache in performing such AROs.
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