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.
• Reducing upstream capital investments by over 50 percent from thecomparative prior-year period. This reduction included eliminating nearly
all
activity in Egypt and the North Sea .
• 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.
• Completing an organizational redesign and achieving an estimated cost
savings of $400 million annually.
• Further protecting cash flows from downside price dislocation by entering
into commodity hedging positions, as the Company believes there will be
higher volatility risk over the near term.
• Conducting, on a continuous basis, price sensitivity analyses andoperational evaluations of producing wells across the Company's portfolio
that allow 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. Apache reported a third quarter loss of$4 million , or$0.02 per diluted common share, compared to a loss of$170 million , or$0.45 per common share, in the third quarter of 2019. Daily production in the third quarter of 2020 averaged 445 Mboe/d, a decrease of only one percent from the comparative prior-year quarter. The Company generated$890 million of cash from operating activities during the first nine months of 2020, a decrease of 57 percent from the first nine months of 2019 driven by lower crude oil prices and associated revenues. Apache ended the quarter with$162 million of cash. 30 -------------------------------------------------------------------------------- Operational Highlights Key operational highlights for the quarter include:United States • Third quarter equivalent production from Apache'sU.S. assets decreased three percent from the third quarter of 2019 as a result of reduced activity in response to commodity price weakness. The Company had no rigs or drilling activity in theU.S. during the third quarter of 2020, compared to 10 average rigs in the prior-year quarter.
International
•
3 percent from the third quarter of 2019, primarily a result of natural
decline and reduced drilling activity. 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
two were productive, during the third quarter of 2020. The Company's daily
production in the
2019, primarily the result of its second well at the Garten field, which
came on-line in the first quarter of 2020.
• 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. Fluid samples and test
results indicate at least 278 meters (912 feet) of net oil and oil/gas
condensate pay in two intervals. This is the third consecutive oil
discovery offshore Suriname.
• In
well in the block at the Keskesi prospect. Apache is in the process of
transitioning operatorship of Block 58 to its partner, Total S.A, which
will conduct all exploration and appraisal activities subsequent to
Keskesi.
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Results of Operations
Oil and Gas Production Revenues
Apache's oil and gas production revenues and respective contribution to revenues
by country are as follows:
For the Quarter Ended September 30, For the Nine Months Ended September 30,
2020 2019 2020 2019
$ % $ % $ % $ %
Value Contribution Value Contribution Value Contribution Value Contribution
($ in millions)
Oil Revenues:
United States $ 303 39 % $ 504 42 % $ 929 40 % $ 1,537 39 %
Egypt(1) 303 38 % 472 39 % 823 35 % 1,509 39 %
North Sea 179 23 % 231 19 % 578 25 % 868 22 %
Total(1) $ 785 100 % $ 1,207 100 % $ 2,330 100 % $ 3,914 100 %
Natural Gas
Revenues:
United States $ 77 47 % $ 50 37 % $ 169 41 % $ 203 41 %
Egypt(1) 74 45 % 72 53 % 209 50 % 223 46 %
North Sea 13 8 % 14 10 % 39 9 % 64 13 %
Total(1) $ 164 100 % $ 136 100 % $ 417 100 % $ 490 100 %
Natural Gas
Liquids (NGL)
Revenues:
United States $ 90 93 % $ 88 93 % $ 211 91 % $ 261 91 %
Egypt(1) 2 2 % 2 2 % 6 3 % 9 3 %
North Sea 5 5 % 5 5 % 15 6 % 16 6 %
Total(1) $ 97 100 % $ 95 100 % $ 232 100 % $ 286 100 %
Oil and Gas
Revenues:
United States $ 470 45 % $ 642 45 % $ 1,309 44 % $ 2,001 43 %
Egypt(1) 379 36 % 546 38 % 1,038 35 % 1,741 37 %
North Sea 197 19 % 250 17 % 632 21 % 948 20 %
Total(1) $ 1,046 100 % $ 1,438 100 % $ 2,979 100 % $ 4,690 100 %
(1) Includes revenues attributable to a noncontrolling interest in
32
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The following table presents production volumes by country:
For the Quarter Ended September 30 , For
the Nine Months Ended
Increase Increase
2020 (Decrease) 2019 2020 (Decrease) 2019
Oil Volume - b/d
United States 83,178 (17 )% 100,045 93,051 (10 )% 103,912
Egypt(1)(2) 79,194 (6 )% 84,114 77,410 (10 )% 86,470
North Sea 48,755 10 % 44,281 50,339 2 % 49,584
Total 211,127 (8 )% 228,440 220,800 (8 )% 239,966
Natural Gas Volume -
Mcf/d
United States 597,686 6 % 563,162 571,325 (10 )% 633,239
Egypt(1)(2) 286,744 4 % 275,569 273,676 (5 )% 289,397
North Sea 53,137 11 % 47,875 57,659 12 % 51,596
Total 937,567 6 % 886,606 902,660 (7 )% 974,232
NGL Volume - b/d
United States 75,266 5 % 72,005 75,468 17 % 64,329
Egypt(1)(2) 611 (31 )% 891 812 (17 )% 979
North Sea 1,976 28 % 1,540 1,948 16 % 1,678
Total 77,853 5 % 74,436 78,228 17 % 66,986
BOE per day(3)
United States 258,058 (3 )% 265,910 263,740 (4 )% 273,781
Egypt(1)(2) 127,595 (3 )% 130,934 123,834 (9 )% 135,681
North Sea(4) 59,588 11 % 53,800 61,897 3 % 59,861
Total 445,241 (1 )% 450,644 449,471 (4 )% 469,323
(1) Gross oil, natural gas, and NGL production in
For the Quarter Ended September For the Nine Months Ended
30, September 30,
2020 2019 2020 2019
Oil (b/d) 159,941 187,589 171,778 196,643
Natural Gas (Mcf/d) 649,566 673,065 648,995 719,083
NGL (b/d) 1,175 1,529 1,534 1,810
(2) Includes net production volumes per day attributable to a noncontrolling
interest in
For the Quarter Ended September For the Nine Months Ended
30, September 30,
2020 2019 2020 2019
Oil (b/d) 26,459 28,052 25,891 28,839
Natural Gas (Mcf/d) 95,776 92,212 91,374 96,706
NGL (b/d) 204 297 271 326
(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 57,099 boe/d and 49,349 boe/d, respectively, and 61,771 boe/d and
58,843 boe/d for the first nine 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 Nine Months Ended September
For the Quarter Ended September 30, 30,
Increase Increase
2020 (Decrease) 2019 2020 (Decrease) 2019
Average Oil Price - Per barrel
United States $ 39.60 (28 )% $ 54.70 $ 36.45 (33 )% $ 54.16
Egypt 41.51 (32 )% 61.10 38.79 (39 )% 63.96
North Sea 42.10 (33 )% 63.12 41.99 (36 )% 65.45
Total 40.88 (30 )% 58.60 38.53 (36 )% 60.00
Average Natural Gas Price - Per Mcf
United States $ 1.40 44 % $ 0.97 $ 1.08 (8 )% $ 1.17
Egypt 2.82 - % 2.81 2.79 (1 )% 2.82
North Sea 2.58 (19 )% 3.20 2.46 (46 )% 4.56
Total 1.90 14 % 1.66 1.69 (8 )% 1.84
Average NGL Price - Per barrel
United States $ 13.06 (2 )% $ 13.26 $ 10.20 (32 )% $ 14.93
Egypt 25.88 (7 )% 27.76 26.24 (21 )% 33.17
North Sea 27.08 2 % 26.63 28.54 (16 )% 33.98
Total 13.51 (1 )% 13.71 10.83 (31 )% 15.68
Third-Quarter 2020 compared to Third-Quarter 2019
Crude Oil Revenues Crude oil revenues for the third quarter of 2020 totaled $785
million , a $422 million decrease from the comparative 2019 quarter. A 30 percent
decrease in average realized prices reduced third-quarter 2020 revenues by $365
million compared to the prior-year quarter, while 8 percent lower average daily
production decreased revenues by $57 million . Crude oil accounted for 75 percent
of oil and gas production revenues and 47 percent of the Company's worldwide
production in the third quarter of 2020. Crude oil prices realized in the third
quarter of 2020 averaged $40.88 per barrel, compared with $58.60 per barrel in
the comparative prior-year quarter.
The Company's worldwide oil production decreased 17.3 Mb/d to 211.1 Mb/d in the
third quarter of 2020 from the comparative prior-year period, primarily a result
of production decline in the U.S.
Natural Gas Revenues Gas revenues for the third quarter of 2020 totaled $164
million , a $28 million increase from the comparative 2019 quarter. A 14 percent
increase in average realized prices increased third-quarter 2020 revenues by $19
million compared to the prior-year quarter, while 6 percent higher average daily
production increased revenues by $9 million . Natural gas accounted for 16
percent of Apache's oil and gas production revenues and 35 percent of its
equivalent production during the third quarter of 2020.
The Company's worldwide natural gas production increased 51 MMcf/d to 938 MMcf/d
in the third quarter of 2020 from the comparative prior-year period, primarily a
result of Permian Basin drilling activity and the timing of well completions in
late 2019.
NGL Revenues NGL revenues for the third quarter of 2020 totaled $97 million , a
$2 million increase from the comparative 2019 quarter. A 1 percent decrease in
average realized prices reduced third-quarter 2020 revenues by $2 million
compared to the prior-year quarter, while 5 percent higher average daily
production increased revenues by $4 million . NGLs accounted for 9 percent of
Apache's oil and gas production revenues and 18 percent of its equivalent
production during the third quarter of 2020.
The Company's worldwide production of NGLs increased 3.4 Mb/d to 77.9 Mb/d in
the third 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.
34
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Year-to-Date 2020 compared to Year-to-Date 2019
Crude Oil Revenues Crude oil revenues for the first nine months of 2020 totaled
$2.3 billion , a $1.6 billion decrease from the comparative 2019 period. A 36
percent decrease in average realized prices reduced 2020 oil revenues by $1.4
billion compared to the prior-year period, while 8 percent lower average daily
production reduced revenues by $183 million . Crude oil accounted for 78 percent
of oil and gas production revenues and 49 percent of worldwide production for
the first nine months of 2020, compared to 83 percent and 51 percent,
respectively, for the 2019 period. Crude oil prices realized in the first nine
months of 2020 averaged $38.53 per barrel, compared with $60.00 per barrel in
the comparative prior-year period.
The Company's worldwide oil production decreased 19.2 Mb/d to 220.8 Mb/d in the
first nine 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 and natural decline in the U.S. , as well as lower gross
production in Egypt due to natural decline.
Natural Gas Revenues Gas revenues for the first nine months of 2020 totaled $417
million , a $73 million decrease from the comparative 2019 period. An 8 percent
decrease in average realized prices reduced 2020 natural gas revenues by $41
million compared to the prior-year period, while 7 percent lower average daily
production decreased revenues by $32 million . Natural gas accounted for 14
percent of Apache's oil and gas production revenues and 33 percent of its
equivalent production for the first nine months of 2020, compared to 10 percent
and 35 percent, respectively, for the 2019 period.
The Company's worldwide natural gas production decreased 71.6 MMcf/d to 902.7
MMcf/d in the first nine 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, as well as lower gross production in Egypt
due to natural decline.
NGL Revenues NGL revenues for the first nine months of 2020 totaled $232
million , a $54 million decrease from the comparative 2019 period. A 31 percent
decrease in average realized prices decreased 2020 NGL revenues by $88 million
compared to the prior-year period, while 17 percent higher average daily
production increased revenues by $34 million . NGLs accounted for nearly 8
percent of oil and gas production revenues and 18 percent of its equivalent
production for the first nine months of 2020, compared to 7 percent and 14
percent, respectively, for the 2019 period.
The Company's worldwide production of NGLs increased 11.2 Mb/d to 78.2 Mb/d in
the first nine 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 $39 million and $34 million during the third
quarters of 2020 and 2019, respectively, and $111 million and $92 million during
the first nine 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 at Altus' Diamond cryogenic processing
facilities.
Purchased Oil and Gas Sales
Purchased oil and gas sales for the third quarter and first nine months of 2020
totaled $74 million and $237 million , respectively, a $44 million and $165
million increase from the prior-year periods, respectively, and were primarily
offset by associated costs totaling $75 million and $207 million in the third
quarter and first nine months of 2020, respectively.
35
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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 September For the Nine Months Ended
30, September 30,
2020 2019 2020 2019
(In millions)
Lease operating expenses $ 259 $ 350 $ 858 $ 1,104
Gathering, processing, and
transmission 63 66 206 230
Purchased oil and gas costs 75 23 207 60
Taxes other than income 34 44 90 141
Exploration 58 56 187 220
General and administrative 52 98 214 323
Transaction, reorganization, and
separation 7 7 44 17
Depreciation, depletion, and
amortization:
Oil and gas property and equipment 366 667 1,284 1,836
GPT assets 19 28 58 76
Other assets 13 16 40 47
Asset retirement obligation
accretion 27 27 81 80
Impairments - 9 4,492 249
Financing costs, net 99 95 168 365
Lease Operating Expenses (LOE) LOE decreased $91 million , or 26 percent, and
$246 million , or 22 percent, for the third quarter and first nine months of
2020, respectively, on an absolute dollar basis relative to the comparable
periods of 2019. On a per-unit basis, LOE decreased 25 percent and 19 percent
for the third quarter and first nine 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 divestitures of the Company's Woodford-SCOOP and STACK plays and western
Anadarko Basin assets in the U.S. in the third quarter of 2019.
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 September 30, For the Nine Months Ended September 30,
2020 2019 2020 2019
(In millions)
Third-party processing and
transmission costs $ 54 $ 53 $ 177 $ 187
Midstream service affiliate costs 38 34 110 90
Upstream processing and transmission
costs 92 87 287 277
Midstream operating expenses 9 13 29 43
Intersegment eliminations (38 ) (34 ) (110 ) (90 )
Total Gathering, processing, and
transmission $ 63 $ 66 $ 206 $ 230
GPT costs decreased $3 million and $24 million from the third quarter and first
nine months of 2019, respectively. Third-party processing and transmission costs
increased $1 million compared to the third quarter of 2019 and decreased $10
million compared to the first nine 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 in Oklahoma and Texas . Midstream operating expenses decreased $4
million and $14 million from the third quarter and first nine months of 2019,
respectively, 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
36
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quarter of 2019. The transition resulted in decreases in employee-related costs,
contract labor, lower supplies expenses, and lower equipment rentals.
Midstream service affiliate costs increased $4 million and $20 million from the
third quarter and first nine months of 2019, primarily driven by higher
throughput of rich natural gas volumes at Alpine High .
Purchased Oil and Gas Costs Purchased oil and gas costs for the third quarter
and first nine months of 2020 totaled $75 million and $207 million ,
respectively, an increase of $52 million and $147 million , respectively, from
the prior-year periods, and were offset by associated sales totaling $74 million
and $237 million in the third quarter and first nine months of 2020,
respectively.
Taxes other than Income Taxes other than income decreased $10 million and $51
million from the third quarter and first nine 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 in Oklahoma and Texas .
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 Quarter Ended September For the Nine Months Ended
30, September 30,
2020 2019 2020 2019
(Inmillions)
Unproved leasehold impairments $ 36$ 12 $ 86$ 74 Dry hole expense 5 5 52 33 Geological and geophysical expense 7 18 14 54 Exploration overhead and other 10 21 35 59 Total Exploration $ 58$ 56 $ 187$ 220 Exploration expenses in the third quarter and first nine months of 2020 increased$2 million and decreased$33 million , respectively, compared to the prior-year periods. Geological and geophysical expense decreased$11 million and$40 million in the third quarter and first nine months of 2020, respectively, and exploration overhead and other decreased$11 million and$24 million in the third quarter and first nine months of 2020, respectively. The 2019 periods reflect large-scale seismic surveys inEgypt and higher delay rentals in theU.S. Dry hole expense remained flat compared to the third quarter of 2019 and increased$19 million in the first nine months of 2020 compared to the prior-year period. The year-to-date increase is primarily related to onshore exploration wells in theU.S. andEgypt and a Beryl exploration well in theNorth Sea . Unproved leasehold impairments increased$24 million and$12 million in the third quarter and first nine months of 2020, respectively. Higher leasehold impairments in the 2020 period were associated withU.S. leasehold acreage. General and Administrative (G&A) Expenses G&A expense for the third quarter and first nine months of 2020 decreased$46 million and$109 million , respectively, compared to the prior-year periods, primarily related to cost-cutting measures associated with the Company's organizational redesign efforts, as well as lower cash-based stock compensation expense resulting from a decrease in the Company's stock price and expected payout of performance awards. Transaction, Reorganization, and Separation (TRS) Costs TRS costs for the third quarter and first nine months of 2020 totaled$7 million and$44 million , respectively. TRS costs remained flat compared to the third quarter of 2019 and increased$27 million in the first nine months of 2020 compared to the prior-year period. The year-to-date increase was related to severance costs associated with the Company's reorganization efforts initiated in the second half 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.Apache has achieved an estimated cost savings of more than$400 million annually. Reorganization efforts were substantially completed during the first half of 2020. 37 -------------------------------------------------------------------------------- Depreciation, Depletion, and Amortization (DD&A) Oil and gas property DD&A expense decreased$301 million and$552 million compared to the third quarter and first nine months of 2019, respectively. The Company's oil and gas property DD&A rate decreased$7.25 per boe and$3.93 per boe in the third quarter and first nine 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$9 million and$18 million from the third quarter and first nine 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 no asset impairments in connection with fair value assessments in the third quarter of 2020 and$4.5 billion in the first nine months of 2020. 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 in connection with fair value assessments totaling$9 million and$249 million in the third quarter and first nine months of 2019, respectively. The Company recorded a$9 million impairment in the third quarter of 2019 on certain Altus Midstream held-for-sale assets, as well as a$240 million impairment during the second quarter 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 September 30, For the Nine Months Ended September 30, 2020 2019 2020 2019 (In millions) Interest expense $ 113 $ 107 $ 327 $ 323 Amortization of debt issuance costs 2 2 6 5 Capitalized interest (3 ) (9 ) (9 ) (26 ) Loss (gain) on extinguishment of debt (12 ) - (152 ) 75 Interest income (1 ) (5 ) (4 ) (12 ) Financing costs, net $ 99 $ 95 $ 168 $ 365 Net financing costs increased$4 million and decreased$197 million compared with the third quarter and first nine months of 2019, respectively. The year-to-date decrease is primarily a result of a$152 million gain on extinguishment of debt in the first nine months of 2020, compared to a$75 million loss on extinguishment of debt in the first nine months of 2019. In addition, capitalized interest decreased in the current year as a result of lower drilling activity and construction activities atAlpine High . 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 third 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 under audit by the Internal Revenue Service (IRS) for the 2014-2017 tax years and is also under audit in various states and foreign jurisdictions as part of its normal course of business. 38 -------------------------------------------------------------------------------- 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
higher returns in lower price environments; and
• eliminating virtually all U.S. drilling and completion activity by May2020 until service costs and commodity prices provide for competitive
returns. As a result of compelling service cost reductions in the Permian
Basin,
complete its backlog of drilled but uncompleted wells.
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 nine months of 2020,Apache recognized negative reserve revisions of approximately 7 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 ofSeptember 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 . 39 -------------------------------------------------------------------------------- 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 Nine Months Ended September 30, 2020 2019 (In millions) Sources of Cash and Cash Equivalents: Net cash provided by operating activities $ 890 $ 2,089 Proceeds from Apache credit facility, net 87 - Proceeds from Altus credit facility, net 184 235 Proceeds from sale of oil and gas properties 132 590 Fixed-rate debt borrowings 1,238 989
Redeemable noncontrolling interest - Altus Preferred Unit limited partners
- 611
2,531 4,514
Uses of Cash and Cash Equivalents:
Additions to oil and gas property(1) $ 1,075 $ 2,015
Additions to Altus gathering, processing, and
transmission facilities(1) 27 294
Leasehold and property acquisitions 3 39
Contributions to Altus equity method interests 286 338
Acquisition of Altus equity method interests - 670
Payments on fixed-rate debt 980 1,150
Dividends paid 113 282
Distributions to noncontrolling interest - Egypt 61 235
Distributions to Altus Preferred Unit limited
partners 11 -
Other 60 42
2,616 5,065
Decrease in cash and cash equivalents $ (85 ) $ (551 )
(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 nine months of 2020 totaled$890 million , a decrease of$1.2 billion from the first nine 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 As ofSeptember 30, 2020 ,Apache had outstanding borrowings of$87 million under its credit facility, which is classified as long-term debt. The Company had no borrowings under the revolver as ofSeptember 30, 2019 . 40 -------------------------------------------------------------------------------- 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 nine months of 2020 and 2019,Altus Midstream LP borrowed$184 million and$235 million , respectively, under its revolving credit facility. With the 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 fundAltus Midstream LP's continuing obligations, primarily related to the remaining construction of the Permian Highway Pipeline. Asset DivestituresThe Company recorded proceeds from non-core asset divestitures totaling$132 million and$590 million in the first nine 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 OnAugust 17, 2020 , the Company closed offerings of$1.25 billion in aggregate principal amount of senior unsecured notes, comprised of$500 million in aggregate principal amount of 4.625% notes due 2025 and$750 million in aggregate principal amount of 4.875% notes due 2027. The senior unsecured notes are redeemable at any time, in whole or in part, atApache's option, at the applicable redemption price. The net proceeds from the sale of the notes were used to purchase certain outstanding notes in cash tender offers, repay a portion of outstanding borrowings under the Company's senior revolving credit facility, and for general corporate purposes. 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 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 nine months of 2020, exploration and development cash expenditures totaled$1.1 billion , compared to$2.0 billion for the first nine 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 8 drilling rigs during the third quarter of 2020 compared to 20 drilling rigs in the prior-year quarter. Additions to Altus GPT Facilities Apache's cash expenditures in GPT facilities totaled$27 million and$294 million in the first nine 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. Contributions to Altus Equity Method Interests Altus made contributions of$286 million and$338 million in the first nine months of 2020 and 2019, respectively, for equity interests in fourPermian Basin long-haul pipeline entities. 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. Acquisition of Altus Equity Method Interests Altus made no acquisitions of equity method interests during the first nine months of 2020 and$670 million during the first nine 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. 41 -------------------------------------------------------------------------------- Payments on Fixed-Rate Debt OnAugust 18, 2020 , the Company closed cash tender offers for certain outstanding notes.Apache accepted for purchase$644 million aggregate principal amount of certain notes covered by the tender offers.Apache paid holders an aggregate$644 million , reflecting principal, aggregate discount to par of$38 million , early tender premium of$32 million , and accrued and unpaid interest of$6 million . The Company recorded a net gain of$2 million on extinguishment of debt, including an acceleration of unamortized debt discount and issuance costs, in connection with the note purchases. During the quarter endedSeptember 30, 2020 , the Company purchased in the open market and canceled senior notes issued under its indentures in an aggregate principal amount of$89 million for an aggregate purchase price of$79 million in cash, including accrued interest and broker fees, reflecting a discount to par of an aggregate$11 million . These repurchases resulted in a$10 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. 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 open-market repurchases during the quarters endedJune 30, 2020 andSeptember 30, 2020 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 nine-month periods endedSeptember 30, 2020 and 2019, the Company paid$113 million and$282 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 .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$61 million and$235 million to Sinopec in the first nine months of 2020 and 2019, respectively. Distributions to Altus Preferred Units limited partnersAltus Midstream LP made cash distributions totaling$11 million to Altus Preferred Unit limited partners in the first nine months of 2020. No cash distributions were made during the first nine months of 2019. Liquidity The following table presents a summary of the Company's key financial indicators at the dates presented: September 30, 2020 December 31, 2019 (In millions) Cash and cash equivalents $ 162 $ 247 Total debt - Apache 8,354 8,170 Total debt - Altus 580 396 Equity (deficit) (637 ) 4,465 Available committed borrowing capacity - Apache 3,090 4,000 Available committed borrowing capacity - Altus 220 404
Cash and Cash Equivalents
42
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Debt As of September 30, 2020 , outstanding debt, which consisted of notes,
debentures, credit facility borrowings, and finance lease obligations, totaled
$8.9 billion . As of September 30, 2020 , current debt included $183 million , net
of discount, of 3.625% senior notes due February 1, 2021 and $1 million of
finance lease obligations. On November 3, 2020 , the Company redeemed the 3.625%
senior notes due February 1, 2021 at a redemption price equal to 100 percent of
their principal amount, plus accrued and unpaid interest to the redemption date.
Apache intends to reduce debt outstanding under its indentures from time to
time.
In March 2018 , the Company entered into a revolving credit facility with
commitments totaling $4.0 billion . In March 2019 , the term of this facility was
extended by one year to March 2024 (subject to Apache's remaining one-year
extension option) pursuant to Apache'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 of September 30, 2020 . The facility is for general corporate
purposes, and available committed borrowing capacity supports Apache'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 of
September 30, 2020 , there were $87 million of borrowings and aggregate £637
million in letters of credit outstanding under this facility. As of December 31,
2019 , there were no borrowings or letters of credit outstanding under this
facility. The outstanding letters of credit were issued to support North Sea
decommissioning obligations, the terms of which required such support after
Standard & Poor's reduced the Company's credit rating from BBB to BB+ on March
26, 2020 .
In November 2018 , Altus Midstream LP entered into a revolving credit facility
for general corporate purposes that matures in November 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 of September 30, 2020 and December 31, 2019 , there were
$580 million and $396 million , respectively, of borrowings outstanding under
this facility. As of September 30, 2020 and December 31, 2019 , there were no
letters of credit outstanding under this facility. The Altus Midstream LP credit
facility is unsecured and is not guaranteed by Apache or any of Apache's other
subsidiaries.
The Company was in compliance with the terms of its credit facilities as of
September 30, 2020 .
The Company's $3.5 billion commercial paper program, which is subject to market
availability, facilitates Apache borrowing funds for up to 270 days. As a result
of downgrades in Apache's credit ratings during 2020, 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 of September 30, 2020 and December 31, 2019 , the Company had
no commercial paper outstanding.
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 ended December 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) to Fieldwood Energy LLC (Fieldwood ). Under the terms of the
purchase agreement (Agreement), Apache received cash consideration of $3.75
billion and Fieldwood assumed $1.5 billion of discounted asset abandonment
liabilities. In respect of such abandonment liabilities, Fieldwood posted
letters of credit in favor of Apache (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 which Apache is the beneficiary. On
February 14, 2018 , Fieldwood filed for protection under Chapter 11 of the U.S.
Bankruptcy Code. In connection with the 2018 bankruptcy, Fieldwood confirmed a
plan under which Apache 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 secure Fieldwood'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.
On August 3, 2020 , Fieldwood filed for protection under Chapter 11 of the U.S.
Bankruptcy Code. Apache has been engaged with Fieldwood and other interested
parties to discuss Fieldwood's plan of reorganization. However, as of the date
of this report, Apache does not know if, or to what extent, Fieldwood will be
able to continue to perform its AROs with respect to the Transferred Assets. If
Fieldwood fails to perform any of its AROs with respect to the Transferred
Assets, then Apache's remedy would be a claim for damages against Fieldwood for
breach of its contractual obligations under the Agreement.
43--------------------------------------------------------------------------------
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 or such decommissioning security may be reduced, restricted, or otherwise eliminated, in whole or in part, as a result ofFieldwood's current bankruptcy proceedings.
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