| | | | | |
| ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a)Documents included in this report:
| | | | | |
| 2. | Financial Statement Schedules |
| Financial statement schedules have been omitted because they are either not required, not applicable or the information required to be presented is included in the Company’s financial statements and related notes. |
| | | | | | | | |
EXHIBIT
NO. | | DESCRIPTION |
| 2.1 | – | |
| 3.1 | – | |
| 3.2 | – | |
| 4.1 | – | |
| 4.2 | – | |
| 10.1 | – | |
| †10.2 | – | |
| †10.3 | – | |
| †10.4 | – | |
| †10.5 | – | |
| †10.6 | – | |
| †10.7 | – | |
| †10.8 | – | |
| †10.9 | – | |
| †10.10 | – | |
| †10.11 | – | |
| †10.12 | – | |
| †10.13 | – | |
| †10.14 | – | |
| †10.15 | – | |
| | | | | | | | |
EXHIBIT
NO. | | DESCRIPTION |
| †10.16 | – | |
| †10.17 | – | |
| †10.18 | – | |
| †10.19 | – | |
| †10.20 | – | |
| †10.21 | – | |
| †10.22 | – | |
| †10.23 | – | |
| †10.24 | – | |
| †10.25 | – | |
| †10.26 | – | |
| †10.27 | – | |
| †10.28 | – | |
| †10.29 | – | |
| †10.30 | – | |
| †10.31 | – | |
| †10.32 | – | |
| †10.33 | – | |
| †10.34 | – | |
| | | | | | | | |
EXHIBIT
NO. | | DESCRIPTION |
| †10.35 | – | |
| †10.36 | – | |
| †10.37 | – | |
| †10.38 | – | |
| †10.39 | – | |
| †10.40 | – | |
| *†10.41 | – | |
| *†10.42 | – | |
| *†10.43 | – | |
| *21.1 | – | |
| *23.1 | – | |
| *23.2 | – | |
| *24.1 | – | |
| *31.1 | – | |
| *31.2 | – | |
| *32.1 | – | |
| *99.1 | – | |
| *101.INS | – | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). |
| *101.SCH | – | Inline XBRL Taxonomy Schema Document. |
| *101.CAL | – | Inline XBRL Calculation Linkbase Document. |
| *101.DEF | – | Inline XBRL Definition Linkbase Document. |
| *101.LAB | – | Inline XBRL Label Linkbase Document. |
| *101.PRE | – | Inline XBRL Presentation Linkbase Document. |
| *104 | – | Cover Page Interactive Data File (the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). |
| | |
| * Filed herewith. |
| † Management contracts or compensatory plans or arrangements required to be filed herewith pursuant to Item 15 hereof. |
NOTE: Debt instruments of the Registrant defining the rights of long-term debt holders in principal amounts not exceeding 10 percent of the Registrant’s consolidated assets have been omitted and will be provided to the Commission upon request.
| | | | | |
| ITEM 16. | FORM 10-K SUMMARY |
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
APA CORPORATION
/s/ John J. Christmann IV
John J. Christmann IV
Chief Executive Officer and President
Dated: February 22, 2022
POWER OF ATTORNEY
The officers and directors of APA Corporation, whose signatures appear below, hereby constitute and appoint John J. Christmann IV, Stephen J. Riney, and Rebecca A. Hoyt, and each of them (with full power to each of them to act alone), the true and lawful attorney-in-fact to sign and execute, on behalf of the undersigned, any amendment(s) to this report and each of the undersigned does hereby ratify and confirm all that said attorneys shall do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
| Name | | Title | | Date |
/s/ John J. Christmann IV John J. Christmann IV | | Director, Chief Executive Officer, and President (principal executive officer) | | February 22, 2022 |
/s/ Stephen J. Riney Stephen J. Riney | | Executive Vice President and Chief Financial Officer
(principal financial officer) | | February 22, 2022 |
/s/ Rebecca A. Hoyt Rebecca A. Hoyt | | Senior Vice President, Chief Accounting Officer, and Controller
(principal accounting officer) | | February 22, 2022 |
/s/ Annell R. Bay Annell R. Bay | | Director | | February 22, 2022 |
/s/ Juliet S. Ellis
Juliet S. Ellis | | Director | | February 22, 2022 |
/s/ Charles W. Hooper
Charles W. Hooper | | Director | | February 22, 2022 |
/s/ Chansoo Joung
Chansoo Joung | | Director | | February 22, 2022 |
/s/ John E. Lowe John E. Lowe | | Independent, Non-Executive Chairman of the Board and Director | | February 22, 2022 |
/s/ H. Lamar McKay H. Lamar McKay | | Director | | February 22, 2022 |
/s/ William C. Montgomery William C. Montgomery | | Director | | February 22, 2022 |
/s/ Amy H. Nelson Amy H. Nelson | | Director | | February 22, 2022 |
/s/ Daniel W. Rabun Daniel W. Rabun | | Director | | February 22, 2022 |
/s/ Peter A. Ragauss Peter A. Ragauss | | Director | | February 22, 2022 |
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible for the preparation and integrity of the consolidated financial statements appearing in this annual report on Form 10-K. The financial statements were prepared in conformity with accounting principles generally accepted in the United States and include amounts that are based on management’s best estimates and judgments.
Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements. Our internal control over financial reporting is supported by a program of internal audits and appropriate reviews by management, written policies and guidelines, careful selection and training of qualified personnel and a written code of business conduct adopted by our Company’s board of directors, applicable to all Company directors and all officers and employees of our Company and subsidiaries.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013). Based on our assessment, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2021.
The Company’s independent auditors, Ernst & Young LLP, a registered public accounting firm, are appointed by the Audit Committee of the Company’s board of directors. Ernst & Young LLP have audited and reported on the consolidated financial statements of APA Corporation and subsidiaries and the effectiveness of the Company’s internal control over financial reporting. The reports of the independent auditors follow this report on pages F-2 and F-3.
| | |
| /s/ John J. Christmann IV |
| Chief Executive Officer and President |
| (principal executive officer) |
|
| /s/ Stephen J. Riney |
| Executive Vice President and Chief Financial Officer |
| (principal financial officer) |
|
| /s/ Rebecca A. Hoyt |
| Senior Vice President, Chief Accounting Officer and Controller |
| (principal accounting officer) |
Houston, Texas
February 22, 2022
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of APA Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited APA Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, APA Corporation and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related statements of consolidated operations, comprehensive income (loss), cash flows and changes in equity and noncontrolling interest for each of the three years in the period ended December 31, 2021, and the related notes and our report dated February 22, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Houston, Texas
February 22, 2022
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of APA Corporation:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of APA Corporation and subsidiaries (the Company) as of December 31, 2021 and 2020, the related statements of consolidated operations, comprehensive income (loss), cash flows and changes in equity and noncontrolling interest for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 22, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| | | | | | | | |
| | Depreciation, depletion and amortization of property and equipment |
Description of
the Matter | | At December 31, 2021, the carrying value of the Company’s property and equipment was $8,335 million, and depreciation, depletion and amortization (DD&A) expense was $1,360 million for the year then ended. As described in Note 1, the Company follows the successful efforts method of accounting for its oil and gas properties. DD&A of the cost of proved oil and gas properties is calculated using the unit-of-production method based on proved oil and gas reserves, as estimated by the Company’s internal reservoir engineers.
Proved oil and gas reserves are those quantities of natural gas, crude oil, condensate, and natural gas liquids, which by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations. Significant judgment is required by the Company’s internal reservoir engineers in evaluating geological and engineering data when estimating oil and gas reserves. Estimating reserves also requires the selection of inputs, including oil and gas price assumptions, future operating and capital costs assumptions, and tax rates by jurisdiction, among others. Because of the complexity involved in estimating oil and gas reserves, management engaged independent petroleum engineers to audit the proved oil and gas reserve estimates prepared by the Company’s internal reservoir engineers for select properties as of December 31, 2021.
Auditing the Company’s DD&A calculations is complex because of the use of the work of the internal reservoir engineers and the independent petroleum engineers and the evaluation of management’s determination of the inputs described above used by the engineers in estimating oil and gas reserves.
|
How We
Addressed the
Matter in Our
Audit | | We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s controls over its process to calculate DD&A, including management’s controls over the completeness and accuracy of the financial data provided to the engineers for use in estimating oil and gas reserves.
Our audit procedures included, among others, evaluating the professional qualifications and objectivity of the Company’s internal reservoir engineers primarily responsible for overseeing the preparation of the reserve estimates and the independent petroleum engineers used to audit the proved oil and gas reserve estimates for select properties. In addition, in assessing whether we can use the work of the engineers, we evaluated the completeness and accuracy of the financial data and inputs described above used by the engineers in estimating oil and gas reserves by agreeing them to source documentation, and we identified and evaluated corroborative and contrary evidence. For proved undeveloped reserves, we evaluated management’s development plan for compliance with the SEC rule that undrilled locations are scheduled to be drilled within five years, unless specific circumstances justify a longer time, by assessing consistency of the development projections with the Company’s development plan and the availability of capital relative to the development plan. We also tested the mathematical accuracy of the DD&A calculation, including comparing the oil and gas reserve amounts used in the calculation to the Company’s reserve reports. |
| | | | | | | | |
| | Accounting for asset retirement obligation for the North Sea segment |
Description of
the Matter | | At December 31, 2021, the asset retirement obligation (ARO) balance totaled $2,130 million. As further described in Note 8, the Company’s ARO reflects the estimated present value of the amount of dismantlement, removal, site reclamation, and similar activities associated with the Company’s oil and gas properties and other long-lived assets. The estimation of the ARO related to the North Sea segment requires significant judgment given the magnitude of the expected retirement costs and higher estimation uncertainty related to the timing of settlements and settlement amounts.
Auditing the Company’s ARO for the North Sea segment is complex and highly judgmental because of the significant estimation required by management in determining the obligation. In particular, the estimate was sensitive to significant subjective assumptions such as retirement cost estimates and the estimated timing of settlements, which are both affected by expectations about future market and economic conditions.
|
How We
Addressed the
Matter in Our
Audit | | We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s internal controls over its ARO estimation process, including management’s review of the significant assumptions that have a material effect on the determination of the obligations. We also tested management’s controls over the completeness and accuracy of financial data used in the valuation.
To test the ARO for the North Sea segment, our audit procedures included, among others, assessing the significant assumptions and inputs used in the valuation, such as retirement cost estimates and timing of settlement assumptions. For example, we evaluated retirement cost estimates by comparing the Company’s estimates to recent offshore activities and costs. Additionally, we compared assumptions for the timing of settlements to production forecasts. We also involved our internal specialists in testing the underlying retirement cost estimates. |
| | Accounting for decommissioning contingency for sold Gulf of Mexico properties |
Description of
the Matter | | At December 31, 2021, the decommissioning contingency for sold Gulf of Mexico properties (decommissioning contingency) balance totaled $1,186 million. As further described in Note 11, the Company’s decommissioning contingency reflects the estimated undiscounted potential liability to fund decommissioning of the sold Gulf of Mexico properties. The estimation of the decommissioning contingency requires significant judgment given the magnitude and higher estimation uncertainty of the expected retirement costs.
Auditing the Company’s decommissioning contingency is complex and highly judgmental because of the significant estimation required by management in determining the decommissioning contingency. In particular, the estimate was sensitive to retirement cost and duration estimates, which are subjective assumptions affected by expectations about future market and economic conditions. |
How We
Addressed the
Matter in Our
Audit | | We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s internal controls over its decommissioning contingency estimation process, including management’s review of the significant assumptions that have a material effect on the determination of the contingency. We also tested management’s controls over the completeness and accuracy of financial data used in the valuation.
To test the decommissioning contingency, our audit procedures included, among others, assessing the significant assumptions and inputs used in the valuation, such as retirement cost and duration estimates. For example, we evaluated retirement cost estimates by comparing the Company’s estimates to recent offshore activities and costs as well as current bids obtained from service providers. We also involved our internal specialists in testing the underlying retirement cost and duration estimates. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2002.
Houston, Texas
February 22, 2022
APA CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS | | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| | | | | | |
| | | (In millions, except per common share data) |
| REVENUES AND OTHER: | | | | | | |
| Oil, natural gas, and natural gas liquids production revenues | | $ | 6,498 | | | $ | 4,037 | | | $ | 6,315 | |
| Purchased oil and gas sales | | 1,487 | | | 398 | | | 176 | |
| Total revenues | | 7,985 | | | 4,435 | | | 6,491 | |
| Derivative instrument gains (losses), net | | 94 | | | (223) | | | (35) | |
| Gain on divestitures, net | | 67 | | | 32 | | | 43 | |
| Loss on previously sold Gulf of Mexico properties | | (446) | | | — | | | — | |
| Other, net | | 228 | | | 64 | | | 54 | |
| | 7,928 | | | 4,308 | | | 6,553 | |
| OPERATING EXPENSES: | | | | | | |
| Lease operating expenses | | 1,241 | | | 1,127 | | | 1,447 | |
| Gathering, processing, and transmission | | 264 | | | 274 | | | 306 | |
| Purchased oil and gas costs | | 1,580 | | | 357 | | | 142 | |
| Taxes other than income | | 204 | | | 123 | | | 207 | |
| Exploration | | 155 | | | 274 | | | 805 | |
| General and administrative | | 376 | | | 290 | | | 406 | |
| Transaction, reorganization, and separation | | 22 | | | 54 | | | 50 | |
| Depreciation, depletion, and amortization | | 1,360 | | | 1,772 | | | 2,680 | |
| Asset retirement obligation accretion | | 113 | | | 109 | | | 107 | |
| Impairments | | 208 | | | 4,501 | | | 2,949 | |
| Financing costs, net | | 514 | | | 267 | | | 462 | |
| | 6,037 | | | 9,148 | | | 9,561 | |
| NET INCOME (LOSS) BEFORE INCOME TAXES | | 1,891 | | | (4,840) | | | (3,008) | |
| Current income tax provision | | 652 | | | 176 | | | 660 | |
| Deferred income tax provision (benefit) | | (74) | | | (112) | | | 14 | |
| NET INCOME (LOSS) INCLUDING NONCONTROLLING INTERESTS | | 1,313 | | | (4,904) | | | (3,682) | |
| Net income (loss) attributable to noncontrolling interest - Egypt | | 174 | | | (121) | | | 167 | |
| Net income (loss) attributable to noncontrolling interest - Altus | | 4 | | | 1 | | | (334) | |
| Net income attributable to Altus Preferred Unit limited partners | | 162 | | | 76 | | | 38 | |
| NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK | | $ | 973 | | | $ | (4,860) | | | $ | (3,553) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| NET INCOME (LOSS) PER COMMON SHARE: | | | | | | |
| | | | | | |
| | | | | | |
| Basic | | $ | 2.60 | | | $ | (12.86) | | | $ | (9.43) | |
| | | | | | |
| | | | | | |
| | | | | | |
| Diluted | | $ | 2.59 | | | $ | (12.86) | | | $ | (9.43) | |
| WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: | | | | | | |
| Basic | | 374 | | | 378 | | | 377 | |
| Diluted | | 375 | | | 378 | | | 377 | |
The accompanying notes to consolidated financial statements are an integral part of this statement.
F-6
APA CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| | | (In millions) |
| NET INCOME (LOSS) INCLUDING NONCONTROLLING INTERESTS | | $ | 1,313 | | | $ | (4,904) | | | $ | (3,682) | |
| OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: | | | | | | |
| Pension and postretirement benefit plan | | 7 | | (2) | | | 13 | |
| Share of equity method interests other comprehensive income (loss) | | 1 | | — | | | (1) | |
| COMPREHENSIVE INCOME (LOSS) INCLUDING NONCONTROLLING INTERESTS | | 1,321 | | | (4,906) | | | (3,670) | |
| Comprehensive income (loss) attributable to noncontrolling interest - Egypt | | 174 | | | (121) | | | 167 | |
| Comprehensive income (loss) attributable to noncontrolling interest - Altus | | 4 | | | 1 | | | (334) | |
| Comprehensive income attributable to Altus Preferred Unit limited partners | | 162 | | | 76 | | | 38 | |
| COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK | | $ | 981 | | | $ | (4,862) | | | $ | (3,541) | |
The accompanying notes to consolidated financial statements are an integral part of this statement.
F-7
APA CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| | | (In millions) |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
| Net income (loss) including noncontrolling interests | | $ | 1,313 | | | $ | (4,904) | | | $ | (3,682) | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | |
| | | | | | |
| Unrealized derivative instrument losses (gains), net | | (69) | | | 87 | | | 44 | |
| Gain on divestitures, net | | (67) | | | (32) | | | (43) | |
| Exploratory dry hole expense and unproved leasehold impairments | | 97 | | | 211 | | | 676 | |
| Depreciation, depletion, and amortization | | 1,360 | | | 1,772 | | | 2,680 | |
| Asset retirement obligation accretion | | 113 | | | 109 | | | 107 | |
| Impairments | | 208 | | | 4,501 | | | 2,949 | |
| Provision for (benefit from) deferred income taxes | | (74) | | | (112) | | | 14 | |
| Loss (gain) from extinguishment of debt | | 104 | | | (160) | | | 75 | |
| Loss on previously sold Gulf of Mexico properties | | 446 | | | — | | | — | |
| Other | | 28 | | | 102 | | | 50 | |
| Changes in operating assets and liabilities: | | | | | | |
| Receivables | | (386) | | | 149 | | | 133 | |
| Inventories | | (9) | | | 19 | | | (41) | |
| Drilling advances and other current assets | | 71 | | | (29) | | | 30 | |
| Deferred charges and other long-term assets | | (42) | | | (13) | | | — | |
| Accounts payable | | 245 | | | (167) | | | (5) | |
| Accrued expenses | | 127 | | | (163) | | | (84) | |
| Deferred credits and noncurrent liabilities | | 31 | | | 18 | | | (36) | |
| NET CASH PROVIDED BY OPERATING ACTIVITIES | | 3,496 | | | 1,388 | | | 2,867 | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | |
| Additions to oil and gas property | | (1,101) | | | (1,270) | | | (2,594) | |
| Additions to Altus gathering, processing, and transmission (GPT) facilities | | (3) | | | (28) | | | (327) | |
| Leasehold and property acquisitions | | (9) | | | (4) | | | (40) | |
| Contributions to Altus equity method interests | | (28) | | | (327) | | | (501) | |
| Acquisition of Altus equity method interests | | — | | | — | | | (671) | |
| Proceeds from asset divestitures | | 256 | | | 166 | | | 718 | |
| Other | | 52 | | | (3) | | | (31) | |
| NET CASH USED IN INVESTING ACTIVITIES | | (833) | | | (1,466) | | | (3,446) | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | |
| Proceeds from Apache credit facility, net | | 392 | | | 150 | | | — | |
| Proceeds from Altus credit facility | | 33 | | | 228 | | | 396 | |
| Fixed rate debt borrowings | | — | | | 1,238 | | | 989 | |
| Payments on fixed-rate debt | | (1,795) | | | (1,243) | | | (1,150) | |
| Distributions to noncontrolling interest - Egypt | | (279) | | | (91) | | | (305) | |
| Distributions to Altus Preferred Unit limited partners | | (46) | | | (23) | | | — | |
| Redeemable noncontrolling interest - Altus Preferred Unit limited partners | | — | | | — | | | 611 | |
| Dividends paid | | (52) | | | (123) | | | (376) | |
| Treasury stock activity, net | | (847) | | | 1 | | | 2 | |
| Other | | (29) | | | (44) | | | (55) | |
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | | (2,623) | | | 93 | | | 112 | |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | 40 | | | 15 | | | (467) | |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | | 262 | | | 247 | | | 714 | |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | | $ | 302 | | | $ | 262 | | | $ | 247 | |
| SUPPLEMENTARY CASH FLOW DATA: | | | | | | |
| Interest paid, net of capitalized interest | | $ | 442 | | | $ | 419 | | | $ | 394 | |
| Income taxes paid, net of refunds | | $ | 633 | | | $ | 212 | | | $ | 649 | |
The accompanying notes to consolidated financial statements are an integral part of this statement.
F-8
APA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
| | | | | | | | | | | | | | |
| | | December 31, |
| | 2021 | | 2020 |
| | | | |
| | (In millions, except share data) |
| ASSETS | | | | |
| CURRENT ASSETS: | | | | |
Cash and cash equivalents ($132 and $24 related to Altus VIE) | | $ | 302 | | | $ | 262 | |
Receivables, net of allowance of $109 and $95 | | 1,394 | | | 908 | |
Other current assets (Note 5) ($9 and $5 related to Altus VIE) | | 684 | | | 676 | |
| | 2,380 | | | 1,846 | |
| PROPERTY AND EQUIPMENT: | | | | |
| Oil and gas, on the basis of successful efforts accounting: | | 40,749 | | | 41,819 | |
| | | | |
| | | | |
Gathering, processing, and transmission facilities ($209 and $206 related to Altus VIE) | | 673 | | | 670 | |
Other ($3 and $3 related to Altus VIE) | | 1,126 | | | 1,140 | |
| | | | |
Less: Accumulated depreciation, depletion, and amortization ($25 and $13 related to Altus VIE) | | (34,213) | | | (34,810) | |
| | 8,335 | | | 8,819 | |
| OTHER ASSETS: | | | | |
Equity method interests (Note 6) ($1,365 and $1,555 related to Altus VIE) | | 1,365 | | | 1,555 | |
Decommissioning security for sold Gulf of Mexico properties (Note 11) | | 640 | | | — | |
Deferred charges and other ($6 and $5 related to Altus VIE) | | 583 | | | 526 | |
| | $ | 13,303 | | | $ | 12,746 | |
| | | | |
| LIABILITIES, NONCONTROLLING INTEREST, AND EQUITY (DEFICIT) | | | | |
| CURRENT LIABILITIES: | | | | |
Accounts payable ($12 and $6 related to Altus VIE) | | $ | 731 | | | $ | 444 | |
| Current debt | | 215 | | | 2 | |
Other current liabilities (Note 7) ($15 and $4 related to Altus VIE) | | 1,171 | | | 862 | |
| | 2,117 | | | 1,308 | |
LONG-TERM DEBT (Note 9) ($657 and $624 related to Altus VIE) | | 7,295 | | | 8,770 | |
| DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES: | | | | |
| Income taxes | | 148 | | | 215 | |
Asset retirement obligation ($68 and $64 related to Altus VIE) | | 2,089 | | | 1,888 | |
Decommissioning contingency for sold Gulf of Mexico properties (Note 11) | | 1,086 | | | — | |
Other ($67 and $144 related to Altus VIE) | | 573 | | | 602 | |
| | 3,896 | | | 2,705 | |
| | | | |
| | | | |
REDEEMABLE NONCONTROLLING INTEREST - ALTUS PREFERRED UNIT LIMITED PARTNERS (Note 13) | | 712 | | | 608 | |
| | | | |
| EQUITY (DEFICIT): | | | | |
Common stock, $0.625 par, 860,000,000 shares authorized, 419,078,606 and 418,429,375 shares issued, respectively | | 262 | | | 262 | |
| Paid-in capital | | 11,645 | | | 11,735 | |
| Accumulated deficit | | (9,488) | | | (10,461) | |
Treasury stock, at cost, 72,147,841 and 40,946,745 shares, respectively | | (4,036) | | | (3,189) | |
| Accumulated other comprehensive income | | 22 | | | 14 | |
| APA SHAREHOLDERS’ DEFICIT | | (1,595) | | | (1,639) | |
| Noncontrolling interest - Egypt | | 820 | | | 925 | |
| Noncontrolling interest - Altus | | 58 | | | 69 | |
| TOTAL DEFICIT | | (717) | | | (645) | |
| | $ | 13,303 | | | $ | 12,746 | |
The accompanying notes to consolidated financial statements are an integral part of this statement.
F-9
APA CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CHANGES IN EQUITY (DEFICIT) AND NONCONTROLLING INTEREST
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Redeemable Noncontrolling Interest - Altus Preferred Unit Limited Partners | | | Common
Stock | | Paid-In
Capital | | Accumulated Deficit | | Treasury
Stock | | Accumulated
Other
Comprehensive
Income (Loss) | | APA
SHAREHOLDERS’
EQUITY (DEFICIT) | | Noncontrolling
Interests | | TOTAL
EQUITY (DEFICIT) |
| | | (In millions) |
| BALANCE AT DECEMBER 31, 2018 | | $ | — | | | | $ | 260 | | | $ | 12,106 | | | $ | (2,048) | | | $ | (3,192) | | | $ | 4 | | | $ | 7,130 | | | $ | 1,682 | | | $ | 8,812 | |
| Net loss attributable to common stock | | — | | | | — | | | — | | | (3,553) | | | — | | | — | | | (3,553) | | | — | | | (3,553) | |
| Net income attributable to noncontrolling interest - Egypt | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | 167 | | | 167 | |
| Net loss attributable to noncontrolling interest - Altus | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | (334) | | | (334) | |
| Issuance of Altus Preferred Units | | 517 | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Net income attributable to Altus Preferred Unit limited partners | | 38 | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Distributions to noncontrolling interest - Egypt | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | (305) | | | (305) | |
| | | | | | | | | | | | | | | | | | | |
Common dividends ($1.00 per share) | | — | | | | — | | | (376) | | | — | | | — | | | — | | | (376) | | | — | | | (376) | |
| Common stock activity, net | | — | | | | 1 | | | (22) | | | — | | | — | | | — | | | (21) | | | — | | | (21) | |
| | | | | | | | | | | | | | | | | | | |
| Compensation expense | | — | | | | — | | | 61 | | | — | | | — | | | — | | | 61 | | | — | | | 61 | |
| Other | | — | | | | — | | | — | | | — | | | 2 | | | 12 | | | 14 | | | — | | | 14 | |
| BALANCE AT DECEMBER 31, 2019 | | $ | 555 | | | | $ | 261 | | | $ | 11,769 | | | $ | (5,601) | | | $ | (3,190) | | | $ | 16 | | | $ | 3,255 | | | $ | 1,210 | | | $ | 4,465 | |
| Net loss attributable to common stock | | — | | | | — | | | — | | | (4,860) | | | — | | | — | | | (4,860) | | | — | | | (4,860) | |
| Net loss attributable to noncontrolling interest - Egypt | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | (121) | | | (121) | |
| Net income attributable to noncontrolling interest - Altus | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | 1 | |
| Distributions paid to Altus Preferred Unit limited partners | | (23) | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Net income attributable to Altus Preferred Unit limited partners | | 76 | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Distributions to noncontrolling interest - Egypt | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | (91) | | | (91) | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Common dividends ($0.10 per share) | | — | | | | — | | | (38) | | | — | | | — | | | — | | | (38) | | | — | | | (38) | |
| Common stock activity, net | | — | | | | 1 | | | (18) | | | — | | | — | | | — | | | (17) | | | — | | | (17) | |
| Compensation expense | | — | | | | — | | | 23 | | | — | | | — | | | — | | | 23 | | | — | | | 23 | |
| Other | | — | | | | — | | | (1) | | | — | | | 1 | | | (2) | | | (2) | | | (5) | | | (7) | |
| BALANCE AT DECEMBER 31, 2020 | | $ | 608 | | | | $ | 262 | | | $ | 11,735 | | | $ | (10,461) | | | $ | (3,189) | | | $ | 14 | | | $ | (1,639) | | | $ | 994 | | | $ | (645) | |
| Net income attributable to common stock | | — | | | | — | | | — | | | 973 | | | — | | | — | | | 973 | | | — | | | 973 | |
| Net income attributable to noncontrolling interest - Egypt | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | 174 | | | 174 | |
| Net income attributable to noncontrolling interest - Altus | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | 4 | | | 4 | |
| Net income attributable to Altus Preferred Unit limited partners | | 162 | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Distributions payable to Altus Preferred Unit limited partners | | (12) | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Distributions paid to Altus Preferred Unit limited partners | | (46) | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Distributions to noncontrolling interest - Egypt | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | (279) | | | (279) | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Common dividends ($0.2375 per share) | | — | | | | — | | | (87) | | | — | | | — | | | — | | | (87) | | | — | | | (87) | |
| Common stock activity, net | | — | | | | — | | | (6) | | | — | | | — | | | — | | | (6) | | | — | | | (6) | |
| Treasury stock activity, net | | — | | | | — | | | — | | | — | | | (847) | | | — | | | (847) | | | — | | | (847) | |
| Compensation expense | | — | | | | — | | | 21 | | | — | | | — | | | — | | | 21 | | | — | | | 21 | |
| Other | | — | | | | — | | | (18) | | | — | | | — | | | 8 | | | (10) | | | (15) | | | (25) | |
| BALANCE AT DECEMBER 31, 2021 | | $ | 712 | | | | $ | 262 | | | $ | 11,645 | | | $ | (9,488) | | | $ | (4,036) | | | $ | 22 | | | $ | (1,595) | | | $ | 878 | | | $ | (717) | |
The accompanying notes to consolidated financial statements are an integral part of this statement.
F-10
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nature of Operations
APA Corporation (APA or the Company) is an independent energy company that explores for, develops, and produces natural gas, crude oil, and natural gas liquids. The Company’s upstream business has exploration and production operations in three geographic areas: the United States (U.S.), Egypt, and offshore the U.K. in the North Sea (North Sea). APA also has active exploration and appraisal operations ongoing in Suriname, as well as interests in other international locations that may, over time, result in reportable discoveries and development opportunities. The Company’s midstream business (Altus Midstream) is operated by Altus Midstream Company (Nasdaq: ALTM) through its subsidiary Altus Midstream LP (collectively, Altus). Altus owns, develops, and operates a midstream energy asset network in the Permian Basin of West Texas.
On January 4, 2021, Apache Corporation announced plans to implement a holding company reorganization (the Holding Company Reorganization), which was thereafter completed on March 1, 2021. In connection with the Holding Company Reorganization, Apache Corporation became a direct, wholly owned subsidiary of APA Corporation, and all of Apache Corporation’s outstanding shares were automatically converted into equivalent corresponding shares of APA. Pursuant to the Holding Company Reorganization, APA became the successor issuer to Apache Corporation pursuant to Rule 12g-3(a) under the Exchange Act and replaced Apache Corporation as the public company trading on the Nasdaq Global Select Market under the ticker symbol “APA.” The Holding Company Reorganization modernized the Company’s operating and legal structure to more closely align with its growing international presence, making it more consistent with other companies that have subsidiaries operating around the globe.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting policies used by APA and its subsidiaries reflect industry practices and conform to accounting principles generally accepted in the U.S. (GAAP). The Company’s financial statements for prior periods include reclassifications that were made to conform to the current-year presentation. Significant accounting policies are discussed below.
Principles of Consolidation
The implementation of the Holding Company Reorganization was accounted for as a merger under common control. APA recognized the assets and liabilities of Apache at carryover basis. The consolidated financial statements of APA present comparative information for prior years on a combined basis, as if both APA and Apache were under common control for all periods presented.
The accompanying consolidated financial statements include the accounts of APA and its subsidiaries after elimination of intercompany balances and transactions. The Company’s undivided interests in oil and gas exploration and production ventures and partnerships are proportionately consolidated.
The Company consolidates all other investments in which, either through direct or indirect ownership, it has more than a 50 percent voting interest or controls the financial and operating decisions. ALTM is consolidated and qualifies as a variable interest entity (VIE) under GAAP. Additionally, in November of 2021, the Company determined that a limited partnership and APA subsidiary, which has control over APA’s Egyptian operations, qualifies as a VIE under GAAP. Apache consolidates the activities of ALTM and APA’s Egyptian operations because it has concluded that wholly owned subsidiaries have a controlling financial interest in ALTM and APA’s Egyptian operations, respectively, and were determined to be the primary beneficiaries of the VIEs. Additionally, the assets of ALTM may only be used to settle obligations of ALTM. There is no recourse to the Company for ALTM’s liabilities.
Noncontrolling interests represent third-party ownership in the net assets of a consolidated subsidiary of APA and are reflected separately in the Company’s financial statements. Sinopec International Petroleum Exploration and Production Corporation (Sinopec) owns a one-third minority participation in the Company’s Egypt oil and gas business as a noncontrolling interest, which is reflected as a separate component of equity in the Company’s consolidated balance sheet. Additionally, third-party investors own a minority interest of approximately 21 percent of Altus Midstream Company (ALTM), which is reflected as a separate noncontrolling interest component of equity in the Company’s consolidated balance sheet. APA regularly reassesses whether changes in the facts and circumstances regarding the Company’s involvement with a VIE could cause a change in its conclusions related to consolidation. Changes in consolidation status, if any, are applied prospectively.
On June 12, 2019, Altus Midstream LP issued and sold Series A Cumulative Redeemable Preferred Units (the Preferred Units) through a private offering that admitted additional limited partners with separate rights for the Preferred Unit holders. Refer to Note 13—Redeemable Noncontrolling Interest — Altus for further detail.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Investments in which the Company holds less than 50 percent of the voting interest are typically accounted for under the equity method of accounting. These investments are recorded separately as “Equity method interests” in the Company’s consolidated balance sheet. The Company’s proportionate share of the results of operations generated by the equity method interests are recorded as a component of “Other, net” under “Revenues and Other” in the Company’s statement of consolidated operations. Refer to Note 6—Equity Method Interests for further detail. Use of Estimates
Preparation of financial statements in conformity with GAAP and disclosure of contingent assets and liabilities requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. The Company evaluates its estimates and assumptions on a regular basis. Actual results may differ from these estimates and assumptions used in preparation of the Company’s financial statements and changes in these estimates are recorded when known.
Fair Value Measurements
Certain assets and liabilities are reported at fair value on a recurring basis in the Company’s consolidated balance sheet. Accounting Standards Codification (ASC) 820-10-35, “Fair Value Measurement” (ASC 820), provides a hierarchy that prioritizes and defines the types of inputs used to measure fair value. The fair value hierarchy gives the highest priority to Level 1 inputs, which consist of unadjusted quoted prices for identical instruments in active markets. Level 2 inputs consist of quoted prices for similar instruments. Level 3 valuations are derived from inputs that are significant and unobservable; hence, these valuations have the lowest priority.
The valuation techniques that may be used to measure fair value include a market approach, an income approach, and a cost approach. A market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. An income approach uses valuation techniques to convert future amounts to a single present amount based on current market expectations, including present value techniques, option-pricing models, and the excess earnings method. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).
The Company also uses fair value measurements on a nonrecurring basis when certain qualitative assessments of its assets indicate a potential impairment. The following table presents a summary of asset impairments recorded in connection with fair value assessments:
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
| | (In millions) |
| Oil and gas proved property | | $ | — | | | $ | 4,319 | | | $ | 1,484 | |
| Gathering, processing, and transmission facilities | | — | | | 68 | | | 1,295 | |
| Equity method interests | | 160 | | | — | | | — | |
| Divested unproved properties and leasehold | | — | | | — | | | 149 | |
| Goodwill | | — | | | 87 | | | — | |
| Inventory and other | | 48 | | | 27 | | | 21 | |
| Total Impairments | | $ | 208 | | | $ | 4,501 | | | $ | 2,949 | |
For the year ended December 31, 2021, the Company recorded asset impairments totaling $208 million. These charges include a $160 million impairment on the Company’s equity method interest in the EPIC crude oil pipeline (EPIC) as part of Altus’ review of the fair value of its assets in relation to the announced BCP Business Combination. Refer to “Equity Method Interests” within this Note 1 below and Note 2—Acquisitions and Divestitures for further detail on the BCP Business Combination. The Company also recorded other impairments during 2021 of approximately $26 million in connection with inventory valuations in Egypt and $22 million in connection with inventory valuations and expected equipment dispositions in the North Sea. For the year ended December 31, 2020, the Company recorded asset impairments totaling $4.5 billion in connection with non-recurring fair value assessments. Given the crude oil price collapse on lower demand and economic activity resulting from the coronavirus disease 2019 (COVID-19) global pandemic and related governmental actions, the Company assessed its oil and gas property and gathering, processing, and transmission (GPT) facilities for impairment based on the net book value of its assets as of March 31, 2020. The Company recognized proved property impairments of $3.9 billion, $354 million, and $7 million in the U.S., Egypt, and North Sea, respectively, all of which were impaired to their estimated fair values as a result of lower forecasted commodity prices, changes to planned development activity, and increasing market uncertainty. Similarly, the Company recognized GPT facility impairments of $68 million in Egypt. These impairments are discussed in further detail below in “Property and Equipment - Oil and Gas Property” and “Property and Equipment - Gathering, Processing, and Transmission Facilities.”
The Company also performed an interim impairment analysis of the goodwill related to its Egypt reporting unit. Reductions in estimated net present value of expected future cash flows from oil and gas properties resulted in implied fair values below the carrying values of the Company’s Egypt reporting unit. As a result of these assessments, the Company recognized non-cash impairments of the entire amount of recorded goodwill in the Egypt reporting unit of $87 million in the first quarter of 2020.
During the remainder of 2020, the Company recorded additional proved property impairments totaling $20 million in Egypt, as well as $13 million for the early termination of drilling rig leases, $5 million for inventory revaluations, and $9 million of other asset impairments, all in the U.S.
During the fourth quarter of 2019, following a material reduction to planned investment in the Company’s Alpine High development, the Company recorded impairments totaling $1.4 billion for its Alpine High proved properties and upstream infrastructure which were written down to their fair values. Altus separately assessed its long-lived infrastructure assets for impairment based on expected reductions to future throughput volumes from Alpine High. Altus subsequently recorded impairments totaling $1.3 billion on its GPT facilities. These impairments are discussed in further detail below in “Property and Equipment - Oil and Gas Property” and “Property and Equipment - Gathering, Processing, and Transmission Facilities.”
Separate from the Company’s Alpine High and Altus impairments, the Company entered into agreements to sell certain of its assets in the Western Anadarko Basin in Oklahoma and Texas. As a result of these agreements, a separate impairment analysis was performed for each of the assets within the disposal groups. The analyses were based on the agreed-upon proceeds less costs to sell for the transaction, a Level 1 fair value measurement. The carrying value of the net assets to be divested exceeded the fair value implied by the expected net proceeds, resulting in impairments in the second and fourth quarters of 2019 totaling $255 million, including $101 million on the Company’s proved properties, $149 million on its unproved properties, and $5 million on other working capital. For more information regarding this transaction, refer to Note 2—Acquisitions and Divestitures.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Revenue Recognition
Upstream
The Company’s upstream oil and gas segments primarily generate revenue from contracts with customers from the sale of its crude oil, natural gas, and natural gas liquids production volumes. In addition to APA-related production volumes, the Company also sells commodity volumes purchased from third-parties to fulfill sales obligations and commitments as the Company’s production fluctuates with potential operational issues and changes to development plans. Under these short-term commodity sales contracts, the physical delivery of each unit of quantity represents a single, distinct performance obligation on behalf of the Company. Contract prices are determined based on market-indexed prices, adjusted for quality, transportation, and other market-reflective differentials. Revenue is measured by allocating an entirely variable market price to each performance obligation and recognized at a point in time when control is transferred to the customer. The Company considers a variety of facts and circumstances in assessing the point of control transfer, including but not limited to: whether the purchaser can direct the use of the hydrocarbons, the transfer of significant risks and rewards, and the Company’s right to payment. Control typically transfers to customers upon the physical delivery at specified locations within each contract and the transfer of title.
APA’s Egypt operations are conducted pursuant to production-sharing contracts (PSCs). Under the terms of the Company’s PSCs, the Company is the contractor partner (Contractor) with the Egyptian General Petroleum Corporation (EGPC) and bears the risk and cost of exploration, development, and production activities. In return, if exploration is successful, the Contractor receives entitlement to variable physical volumes of hydrocarbons, representing recovery of the costs incurred and a stipulated share of production after cost recovery. Additionally, the Contractor’s income taxes, which remain the liability of the Contractor under domestic law, are paid by EGPC on behalf of the Contractor out of EGPC’s production entitlement. Income taxes paid to the Arab Republic of Egypt on behalf of the Contractor are recognized as oil and gas sales revenue and income tax expense and reflected as production and estimated reserves. Because Contractor cost recovery entitlement and income taxes paid on its behalf are determined as a monetary amount, the quantities of production entitlement and estimated reserves attributable to these monetary amounts will fluctuate with commodity prices. In addition, because the Contractor income taxes are paid by EGPC, the amount of the income tax has no economic impact on the Company’s Egypt operations despite impacting the Company’s production and reserves. Revenues related to Egypt’s tax volumes are considered revenue from a non-customer.
On December 27, 2021, the Company announced the ratification of a modernized PSC with the Egyptian Ministry of Petroleum and the EGPC, having an effective date of April 1, 2021. The new PSC consolidates 98 percent of gross acreage and 90 percent of gross production into a single concession and refreshes the existing development lease terms for 20 years and exploration leases for 5 years. The consolidated concession has a single cost recovery pool to provide improved access to cost recovery, a fixed 40 percent cost recovery limit, and a fixed profit-sharing rate of 30 percent for all the Company’s production covered under the new concession. The APA subsidiary that became the sole Contractor under the PSC is owned by an APA-operated joint venture owned two-thirds by APA and one-third by Sinopec.
Altus Midstream
The Company’s Altus Midstream segment is operated by ALTM, through its subsidiary, Altus Midstream LP. Altus generates revenue from contracts with customers from its gathering, compression, processing, and transmission services provided on the Company’s natural gas and natural gas liquid production volumes. Under these long-term commercial service contracts, providing the related service represents a single, distinct performance obligation on behalf of Altus that is satisfied over time. In accordance with the terms of these agreements, Altus primarily receives a fixed fee for each contract year, subject to yearly fee escalation recalculations. Revenue is primarily measured using the output method and recognized in the amount to which Altus has the right to invoice, as performance completed to date corresponds directly with the value to its customers. For the periods presented, Altus Midstream segment revenues were primarily attributable to sales between Altus and APA, which are fully eliminated upon consolidation.
Payment Terms and Contract Balances
Payments under all contracts with customers are typically due and received within a short-term period of one year or less, after physical delivery of the product or service has been rendered. Receivables from contracts with customers, net of allowance for credit losses, totaled $956 million and $670 million as of December 31, 2021 and 2020, respectively.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In accordance with the provisions of ASC 606, “Revenue from Contracts with Customers,” variable market prices for each short-term commodity sale are allocated entirely to each performance obligation as the terms of payment relate specifically to the Company’s efforts to satisfy its obligations. As such, the Company has elected the practical expedients available under the standard to not disclose the aggregate transaction price allocated to unsatisfied, or partially unsatisfied, performance obligations as of the end of the reporting period.
Cash and Cash Equivalents
The Company considers all highly liquid short-term investments with a maturity of three months or less at the time of purchase to be cash equivalents. These investments are carried at cost, which approximates fair value. As of December 31, 2021 and 2020, the Company had $302 million and $262 million, respectively, of cash and cash equivalents, of which approximately $132 million and $24 million, respectively, was held by Altus. The Company had no restricted cash as of December 31, 2021 and 2020.
Accounts Receivable and Allowance for Credit Losses
Accounts receivable are stated at amortized cost net of an allowance for credit losses. The Company routinely assesses the collectability of its financial assets measured at amortized cost. In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, “Financial Instruments-Credit Losses.” The standard changes the impairment model for trade receivables, held-to-maturity debt securities, net investments in leases, loans, and other financial assets measured at amortized cost. This ASU requires the use of a new forward-looking “expected loss” model compared to the previous “incurred loss” model, resulting in accelerated recognition of credit losses. The Company adopted this update in the first quarter of 2020. This ASU primarily applies to the Company’s accounts receivable balances, of which the majority are received within a short-term period of one year or less. The Company monitors the credit quality of its counterparties through review of collections, credit ratings, and other analyses. The Company develops its estimated allowance for credit losses primarily using an aging method and analyses of historical loss rates as well as consideration of current and future conditions that could impact its counterparties’ credit quality and liquidity. The adoption and implementation of this ASU did not have a material impact on the Company’s financial statements.
The following table presents changes to the Company’s allowance for credit loss:
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
| | (In millions) |
| Allowance for credit loss at beginning of year | | $ | 95 | | | $ | 88 | | | $ | 92 | |
| Additional provisions for the year | | 19 | | | 7 | | | 3 | |
| Uncollectible accounts written off, net of recoveries | | (5) | | | — | | | (7) | |
| Allowance for credit loss at end of year | | $ | 109 | | | $ | 95 | | | $ | 88 | |
Inventories
Inventories consist principally of tubular goods and equipment and are stated at the lower of weighted-average cost or net realizable value. Oil produced but not sold, primarily in the North Sea, is also recorded to inventory and is stated at the lower of the cost to produce or net realizable value.
Property and Equipment
The carrying value of the Company’s property and equipment represents the cost incurred to acquire the property and equipment, including capitalized interest, net of any impairments. For business combinations, property and equipment cost is based on the fair values at the acquisition date.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Oil and Gas Property
The Company follows the successful efforts method of accounting for its oil and gas property. Under this method of accounting, exploration costs such as exploratory geological and geophysical costs, delay rentals, and exploration overhead are expensed as incurred. All costs related to production, general corporate overhead, and similar activities are expensed as incurred. If an exploratory well provides evidence to justify potential development of reserves, drilling costs associated with the well are initially capitalized, or suspended, pending a determination as to whether a commercially sufficient quantity of proved reserves can be attributed to the area as a result of drilling. This determination may take longer than one year in certain areas depending on, among other things, the amount of hydrocarbons discovered, the outcome of planned geological and engineering studies, the need for additional appraisal drilling activities to determine whether the discovery is sufficient to support an economic development plan, and government sanctioning of development activities in certain international locations. At the end of each quarter, management reviews the status of all suspended exploratory well costs in light of ongoing exploration activities; in particular, whether the Company is making sufficient progress in its ongoing exploration and appraisal efforts or, in the case of discoveries requiring government sanctioning, whether development negotiations are underway and proceeding as planned. If management determines that future appraisal drilling or development activities are unlikely to occur, associated suspended exploratory well costs are expensed.
Acquisition costs of unproved properties are assessed for impairment at least annually and are transferred to proved oil and gas properties to the extent the costs are associated with successful exploration activities. Significant undeveloped leases are assessed individually for impairment based on the Company’s current exploration plans. Unproved oil and gas properties with individually insignificant lease acquisition costs are amortized on a group basis over the average lease term at rates that provide for full amortization of unsuccessful leases upon lease expiration or abandonment. Costs of expired or abandoned leases are charged to exploration expense, while costs of productive leases are transferred to proved oil and gas properties. Costs of maintaining and retaining unproved properties, as well as amortization of individually insignificant leases and impairment of unsuccessful leases, are included in exploration costs in the statement of consolidated operations.
Costs to develop proved reserves, including the costs of all development wells and related equipment used in the production of crude oil and natural gas, are capitalized. Depreciation of the cost of proved oil and gas properties is calculated using the unit-of-production (UOP) method. The UOP calculation multiplies the percentage of estimated proved reserves produced each quarter by the carrying value of associated proved oil and gas properties. The reserve base used to calculate depreciation for leasehold acquisition costs and the cost to acquire proved properties is the sum of proved developed reserves and proved undeveloped reserves. The reserve base used to calculate the depreciation for capitalized well costs is the sum of proved developed reserves only. Estimated future dismantlement, restoration and abandonment costs, net of salvage values, are included in the depreciable cost.
Oil and gas properties are grouped for depreciation in accordance with ASC 932 “Extractive Activities—Oil and Gas.” The basis for grouping is a reasonable aggregation of properties with a common geological structural feature or stratigraphic condition, such as a reservoir or field.
When circumstances indicate that the carrying value of proved oil and gas properties may not be recoverable, the Company compares unamortized capitalized costs to the expected undiscounted pre-tax future cash flows for the associated assets grouped at the lowest level for which identifiable cash flows are independent of cash flows of other assets. If the expected undiscounted pre-tax future cash flows, based on the Company’s estimate of future crude oil and natural gas prices, operating costs, anticipated production from proved reserves and other relevant data, are lower than the unamortized capitalized cost, the capitalized cost is reduced to fair value. Fair value is generally estimated using the income approach described in ASC 820. The expected future cash flows used for impairment reviews and related fair value calculations are typically based on judgmental assessments, a Level 3 fair value measurement.
The significant decline in crude oil and natural gas prices, as well as longer-term commodity price outlooks, related to reduced demand for oil and natural gas as a result of the COVID-19 pandemic and related governmental actions indicated possible impairment of the Company’s proved and unproved oil and gas properties in early 2020. In addition to estimating risk-adjusted reserves and future production volumes, estimated future commodity prices are the largest driver in variability of undiscounted pre-tax cash flows. Expected cash flows were estimated based on management’s views of published West Texas Intermediate (WTI), Brent, and Henry Hub forward pricing as of the balance sheet dates. Other significant assumptions and inputs used to calculate estimated future cash flows include estimates for future development activity, exploration plans and remaining lease terms. A 10 percent discount rate, based on a market-based weighted-average cost of capital estimate, was applied to the undiscounted cash flow estimate to value all of the Company’s asset groups that were subject to impairment charges in 2019.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table represents non-cash impairments charges of the carrying value of the Company’s proved and unproved properties:
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
| | (In millions) |
| Proved properties: | | | | | | |
| U.S. | | $ | — | | | $ | 3,938 | | | $ | 1,484 | |
| Egypt | | — | | | 374 | | | — | |
| North Sea | | — | | | 7 | | | — | |
| Total proved properties | | $ | — | | | $ | 4,319 | | | $ | 1,484 | |
| | | | | | |
| Unproved properties: | | | | | | |
| U.S. | | $ | 22 | | | $ | 92 | | | $ | 760 | |
| Egypt | | 8 | | | 8 | | | 8 | |
| North Sea | | 1 | | | 1 | | | — | |
| Total unproved properties | | $ | 31 | | | $ | 101 | | | $ | 768 | |
Proved properties impaired had aggregate fair values as of the most recent date of impairment of $1.9 billion and $628 million for 2020 and 2019, respectively.
Unproved leasehold impairments are typically recorded as a component of “Exploration” expense in the Company’s statement of consolidated operations. However, in 2019, unproved impairments of $149 million were recorded as a component of “Impairments” in connection with an agreement to sell certain non-core leasehold properties in Oklahoma and Texas.
Gains and losses on divestitures of the Company’s oil and gas properties are recognized in the statement of consolidated operations upon closing of the transaction. Refer to Note 2—Acquisitions and Divestitures for more detail. Gathering, Processing, and Transmission Facilities
GPT facilities totaled $673 million and $670 million at December 31, 2021 and 2020, respectively, with accumulated depreciation for these assets totaling $386 million and $323 million for the respective periods. GPT facilities are depreciated on a straight-line basis over the estimated useful lives of the assets. The estimation of useful life takes into consideration anticipated production lives from the fields serviced by the GPT assets, whether APA-operated or third party-operated, as well as potential development plans by the Company for undeveloped acreage within or in close proximity to those fields.
The Company assesses the carrying amount of its GPT facilities whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the carrying amount of these facilities is more than the sum of the undiscounted cash flows, an impairment loss is recognized for the excess of the carrying value over its fair value.
The Company assessed its long-lived infrastructure assets for impairment as of March 31, 2020, and recorded an impairment of $68 million on its GPT facilities in Egypt during the first quarter of 2020. The fair values of the impaired assets, which were determined to be $46 million, were estimated using the income approach, which considers internal estimates based on future throughput volumes from applicable development concessions in Egypt and estimated costs to operate. These assumptions were applied based on throughput assumptions developed in relation to the oil and gas proved property impairment assessment, as discussed above, to develop future cash flow projections that were then discounted to estimated fair value, using a 10 percent discount rate, based on a market-based weighted-average cost of capital estimate. The Company has classified these non-recurring fair value measurements as Level 3 in the fair value hierarchy.
As discussed under “Fair Value Measurements” above, the Company decided to materially reduce its planned investment in the Alpine High play during its fourth-quarter 2019 capital planning review. Altus management subsequently assessed its long-lived infrastructure assets for impairment given the expected reduction to future throughput volumes and recorded impairments of $1.3 billion on its gathering, processing, and transmission assets. The fair values of the impaired assets were determined to be $203 million as of the time of the impairment and were estimated using the income approach. The income approach considered internal estimates of future throughput volumes, processing rates, and costs. These assumptions were applied to develop future cash flow projections that were then discounted to estimated fair value, using discount rates believed to be consistent with those applied by market participants. The Company has classified these non-recurring fair value measurements as Level 3 in the fair value hierarchy.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Other Property and Equipment
Other property and equipment includes computer software and equipment, buildings, vehicles, furniture and fixtures, land, and other equipment. These assets are depreciated on a straight-line basis over the estimated useful lives of the assets, which range from 3 to 20 years. Other property and equipment totaled $1.1 billion at each of December 31, 2021 and 2020, with accumulated depreciation for these assets totaling $901 million and $864 million at December 31, 2021 and 2020, respectively.
Asset Retirement Costs and Obligations
The initial estimated asset retirement obligation related to property and equipment and subsequent revisions are recorded as a liability at fair value, with an offsetting asset retirement cost recorded as an increase to the associated property and equipment on the consolidated balance sheet. Revisions in estimated liabilities can result from changes in estimated inflation rates, changes in service and equipment costs and changes in the estimated timing of an asset’s retirement. Asset retirement costs are depreciated using a systematic and rational method similar to that used for the associated property and equipment. Accretion expense on the liability is recognized over the estimated productive life of the related assets.
Capitalized Interest
For significant projects, interest is capitalized as part of the historical cost of developing and constructing assets. Significant oil and gas investments in unproved properties actively being explored, significant exploration and development projects that have not commenced production, significant midstream development activities that are in progress, and investments in equity method affiliates that are undergoing the construction of assets that have not commenced principal operations qualify for interest capitalization. Interest is capitalized until the asset is ready for service. Capitalized interest is determined by multiplying the Company’s weighted-average borrowing cost on debt by the average amount of qualifying costs incurred. Once an asset subject to interest capitalization is completed and placed in service, the associated capitalized interest is expensed through depreciation.
Goodwill
Goodwill represents the excess of the purchase price of an entity over the estimated fair value of the assets acquired and liabilities assumed. The Company currently carries no goodwill, but, in comparative periods, it was recorded in “Deferred charges and other” in the Company’s consolidated balance sheet. The Company assessed the carrying amount of goodwill by testing for impairment annually and when impairment indicators arose. The impairment test requires allocating goodwill and all other assets and liabilities to assigned reporting units. The Company assessed each country as a reporting unit, with Egypt being the only reporting unit to have associated goodwill during the periods presented. The fair value of the reporting unit was determined and compared to the book value of the reporting unit. If the fair value of the reporting unit was less than the book value, including goodwill, then goodwill was written down to its implied fair value through a charge to expense.
The following presents the changes to goodwill for the years ended 2020 and 2019:
| | | | | | | | | | | | | | |
| | Egypt | | Total |
| | | | |
| | (In millions) |
| Goodwill at December 31, 2018 | | $ | 87 | | | $ | 87 | |
| Impairments | | — | | | — | |
| Goodwill at December 31, 2019 | | 87 | | | 87 | |
| Impairments | | (87) | | | (87) | |
| Goodwill at December 31, 2020 | | $ | — | | | $ | — | |
| | | | |
| | | | |
Reductions in estimated net present value of expected future cash flows from oil and gas properties during 2020 resulted in implied fair values below the carrying values of the Company’s Egypt reporting unit. As a result of this assessment, the Company recognized non-cash impairments of the entire amount of recorded goodwill in the Egypt reporting unit of $87 million in 2020. This goodwill impairment was recorded in “Impairments” in the Company’s statement of consolidated operations.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Equity Method Interests
The Company follows the equity method of accounting when it does not exercise control over its equity interests, but can exercise significant influence over the operating and financial policies of the entity. Under this method, the equity interests are carried originally at acquisition cost, increased by the Company’s proportionate share of the equity interest’s net income and contributions made by the Company, and decreased by the Company’s proportionate share of the equity interest’s net losses and distributions received by the Company.
Equity method interests are assessed for impairment whenever changes in the facts and circumstances indicate a loss in value has occurred, if the loss is deemed to be other than temporary. When the loss is deemed to be other than temporary, the carrying value of the equity method investment is written down to fair value, and the amount of the write-down is included in income. In the fourth quarter of 2021, Altus, as part of its review of the fair value of its assets in relation to the announced BCP Business Combination, determined the current fair value of its investment in EPIC was below carrying value. Altus subsequently determined that this loss in value to be other than temporary. As such, in the fourth quarter of 2021, Altus recorded an impairment charge of $160 million on its equity method interest in EPIC. The fair value of the impaired interest was determined using the income approach. The income approach considered estimates of future throughput volumes, tariff rates, and costs. These assumptions were applied to develop future cash flow projections that were then discounted to estimated fair value, using a discount rate believed to be consistent with that which would be applied by market participants. Altus has classified this nonrecurring fair value measurement as Level 3 in the fair value hierarchy. Refer to Note 6—Equity Method Interests for further details of the Company’s equity method interests. Commitments and Contingencies
Accruals for loss contingencies arising from claims, assessments, litigation, environmental and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. These accruals are adjusted as additional information becomes available or circumstances change. For more information regarding loss contingencies, refer to Note 11—Commitments and Contingencies. Derivative Instruments and Hedging Activities
The Company periodically enters into derivative contracts to manage its exposure to commodity price, interest rate, and/or foreign exchange risk. These derivative contracts, which are generally placed with major financial institutions, may take the form of forward contracts, futures contracts, swaps, or options.
All derivative instruments, other than those that meet the normal purchases and sales exception, are recorded on the Company’s consolidated balance sheet as either an asset or liability measured at fair value. The Company does not apply hedge accounting to any of its derivative instruments. As a result, gains and losses from the change in fair value of derivative instruments are reported in current-period income as “Derivative instrument losses, net” under “Revenues and Other” in the statement of consolidated operations. Refer to Note 4—Derivative Instruments and Hedging Activities for further information. Income Taxes
The Company records deferred tax assets and liabilities to account for the expected future tax consequences of events that have been recognized in the financial statements and tax returns. The Company routinely assesses the ability to realize its deferred tax assets. If the Company concludes that it is more likely than not that some or all of the deferred tax assets will not be realized, the tax asset is reduced by a valuation allowance. Numerous judgments and assumptions are inherent in the determination of future taxable income, including factors such as future operating conditions (particularly as related to prevailing oil and gas prices) and changing tax laws.
Earnings Per Share
The Company’s basic earnings per share (EPS) amounts have been computed based on the weighted-average number of shares of common stock outstanding for the period. Diluted EPS reflects potential dilution, using the treasury stock method, which assumes that options were exercised and restricted stock was fully vested. The Company uses the “if-converted method” to determine the potential dilutive effect of an assumed exchange of the outstanding Preferred Units of Altus Midstream LP for shares of ALTM’s common stock. The impact to net income (loss) attributable to common stock on an assumed conversion of the redeemable noncontrolling Preferred Units interest in Altus Midstream LP were anti-dilutive for the years ended December 31, 2021, 2020, and 2019.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Stock-Based Compensation
The Company grants various types of stock-based awards including stock options, restricted stock, cash-settled restricted stock units, and performance-based awards. Stock compensation equity awards granted are valued on the date of grant and are expensed over the required vesting service period. Cash-settled awards are recorded as a liability based on the Company’s stock price and remeasured at the end of each reporting period over the vesting terms. The Company has elected to account for forfeitures as they occur rather than estimate expected forfeitures. The Company’s stock-based compensation plans and related accounting policies are defined and described more fully in Note 14—Capital Stock. Treasury Stock
The Company follows the weighted-average-cost method of accounting for treasury stock transactions.
Transaction, Reorganization, and Separation (TRS)
In recent years, the Company streamlined its portfolio through strategic divestitures and centralized certain operational activities in an effort to capture greater efficiencies and cost savings through shared services. In light of the continued streamlining of the Company’s asset portfolio through divestitures and strategic transactions, in late 2019 management initiated a comprehensive redesign of the Company’s organizational structure and operations. Efforts related to this organization were substantially completed during 2020. The Company incurred and paid a cumulative total of $79 million of reorganization costs through December 31, 2020. An additional $17 million of reorganization costs were incurred during the year ended December 31, 2021, primarily related to ongoing consulting and separation activities in the Company’s international operations.
The Company recorded $22 million, $54 million, and $50 million of TRS costs in 2021, 2020, and 2019, respectively. TRS costs incurred in 2021 relate to $11 million for consulting costs associated with the reorganization, $6 million of separation costs associated with the reorganization, and $5 million for costs associated with the BCP Business Combination. TRS costs incurred in 2020 relate to $51 million of separation costs associated with the reorganization, $2 million for transaction consulting fees, and $1 million of office closure costs. TRS costs incurred in 2019 associated with the reorganization include $26 million for employee termination benefits and $2 million for consulting fees. The Company also incurred $15 million of expenses for employee termination benefits and office closures associated with other reorganization efforts and $7 million for consulting and legal fees on various transactions throughout 2019.
New Pronouncements Issued But Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848),” which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (LIBOR) or by another reference rate expected to be discontinued. In January 2021, the FASB issued ASU 2021-01, which clarified the scope and application of the original guidance. The guidance was effective beginning March 12, 2020 and can be applied prospectively through December 31, 2022. The Company is evaluating whether to apply any of these expedients and, if elected, will adopt these standards when LIBOR is discontinued.
In August 2020, the FASB issued ASU 2020-06, “Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40)” to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. This update is effective for the Company beginning in the first quarter of 2022 using either the modified or fully retrospective method with a cumulative effect adjustment to the opening balance of retained earnings. The Company does not believe it will have a material impact on its financial statements.
2. ACQUISITIONS AND DIVESTITURES
2022 Activity
In February 2022, the Company entered into an agreement to sell certain non-core mineral rights in the Delaware Basin for cash consideration of approximately $805 million, subject to customary post-closing adjustments. The transaction is expected to close in late February 2022, subject to regulatory approvals.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
2021 Activity
During the second quarter of 2021, the Company completed the sale of certain non-core assets in the Permian Basin with a net carrying value of $157 million for cash proceeds of $176 million and the assumption of asset retirement obligations of $44 million. The Company recognized a gain of approximately $63 million in connection with the sale. The transaction is subject to normal post-closing adjustments.
During 2021, the Company also completed the sale of other non-core assets and leasehold, primarily in the Permian Basin, in multiple transactions for total cash proceeds of $80 million. The Company recognized a gain of approximately $4 million upon closing of these transactions.
During 2021, the Company completed leasehold and property acquisitions, primarily in the Permian Basin, for total cash consideration of $9 million.
On October 21, 2021, ALTM announced that it will combine with privately-owned BCP Raptor Holdco LP (BCP) in an all-stock transaction (the BCP Business Combination). BCP is the parent company of EagleClaw Midstream, which includes EagleClaw Midstream Ventures, the Caprock Midstream and Pinnacle Midstream businesses, and a 26.7 percent interest in the Permian Highway Pipeline.
As consideration for the transaction, ALTM will issue 50 million shares of Class C Common Stock (and its subsidiary, Altus Midstream LP, will issue a corresponding number of common units) to BCP’s unitholders, which are principally funds affiliated with Blackstone and I Squared Capital. The transaction is expected to close during the first quarter of 2022, following completion of customary closing conditions.
2020 Activity
During 2020, the Company completed leasehold and property acquisitions, primarily in the Permian Basin, for total cash consideration of $4 million. Also during 2020, the Company completed the sale of certain non-core assets and leasehold, primarily in the Permian Basin, in multiple transactions for total cash proceeds of $87 million, and recognized a gain of $13 million.
2019 Activity
U.S. Divestitures and Leasehold, Property, and Other Acquisitions
In the third quarter of 2019, the Company completed the sale of non-core assets in the Western Anadarko Basin of Oklahoma and Texas for aggregate cash proceeds of approximately $322 million and the assumption of asset retirement obligations of $49 million. These assets met the criteria to be classified as held for sale in the second quarter of 2019. Accordingly, the Company performed a fair value assessment of the assets and recorded impairments of $240 million to the carrying value of proved and unproved oil and gas properties, other fixed assets, and working capital. The transaction closed in the third quarter of 2019, and the Company recognized a $7 million loss in connection with the sale.
In the second quarter of 2019, the Company completed the sale of certain non-core assets in Oklahoma that had a net carrying value of $206 million for aggregate cash proceeds of approximately $223 million. The Company recognized a $17 million gain in connection with the sale.
During 2019, the Company also completed the sale of certain other non-core producing assets, GPT assets, and leasehold acreage, primarily in the Permian Basin, in multiple transactions for total cash proceeds of $73 million. The Company recognized a net gain of approximately $33 million upon closing of these transactions.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
During 2019, the Company completed leasehold and property acquisitions, primarily in the Permian Basin, for total cash consideration of $40 million.
Suriname Joint Venture Agreement
In December 2019, the Company entered into a joint venture agreement with TotalEnergies (formerly, Total S.A.) to explore and develop Block 58 offshore Suriname. Under the terms of the agreement, the Company and TotalEnergies each hold a 50 percent working interest in Block 58. Pursuant to the agreement, the Company operated the drilling of the first four wells, the Maka Central-1, Sapakara West-1, Kwaskwasi-1, and Keskesi East-1, and subsequently transferred operatorship of Block 58 to TotalEnergies on January 1, 2021. The Company continued to operate the Keskesi exploration well until completion of drilling operations during the first half of 2021.
In connection with the agreement, the Company received $100 million from TotalEnergies upon closing in the fourth quarter of 2019 and $79 million upon satisfying certain closing conditions in the first quarter of 2020 for reimbursement of 50 percent of all costs incurred on Block 58 as of December 31, 2019. All proceeds were applied against the carrying value of the Company’s Suriname properties and associated inventory. The Company recognized a $19 million gain in the first quarter of 2020 associated with the transaction.
Key terms of the agreement provide for TotalEnergies to pay a proportionately larger share of appraisal and development costs, which would be recoverable through hydrocarbon participation. For the first $10 billion of gross capital expenditures, TotalEnergies pays 87.5 percent, and the Company pays 12.5 percent; for the next $5 billion in gross expenditures, TotalEnergies pays 75 percent and the Company pays 25 percent; and for all gross expenditures above $15 billion, TotalEnergies pays 62.5 percent and the Company pays 37.5 percent. The Company will also receive various other forms of consideration, including a $75 million cash payment upon achieving first oil production, and future contingent royalty payments from successful joint development projects.
3. CAPITALIZED EXPLORATORY WELL COSTS
The following summarizes the changes in capitalized exploratory well costs for the years ended December 31, 2021, 2020, and 2019. Additions pending the determination of proved reserves excludes amounts capitalized and subsequently charged to expense within the same year.
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
| | (In millions) |
| Capitalized well costs at beginning of year | | $ | 197 | | | $ | 141 | | | $ | 159 | |
| Additions pending determination of proved reserves | | 174 | | | 226 | | | 286 | |
| Divestitures and other | | — | | | (38) | | | (100) | |
| Reclassifications to proved properties | | (40) | | | (56) | | | (179) | |
| Charged to exploration expense | | (10) | | | (76) | | | (25) | |
| Capitalized well costs at end of year | | $ | 321 | | | $ | 197 | | | $ | 141 | |
The following provides an aging of capitalized exploratory well costs and the number of projects for which exploratory well costs have been capitalized for a period greater than one year since the completion of drilling as of December 31:
| | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
| | (In millions) |
| Exploratory well costs capitalized for a period of one year or less | | $ | 198 | | | $ | 184 | | | $ | 108 | |
| Exploratory well costs capitalized for a period greater than one year | | 123 | | | 13 | | | 33 | |
| Capitalized well costs at end of year | | $ | 321 | | | $ | 197 | | | $ | 141 | |
| | | | | | |
| Number of projects with exploratory well costs capitalized for a period greater than one year | | 13 | | | 5 | | | 2 | |
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Projects with suspended exploratory well costs capitalized for a period greater than one year since the completion of drilling are those identified by management as exhibiting sufficient quantities of hydrocarbons to justify potential development. Management is actively pursuing efforts to assess whether reserves can be attributed to these projects. Suspended exploratory well costs capitalized for a period greater than one year since the completion of drilling were $123 million at December 31, 2021, with $90 million related to Suriname. Analysis of well results is ongoing as is additional exploration and appraisal activity. Exploration and appraisal well activity in the North Sea accounted for $24 million, where subsurface evaluation and project viability assessment is ongoing. The remaining projects pertain to onshore drilling activity in Egypt for which continued testing and evaluation is ongoing.
Suspended exploratory well costs capitalized for a period greater than one year since the completion of drilling at December 31, 2020 and 2019, relate to onshore projects in Egypt and the U. S. Drilling activity and testing has continued for several of these projects in Egypt throughout 2021, and are currently being evaluated for potential development. The costs related to the U.S. projects were charged to exploration expense based on management’s assessment and development efforts.
In December 2019, the Company entered into the joint venture agreement with TotalEnergies, pursuant to which the Company sold 50 percent of its ownership interest in Block 58 to TotalEnergies. Proceeds received from TotalEnergies upon closing were applied against the carrying value of its Suriname properties.
The following table summarizes aging by geographic area of those exploratory well costs that, as of December 31, 2021, have been capitalized for a period greater than one year, categorized by the year in which drilling was completed:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total | | 2020 | | 2019 | | 2018
and Prior |
| | | | | | | | |
| | (In millions) |
| Suriname | | $ | 90 | | | $ | 90 | | | $ | — | | | $ | — | |
| Egypt | | 9 | | | — | | | — | | | 9 | |
| North Sea | | 24 | | | 24 | | | — | | | — | |
| | $ | 123 | | | $ | 114 | | | $ | — | | | $ | 9 | |
4. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Objectives and Strategies
The Company is exposed to fluctuations in crude oil and natural gas prices on the majority of its worldwide production, as well as transactions denominated in foreign currencies. The Company manages the variability in its cash flows by occasionally entering into derivative transactions on a portion of its crude oil and natural gas production and foreign currency transactions. The Company utilizes various types of derivative financial instruments, including forward contracts, futures contracts, swaps, and options, to manage fluctuations in cash flows resulting from changes in commodity prices or foreign currency values.
Counterparty Risk
The use of derivative instruments exposes the Company to credit loss in the event of nonperformance by the counterparty. To reduce the concentration of exposure to any individual counterparty, the Company utilizes a diversified group of investment-grade rated counterparties, primarily financial institutions, for its derivative transactions. As of December 31, 2021, the Company had derivative positions with 10 counterparties. The Company monitors counterparty creditworthiness on an ongoing basis; however, it cannot predict sudden changes in counterparties’ creditworthiness. In addition, even if such changes are not sudden, the Company may be limited in its ability to mitigate an increase in counterparty credit risk. Should one of these counterparties not perform, the Company may not realize the benefit of some of its derivative instruments resulting from lower commodity prices or changes in currency exchange rates.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Derivative Instruments
Commodity Derivative Instruments
As of December 31, 2021, the Company had the following open natural gas financial basis swap contracts:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Basis Swap Purchased | | Basis Swap Sold |
| Production Period | | Settlement Index | | MMBtu
(in 000’s) | | Weighted Average Price Differential | | MMBtu
(in 000’s) | | Weighted Average Price Differential |
| January—December 2022 | | NYMEX Henry Hub/IF Waha | | 43,800 | | | $(0.45) | | — | | | — |
| January—December 2022 | | NYMEX Henry Hub/IF HSC | | — | | | — | | 43,800 | | | $(0.08) |
| January—December 2023 | | NYMEX Henry Hub/IF Waha | | 29,200 | | | $(0.40) | | — | | | — |
| January—December 2023 | | NYMEX Henry Hub/IF HSC | | — | | | — | | 29,200 | | | $0.02 |
Foreign Currency Derivative Instruments
The Company has open foreign currency costless collar contracts in GBP/USD for £15 million per month for the calendar year 2022 with a weighted average floor and ceiling price of $1.39 and $1.29, respectively.
Embedded Derivatives
Altus Preferred Units Embedded Derivative
During the second quarter of 2019, Altus Midstream LP issued and sold the Preferred Units. Certain redemption features embedded within the Preferred Units require bifurcation and measurement at fair value. For further discussion of this derivative, refer to “Fair Value Measurements” below and Note 13—Redeemable Noncontrolling Interest — Altus. Pipeline Capacity Embedded Derivatives
During the fourth quarter of 2019 and first quarter of 2020, the Company entered into an agreement to assign a portion of its contracted capacity under an existing transportation agreement to a third party. Embedded in this agreement is an arrangement under which the Company has the potential to receive payments calculated based on pricing differentials between Houston Ship Channel and Waha during calendar years 2020 and 2021. This feature requires bifurcation and measurement of the change in market value for each period. Unrealized gains or losses in the fair value of this feature are recorded as “Derivative instrument gains (losses), net” under “Revenues and Other” in the statement of consolidated operations. Any proceeds received are deferred and reflected in income over the original tenure of the host contract.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Fair Value Measurements
The following table presents the Company’s derivative assets and liabilities measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using | | | | | | |
| | Quoted Price in Active Markets (Level 1) | | Significant Other Inputs (Level 2) | | Significant Unobservable Inputs
(Level 3) | | Total Fair Value | | Netting(1) | | Carrying Amount |
| | (In millions) |
| December 31, 2021 | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | |
| Commodity derivative instruments | | $ | — | | | $ | 10 | | | $ | — | | | $ | 10 | | | $ | — | | | $ | 10 | |
| Pipeline capacity embedded derivatives | | — | | | 46 | | | — | | | 46 | | | — | | | 46 | |
| Preferred Units embedded derivative | | — | | | — | | | 57 | | | 57 | | | — | | | 57 | |
| December 31, 2020 | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | |
| | | | | | | | | | | | |
| Commodity derivative instruments | | $ | — | | | $ | 11 | | | $ | — | | | $ | 11 | | | $ | — | | | $ | 11 | |
| | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | |
| Pipeline capacity embedded derivatives | | — | | | 53 | | | — | | | 53 | | | — | | | 53 | |
| Preferred Units embedded derivative | | — | | | — | | | 139 | | | 139 | | | — | | | 139 | |
| | | | | | | | | | | | |
(1)The derivative fair values are based on analysis of each contract on a gross basis, excluding the impact of netting agreements with counterparties.
The fair values of the Company’s derivative instruments and pipeline capacity embedded derivatives are not actively quoted in the open market. The Company primarily uses a market approach to estimate the fair values of these derivatives on a recurring basis, utilizing futures pricing for the underlying positions provided by a reputable third party, a Level 2 fair value measurement.
The fair value of the Preferred Units embedded derivative is calculated using an income approach, a Level 3 fair value measurement. The fair value determination is based on a range of factors, including expected future interest rates using the Black-Karasinski model, Altus’ imputed interest rate, interest rate volatility, the expected timing of periodic cash distributions, any anticipated early redemptions of the Preferred Units, the estimated timing for the potential exercise of the exchange option, and anticipated dividend yields of the Preferred Units. As of the December 31, 2021 valuation date, the Company used the forward B-rated Energy Bond Yield curve to develop the following key unobservable inputs used to value this embedded derivative:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quantitative Information About Level 3 Fair Value Measurements |
| | Fair Value at December 31, 2021 | | Valuation Technique | | Significant Unobservable Inputs | | Range/Value |
| | (In millions) | | | | | | |
| Preferred Units embedded derivative | | $ | 57 | | | Option Model | | Altus’ Imputed Interest Rate | | 5.54-11.21% |
| | | | | | Interest Rate Volatility | | 40.08% |
In addition, no early redemptions of the Preferred Units were assumed for the December 31, 2020 valuation. As a result of the announced BCP Business Combination and associated publicly filed information, the December 31, 2021 valuation assumed 250,000 Preferred Units would be redeemed before the Preferred Unit holders had the right to exercise their exchange option. This early redemption assumption significantly reduced the value of the derivative liability year over year.
A one percent increase in the imputed interest rate assumption would significantly increase the value of the embedded derivative as of December 31, 2021, while a one percent decrease would lead to a similar decrease in value as of December 31, 2021. The assumed expected timing until exercise of the exchange option at December 31, 2021 was 4.45 years.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Derivative Activity Recorded in the Consolidated Balance Sheet
All derivative instruments are reflected as either assets or liabilities at fair value in the consolidated balance sheet. These fair values are recorded by netting asset and liability positions where counterparty master netting arrangements contain provisions for net settlement. The carrying value of the Company’s derivative assets and liabilities and their locations on the consolidated balance sheet are as follows:
| | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2021 | | 2020 |
| | | | |
| | (In millions) |
| Current Assets: Other current assets | | $ | — | | | $ | 6 | |
| Other Assets: Deferred charges and other | | — | | | 5 | |
| Total derivative assets | | $ | — | | | $ | 11 | |
| | | | |
| Current Liabilities: Other current liabilities | | $ | 4 | | | $ | — | |
| Deferred Credits and Other Noncurrent Liabilities: Other | | 109 | | | 192 | |
| Total derivative liabilities | | $ | 113 | | | $ | 192 | |
Derivative Activity Recorded in the Statement of Consolidated Operations
The following table summarizes the effect of derivative instruments on the Company’s statement of consolidated operations:
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| | | | | | |
| | | (In millions) |
| Realized: | | | | | | |
| Commodity derivative instruments | | $ | 25 | | | $ | (135) | | | $ | 27 | |
| | | | | | |
| Foreign currency derivative instruments | | — | | | (1) | | | — | |
| Treasury-lock | | — | | | — | | | (18) | |
| Realized gain (loss), net | | 25 | | | (136) | | | 9 | |
| Unrealized: | | | | | | |
| Commodity derivative instruments | | (20) | | | 11 | | | (44) | |
| Pipeline capacity embedded derivatives | | 7 | | | (61) | | | 8 | |
| Foreign currency derivative instruments | | — | | | (1) | | | 1 | |
| Preferred Units embedded derivative | | 82 | | | (36) | | | (9) | |
| Unrealized gain (loss), net | | 69 | | | (87) | | | (44) | |
| Derivative instrument gains (losses), net | | $ | 94 | | | $ | (223) | | | $ | (35) | |
Derivative instrument gains and losses are recorded in “Derivative instrument gains (losses), net” under “Revenues and Other” in the Company’s statement of consolidated operations. Unrealized gains (losses) for derivative activity recorded in the statement of consolidated operations are reflected in the statement of consolidated cash flows separately as “Unrealized derivative instrument losses (gains), net” in “Adjustments to reconcile net income (loss) to net cash provided by operating activities.”
The Company seeks to maintain a balance between “first of month” and “gas daily pricing” for its U.S. natural gas portfolio and sales activities in a given month as part of its ordinary course of business. This is typically implemented through a combination of physical and financial contracts that settle monthly.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
5. OTHER CURRENT ASSETS
The following table provides detail of the Company’s other current assets as of December 31:
| | | | | | | | | | | | | | |
| | 2021 | | 2020 |
| | | (In millions) |
| Inventories | | $ | 473 | | | $ | 492 | |
| Drilling advances | | 55 | | | 113 | |
| Prepaid assets and other | | 56 | | | 71 | |
| Current decommissioning security for sold Gulf of Mexico assets | | 100 | | | — | |
| Total Other current assets | | $ | 684 | | | $ | 676 | |
6. EQUITY METHOD INTERESTS
As of December 31, 2021 and 2020, the Company, through its ownership of Altus, has the following equity method interests in four Permian Basin long-haul pipeline entities, which are accounted for under the equity method of accounting. For each of the equity method interests, Altus has the ability to exercise significant influence based on certain governance provisions and its participation in activities and decisions that impact the management and economic performance of the equity method interests.
| | | | | | | | | | | | | | | | | | | | |
| | Interest | | 2021 | | 2020 |
| | | | (In millions) |
| Gulf Coast Express Pipeline LLC | | 16.0 | % | | $ | 274 | | | $ | 284 | |
| EPIC Crude Holdings, LP | | 15.0 | % | | — | | | 176 | |
| Permian Highway Pipeline LLC | | 26.7 | % | | 630 | | | 615 | |
| Shin Oak Pipeline (Breviloba, LLC) | | 33.0 | % | | 461 | | | 480 | |
| Total Altus equity method interests | | | | $ | 1,365 | | | $ | 1,555 | |
As of December 31, 2021 and 2020, unamortized basis differences included in the equity method interest balances were $34 million and $38 million, respectively. These amounts represent differences in Altus’ initial costs paid to acquire the equity method interests and its initial underlying equity in the respective entities, as well as capitalized interest related to Permian Highway Pipeline (PHP) construction costs. Unamortized basis differences are amortized into equity income (loss) over the useful lives of the underlying pipeline assets when they are placed into service.
The following table presents the activity in Altus’ equity method interests for the years ended December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gulf Coast Express Pipeline LLC | | EPIC Crude Holdings, LP | | Permian Highway Pipeline LLC | | Breviloba, LLC | | Total |
| | | | | | | | | | |
| | (In millions) |
| Balance at December 31, 2019 | | $ | 291 | | | $ | 163 | | | $ | 311 | | | $ | 493 | | | $ | 1,258 | |
| Capital contributions | | 2 | | | 29 | | | 296 | | | — | | | 327 | |
| Distributions | | (51) | | | — | | | — | | | (46) | | | (97) | |
Capitalized interest(1) | | — | | | — | | | 8 | | | — | | | 8 | |
| Equity income (loss), net | | 42 | | | (16) | | | — | | | 33 | | | 59 | |
| | | | | | | | | | |
| Balance at December 31, 2020 | | 284 | | | 176 | | | 615 | | | 480 | | | 1,555 | |
| | | | | | | | | | |
| Capital contributions | | — | | | 2 | | | 26 | | | — | | | 28 | |
| Distributions | | (50) | | | — | | | (74) | | | (49) | | | (173) | |
| | | | | | | | | | |
| Equity income (loss), net | | 40 | | | (19) | | | 63 | | | 30 | | | 114 | |
| Accumulated other comprehensive loss | | — | | | 1 | | | — | | | — | | | 1 | |
Impairment(2) | | — | | | (160) | | | — | | | — | | | (160) | |
| Balance at December 31, 2021 | | $ | 274 | | | $ | — | | | $ | 630 | | | $ | 461 | | | $ | 1,365 | |
(1)Altus’ proportionate share of the PHP construction costs is funded with Altus’ revolving credit facility. Accordingly, Altus capitalized $8 million of related interest expense during 2020, which is included in the basis of the PHP equity interest.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Summarized Combined Financial Information
The following presents summarized information of combined statement of operations for Altus’ equity method interests (on a 100 percent basis):
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2021 | | 2020 | | 2019(1) |
| | | | | | |
| | (In millions) |
| Operating revenues | | $ | 1,082 | | | $ | 707 | | | $ | 302 | |
| | | | | | |
| Operating income | | 548 | | | 331 | | | 121 | |
| Net income | | 468 | | | 256 | | | 120 | |
| Other comprehensive income (loss) | | 4 | | | 3 | | | (8) | |
(1)Although Altus’ interests in EPIC Crude Holdings, LP, Permian Highway Pipeline LLC, and Breviloba, LLC were acquired in March, May, and July 2019, respectively, the combined financial results are presented for the full year ended December 31, 2019 for comparability.
The following presents summarized combined balance sheet information for Altus’ equity method interests (on a 100 percent basis) as of December 31:
| | | | | | | | | | | | | | |
| | 2021 | | 2020 |
| | | | |
| | (In millions) |
| Current assets | | $ | 280 | | | $ | 260 | |
| Noncurrent assets | | 7,445 | | | 7,678 | |
| Total assets | | $ | 7,725 | | | $ | 7,938 | |
| | | | |
| Current liabilities | | $ | 153 | | | $ | 206 | |
| Noncurrent liabilities | | 1,193 | | | 1,191 | |
| Equity | | 6,379 | | | 6,541 | |
| Total liabilities and equity | | $ | 7,725 | | | $ | 7,938 | |
7. OTHER CURRENT LIABILITIES
The following table provides detail of the Company’s other current liabilities as of December 31:
| | | | | | | | | | | | | | |
| | | 2021 | | 2020 |
| | | | |
| | | (In millions) |
| Accrued operating expenses | | $ | 129 | | | $ | 91 | |
| Accrued exploration and development | | 207 | | | 167 | |
| | | | |
| Accrued compensation and benefits | | 292 | | | 170 | |
| Accrued interest | | 107 | | | 140 | |
| Accrued income taxes | | 28 | | | 25 | |
| Current asset retirement obligation | | 41 | | | 56 | |
| Current operating lease liability | | 99 | | | 116 | |
| | | | |
| Current decommissioning contingency for sold Gulf of Mexico properties | | 100 | | | — | |
| Other | | 168 | | | 97 | |
| Total Other current liabilities | | $ | 1,171 | | | $ | 862 | |
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
8. ASSET RETIREMENT OBLIGATION
The following table describes changes to the Company’s asset retirement obligation (ARO) liability:
| | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2021 | | 2020 |
| | | (In millions) |
| Asset retirement obligation at beginning of the year | | $ | 1,944 | | | $ | 1,858 | |
| Liabilities incurred | | 3 | | | 10 | |
| | | | |
| Liabilities divested | | (44) | | | (26) | |
| Liabilities settled | | (32) | | | (30) | |
| Accretion expense | | 113 | | | 109 | |
| Revisions in estimated liabilities | | 146 | | | 23 | |
| | | | |
| Asset retirement obligation at end of the year | | 2,130 | | | 1,944 | |
| Less current portion | | (41) | | | (56) | |
| Asset retirement obligation, long-term | | $ | 2,089 | | | $ | 1,888 | |
The ARO liability reflects the estimated present value of the amount of dismantlement, removal, site reclamation, and similar activities associated with the Company’s oil and gas properties and other long-lived assets. The Company utilizes current retirement costs to estimate the expected cash outflows for retirement obligations. The Company estimates the ultimate productive life of the properties, a risk-adjusted discount rate, and an inflation factor in order to determine the current present value of this obligation. To the extent future revisions to these assumptions impact the present value of the existing ARO liability, a corresponding adjustment is made to the oil and gas property or other long-lived asset balance.
During 2021 and 2020, the Company recorded $3 million and $10 million, respectively, in abandonment liabilities resulting from the Company’s exploration and development capital program. Liabilities settled primarily relate to individual properties, platforms, and facilities plugged and abandoned during the period. During 2021, approximately $146 million net abandonment costs were revised upward to reflect changes in estimates of higher current activity costs and long-term inflation assumptions, primarily in the U.S. During 2020, approximately $23 million net abandonment costs were revised upward to reflect changes in estimates of timing and costs, primarily in the North Sea.
9. DEBT AND FINANCING COSTS
Overview
The debt of Apache and Altus Midstream LP is senior unsecured debt and has equal priority with respect to the payment of both principal and interest. All indentures of Apache for the notes and debentures described below place certain restrictions on Apache, including limits on Apache’s ability to incur debt secured by certain liens. Certain of these indentures also restrict Apache’s ability to enter into certain sale and leaseback transactions and give holders the option to require Apache to repurchase outstanding notes and debentures upon certain changes in control. None of the indentures contain prepayment obligations in the event of a decline in credit ratings.
On June 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 due January 15, 2030 and $400 million in aggregate principal amount of 5.350% notes due July 1, 2049. The notes are redeemable at any time, in whole or in part, at Apache’s option, subject to a make-whole premium. The net proceeds from the sale of the notes were used to purchase certain outstanding notes in cash tender offers and for general corporate purposes.
On June 21, 2019, Apache closed cash tender offers for certain outstanding notes. Apache accepted for purchase $932 million aggregate principal amount of certain notes covered by the tender offers. Apache paid holders an aggregate cash purchase price of approximately $1.0 billion reflecting principal, the net premium to par, early tender premium, and accrued and unpaid interest. The Company recorded a net loss of $75 million on extinguishment of debt, including $7 million of unamortized debt issuance costs and discount, in connection with the note purchases.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
On August 17, 2020, Apache 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, at Apache’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 Apache’s senior revolving credit facility, and for general corporate purposes.
On August 18, 2020, Apache 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 cash purchase price of $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 2020, Apache purchased in the open market and canceled senior notes issued under its indentures in an aggregate principal amount of $588 million for an aggregate purchase price of $428 million in cash, including accrued interest and broker fees, reflecting a discount to par of an aggregate $168 million. These repurchases resulted in a $158 million net gain on extinguishment of debt. The net gain includes an acceleration of related discount and debt issuance costs. Additionally, on November 3, 2020, Apache redeemed the remaining $183 million of outstanding 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. The repurchases were financed by borrowings under Apache’s revolving credit facility.
During the quarter ended September 30, 2021, Apache closed cash tender offers for certain outstanding notes, accepting for purchase $1.7 billion aggregate principal amount of notes covered by the tender offers. Apache paid holders an aggregate cash purchase price of $1.8 billion, reflecting principal, premium to par, and accrued and unpaid interest. The Company recognized a $105 million loss on extinguishment of debt, including $11 million of unamortized debt discount and issuance costs, in connection with the note purchases.
During 2021, Apache purchased in the open market and canceled senior notes issued under its indentures in an aggregate principal amount of $22 million for an aggregate purchase price of $20 million in cash, including accrued interest and broker fees, reflecting a discount to par of an aggregate $2 million. The Company recognized a $1 million net gain on extinguishment of debt as part of these transactions.
The Company records gains and losses on extinguishment of debt in “Financing costs, net” in the Company’s statement of consolidated operations.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the carrying value of the Company’s debt:
| | | | | | | | | | | | | | |
| | | December 31, |
| | | 2021 | | 2020 |
| | | | |
| | | (In millions) |
| | | | |
| | | | |
3.25% notes due 2022(1)(2) | | $ | 213 | | | $ | 213 | |
2.625% notes due 2023(2) | | 123 | | | 123 | |
4.625% notes due 2025(2) | | 500 | | | 500 | |
7.7% notes due 2026 | | 79 | | | 79 | |
7.95% notes due 2026 | | 133 | | | 133 | |
4.875% due 2027(2) | | 378 | | | 750 | |
4.375% notes due 2028(2) | | 703 | | | 993 | |
7.75% notes due 2029(2)(3) | | 235 | | | 235 | |
4.25% notes due 2030(2) | | 580 | | | 580 | |
6.0% notes due 2037(2) | | 443 | | | 443 | |
5.1% notes due 2040(2) | | 1,333 | | | 1,333 | |
5.25% notes due 2042(2) | | 399 | | | 399 | |
4.75% notes due 2043(2) | | 428 | | | 1,133 | |
4.25% notes due 2044(2) | | 221 | | | 559 | |
7.375% debentures due 2047 | | 150 | | | 150 | |
5.35% notes due 2049(2) | | 387 | | | 390 | |
7.625% debentures due 2096 | | 39 | | | 39 | |
Notes and debentures before unamortized discount and debt issuance costs(4) | | 6,344 | | | 8,052 | |
| Commercial paper | | — | | | — | |
Altus credit facility(5) | | 657 | | | 624 | |
Apache credit facility(5) | | 542 | | | 150 | |
| Finance lease obligations | | 36 | | | 38 | |
| Unamortized discount | | (30) | | | (35) | |
| Debt issuance costs | | (39) | | | (57) | |
| Total debt | | 7,510 | | | 8,772 | |
| Current maturities | | (215) | | | (2) | |
| Long-term debt | | $ | 7,295 | | | $ | 8,770 | |
(1)On January 18, 2022, Apache redeemed the 3.25% senior notes due April 15, 2022, at a redemption price equal to 100 percent of their principal amount, plus accrued and unpaid interest to the redemption date.
(2)These notes are redeemable, as a whole or in part, at Apache’s option, subject to a make-whole premium, except that the 7.75% notes due 2029 are only redeemable as whole for principal and accrued interest in the event of certain Canadian tax law changes. The remaining notes and debentures are not redeemable.
(3)Assumed by Apache in August 2017 as permitted by terms of these notes originally issued by a subsidiary and guaranteed by Apache.
(4)The fair values of Apache’s notes and debentures were $7.1 billion and $8.5 billion as of December 31, 2021 and 2020, respectively. The Company uses a market approach to determine the fair value of its notes and debentures using estimates provided by an independent investment financial data services firm (a Level 2 fair value measurement).
(5)The carrying amount of borrowings on credit facilities approximates fair value because the interest rates are variable and reflective of market rates.
Maturities for the Company’s notes and debentures excluding discount and debt issuance costs as of December 31, 2021 are as follows:
| | | | | |
| | (In millions) |
| 2022 | $ | 213 | |
| 2023 | 123 | |
| 2024 | — | |
| 2025 | 500 | |
| 2026 | 212 | |
| Thereafter | 5,296 | |
| Notes and debentures, excluding discounts and debt issuance costs | $ | 6,344 | |
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Uncommitted Lines of Credit
The Company from time to time has and uses uncommitted credit and letter of credit facilities for working capital and credit support purposes. As of December 31, 2021 and 2020, there were no outstanding borrowings under these facilities. As of December 31, 2021, there were £117 million and $17 million in letters of credit outstanding under these facilities. As of December 31, 2020, there were £34 million and $17 million in letters of credit outstanding under these facilities.
Unsecured Committed Bank Credit Facilities
In March 2018, Apache 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. Apache 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 December 31, 2021. The facility is for general corporate purposes. As of December 31, 2021, there were $542 million of borrowings and an aggregate of £748 million and $20 million in letters of credit outstanding under this facility. As of December 31, 2020, there were $150 million of borrowings and an aggregate of £633 million and $40 million in 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 Apache’s credit rating from BBB to BB+ on March 26, 2020.
At Apache’s option, the interest rate per annum for borrowings under the 2018 facility is either a base rate, as defined, plus a margin, or the LIBOR, plus a margin. Apache also pays quarterly a facility fee at a per annum rate on total commitments. The margins and the facility fee vary based upon Apache’s senior long-term debt rating. At December 31, 2021, the base rate margin was 0.5 percent, the LIBOR margin was 1.50 percent, and the facility fee was 0.25 percent. A commission is payable quarterly to lenders on the face amount of each outstanding letter of credit at a per annum rate equal to the LIBOR margin then in effect. Customary letter of credit fronting fees and other charges are payable to issuing banks.
The financial covenants of the 2018 credit facility require Apache to maintain an adjusted debt-to-capital ratio of not greater than 60 percent at the end of any fiscal quarter. For purposes of this calculation, capital excludes the effects of non-cash write-downs, impairments, and related charges occurring after June 30, 2015.
The 2018 facility’s negative covenants restrict the ability of Apache and its subsidiaries to create liens securing debt on its hydrocarbon-related assets, with exceptions for liens typically arising in the oil and gas industry; liens securing debt incurred to finance the acquisition, construction, improvement, or capital lease of assets, provided that such debt, when incurred, does not exceed the subject purchase price and costs, as applicable, and related expenses; liens on subsidiary assets located outside of the U. S. and Canada; and liens arising as a matter of law, such as tax and mechanics’ liens. Apache also may incur liens on assets if debt secured thereby does not exceed 15 percent of Apache’s consolidated net tangible assets, or approximately $1.9 billion as of December 31, 2021. Negative covenants also restrict Apache’s ability to merge with another entity unless it is the surviving entity, dispose of substantially all of its assets, and guarantee debt of non-consolidated entities in excess of the stated threshold.
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 December 31, 2021, there were $657 million of borrowings and a $2.0 million of letter of credit outstanding under this facility. As of December 31, 2020, there were $624 million of borrowings and no letters of credit outstanding under this facility.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The agreement for Altus Midstream LP’s credit facility, as amended, restricts distributions in respect of capital to ALTM and other unit holders in certain circumstances. Unless the Leverage Ratio is less than or equal to 4.00:1.00, the agreement limits such distributions to $30 million per calendar year until either (i) the consolidated net income of Altus Midstream LP and its restricted subsidiaries, as adjusted pursuant to the agreement, for three consecutive calendar months equals or exceeds $350 million on an annualized basis or (ii) Altus Midstream LP has a specified senior long-term debt rating; in addition, before the occurrence of one of those two events, the Leverage Ratio must be less than or equal to 5.00:1.00. In no event can any distribution be made that would, after giving effect to it on a pro forma basis, result in a Leverage Ratio greater than (i) 5.00:1.00 or (ii) for a specified period after a qualifying acquisition, 5.50:1.00. The Leverage Ratio is the ratio of (1) the consolidated indebtedness of Altus Midstream LP and its restricted subsidiaries to (2) EBITDA (as defined in the agreement) of Altus Midstream LP and its restricted subsidiaries for the 12-month period ending immediately before the determination date. The Leverage Ratio as of December 31, 2021 was less than 4.00:1.00.
The terms of Altus Midstream LP’s Preferred Units also contain certain restrictions on distributions in respect of capital, including the common units held by ALTM and any other units that rank junior to the Preferred Units with respect to distributions or distributions upon liquidation. Refer to Note 13—Redeemable Noncontrolling Interest - Altus for further information. In addition, the amount of any cash distributions to Altus Midstream LP by any entity in which it has an interest accounted for by the equity method is subject to such entity’s compliance with the terms of any debt or other agreements by which it may be bound, which in turn may impact the amount of funds available for distribution by Altus Midstream LP to its partners. The Altus Midstream LP credit facility is unsecured and is not guaranteed by the Company, Apache, or any of the Company’s other subsidiaries.
There are no clauses in either the agreement for Apache’s 2018 credit facility or for Altus Midstream LP’s 2018 credit facility that permit the lenders to accelerate payments or refuse to lend based on unspecified material adverse changes. These agreements do not have drawdown restrictions or prepayment obligations in the event of a decline in credit ratings. However, each agreement allows the lenders to accelerate payment maturity and terminate lending and issuance commitments for nonpayment and other breaches, and if a borrower or any of its subsidiaries defaults on other indebtedness in excess of the stated threshold, is insolvent, or has any unpaid, non-appealable judgment against it for payment of money in excess of the stated threshold. Lenders may also accelerate payment maturity and terminate lending and issuance commitments under the applicable agreement if Apache or Altus Midstream LP, as applicable, undergoes a specified change in control or any borrower has specified pension plan liabilities in excess of the stated threshold. Each of Apache and Altus Midstream LP was in compliance with the terms of its 2018 credit facility as of December 31, 2021.
Commercial Paper Program
As of December 31, 2020, Apache had no commercial paper outstanding. Apache did not use its commercial paper program in 2021 and terminated the program during the third quarter of 2021.
Financing Costs, Net
The following table presents the components of Apache’s financing costs, net:
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| | | (In millions) |
| Interest expense | | $ | 419 | | | $ | 438 | | | $ | 430 | |
| Amortization of debt issuance costs | | 8 | | | 8 | | | 7 | |
| Capitalized interest | | (9) | | | (12) | | | (37) | |
| Loss (gain) on extinguishment of debt | | 104 | | | (160) | | | 75 | |
| Interest income | | (8) | | | (7) | | | (13) | |
| Financing costs, net | | $ | 514 | | | $ | 267 | | | $ | 462 | |
As of December 31, 2021, the Company had $39 million of debt issuance costs, which will be charged to interest expense over the life of the related debt issuances. Discount amortization of $6 million, $7 million, and $2 million was recorded as interest expense in 2021, 2020, and 2019, respectively.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
10. INCOME TAXES
Income (loss) before income taxes is composed of the following:
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| | | (In millions) |
| U.S. | | $ | 629 | | | $ | (4,581) | | | $ | (4,397) | |
| Foreign | | 1,262 | | | (259) | | | 1,389 | |
| Total | | $ | 1,891 | | | $ | (4,840) | | | $ | (3,008) | |
The total income tax provision consists of the following:
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| | | (In millions) |
| Current income taxes: | | | | | | |
| Federal | | $ | 16 | | | $ | (2) | | | $ | 1 | |
| | | | | | |
| Foreign | | 636 | | | 178 | | | 659 | |
| | 652 | | | 176 | | | 660 | |
| Deferred income taxes: | | | | | | |
| Federal | | — | | | — | | | 67 | |
| | | | | | |
| Foreign | | (74) | | | (112) | | | (53) | |
| | (74) | | | (112) | | | 14 | |
| Total | | $ | 578 | | | $ | 64 | | | $ | 674 | |
The total income tax provision differs from the amounts computed by applying the U.S. statutory income tax rate to income (loss) before income taxes. A reconciliation of the tax on the Company’s income (loss) before income taxes and total tax expense is shown below:
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| | | (In millions) |
| Income tax expense (benefit) at U.S. statutory rate | | $ | 397 | | | $ | (1,016) | | | $ | (631) | |
State income tax, less federal effect(1) | | — | | | — | | | 1 | |
| Taxes related to foreign operations | | 298 | | | 97 | | | 328 | |
| Tax credits | | (10) | | | (13) | | | (6) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Net change in tax contingencies | | 16 | | | 1 | | | 1 | |
| Goodwill impairment | | — | | | 35 | | | — | |
| | | | | | |
Valuation allowances(1) | | (90) | | | 965 | | | 972 | |
| Tax attributable to Altus Preferred Unit limited partners | | (34) | | | (16) | | | (8) | |
| All other, net | | 1 | | | 11 | | | 17 | |
| | $ | 578 | | | $ | 64 | | | $ | 674 | |
(1)The change in state valuation allowance is included as a component of state income tax.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The net deferred income tax liability reflects the net tax impact of temporary differences between the asset and liability amounts carried on the balance sheet under GAAP and amounts utilized for income tax purposes. The net deferred income tax liability consists of the following as of December 31:
| | | | | | | | | | | | | | |
| | | 2021 | | 2020 |
| | | (In millions) |
| Deferred tax assets: | | | | |
| | | | |
| U.S. and state net operating losses | | $ | 2,497 | | | $ | 2,306 | |
| Capital losses | | 647 | | | 633 | |
| Foreign net operating losses | | 4 | | | — | |
| Tax credits and other tax incentives | | 24 | | | 33 | |
| Foreign tax credits | | 2,241 | | | 2,241 | |
| Accrued expenses and liabilities | | 152 | | | 93 | |
| Asset retirement obligation | | 712 | | | 654 | |
| Property and equipment | | 12 | | | 261 | |
| Investment in Altus Midstream LP | | 64 | | | 76 | |
| Net interest expense limitation | | 146 | | | 252 | |
| Lease liability | | 81 | | | 79 | |
| Decommissioning contingency for sold Gulf of Mexico properties | | 263 | | | — | |
| Other | | 1 | | | 1 | |
| Total deferred tax assets | | 6,844 | | | 6,629 | |
| Valuation allowance | | (5,902) | | | (5,991) | |
| Net deferred tax assets | | 942 | | | 638 | |
| Deferred tax liabilities: | | | | |
| | | | |
| | | | |
| Equity investments | | 2 | | | 4 | |
| | | | |
| Property and equipment | | 748 | | | 750 | |
| Right-of-use asset | | 77 | | | 74 | |
| Decommissioning security for sold Gulf of Mexico properties | | 164 | | | — | |
| Other | | 86 | | | 13 | |
| Total deferred tax liabilities | | 1,077 | | | 841 | |
| Net deferred income tax liability | | $ | 135 | | | $ | 203 | |
Net deferred tax assets and liabilities are included in the consolidated balance sheet as of December 31 as follows:
| | | | | | | | | | | | | | |
| | | 2021 | | 2020 |
| | | (In millions) |
| Assets: | | | | |
| | | | |
| Deferred charges and other | | $ | 13 | | | $ | 12 | |
| Liabilities: | | | | |
| | | | |
| Income taxes | | 148 | | | 215 | |
| Net deferred income tax liability | | $ | 135 | | | $ | 203 | |
The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to realize existing deferred tax assets. A significant piece of negative evidence evaluated was the pre-tax book cumulative loss incurred over the three-year period ended December 31, 2021. This cumulative loss was primarily the result of low commodity prices and oil and gas impairments during this period. Such objective evidence limits the ability to consider other subjective evidence, such as the Company’s projections for future growth.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In 2021, 2020, and 2019, the Company’s valuation allowance decreased by $89 million, increased by $1.0 billion, and increased by $1.0 billion, respectively, as detailed in the table below:
| | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| | | (In millions) |
| Balance at beginning of year | | $ | 5,991 | | | $ | 4,959 | | | $ | 3,947 | |
State(1) | | 1 | | | 67 | | | 41 | |
| U.S. | | (97) | | | 960 | | | 971 | |
| Foreign | | 7 | | | 5 | | | — | |
| | | | | | |
| Balance at end of year | | $ | 5,902 | | | $ | 5,991 | | | $ | 4,959 | |
(1)Reported as a component of state income taxes.
On December 31, 2021, the Company had net operating losses as follows:
| | | | | | | | | | | | | | |
| | | Amount | | Expiration |
| | | (In millions) | | |
| U.S. | | $ | 9,736 | | | 2021 - Indefinite |
| State | | 6,697 | | | Various |
| Foreign | | 12 | | | 2028 - Indefinite |
The Company has a U.S. net operating loss carryforward of $9.7 billion, which includes $177 million of net operating loss subject to annual limitation under Section 382 of the Internal Revenue Code (Code). Net operating losses generated in tax years beginning after 2017 are subject to an 80 percent taxable income limitation with indefinite carryover under the 2017 Tax Cuts and Jobs Act. The Company also has a net interest expense carryover of $660 million under Section 163(j) of the Code subject to indefinite carryover, a U.S. capital loss carryforward of $1.9 billion, which has a five year carryover period expiring in 2023 and a Canadian capital loss carryforward of $836 million which has an indefinite carryover. The Company has recorded a full valuation allowance against the U.S. net operating losses, the state net operating losses, the net interest expense carryover, the U.S. capital loss, and the Canadian capital loss because it is more likely than not that these attributes will not be realized.
On December 31, 2021, the Company had foreign tax credits as follows:
| | | | | | | | | | | | | | |
| | | Amount | | Expiration |
| | | (In millions) | | |
| Foreign tax credits | | $ | 2,241 | | | 2025-2026 |
The Company has a $2.2 billion U.S. foreign tax credit carryforward. The Company has recorded a full valuation allowance against the U.S. foreign tax credits listed above because it is more likely than not that these attributes will expire unutilized.
The Company accounts for income taxes in accordance with ASC Topic 740, “Income Taxes,” which prescribes a minimum recognition threshold that a tax position must meet before being recognized in the financial statements. Tax positions generally refer to a position taken in a previously filed income tax return or expected to be included in a tax return to be filed in the future that is reflected in the measurement of current and deferred income tax assets and liabilities. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| | | (In millions) |
| Balance at beginning of year | | $ | 93 | | | $ | 82 | | | $ | 24 | |
| Additions based on tax positions related to prior year | | 16 | | | — | | | 49 | |
| Additions based on tax positions related to the current year | | 7 | | | 11 | | | 9 | |
| | | | | | |
| Balance at end of year | | $ | 116 | | | $ | 93 | | | $ | 82 | |
The Company records interest and penalties related to unrecognized tax benefits as a component of income tax expense. Each quarter, the Company assesses the amounts provided for and, as a result, may increase or reduce the amount of interest and penalties. During each of the years ended December 31, 2021, 2020, and 2019, the Company recorded tax expense of $1 million for interest and penalties. At December 31, 2021, 2020, and 2019, the Company had an accrued liability for interest and penalties of $4 million, $3 million, and $2 million, respectively.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In 2021, 2020, and 2019, the Company recorded a $23 million net increase, an $11 million net increase, and a $58 million net increase, respectively, in its reserve for uncertain tax positions. The Company is currently under IRS audit for the 2014 through 2017 tax years.
Apache and its subsidiaries are subject to U.S. federal income tax as well as income tax in various states and foreign jurisdictions. The Company’s uncertain tax positions are related to tax years that may be subject to examination by the relevant taxing authority. Apache’s earliest open tax years in its key jurisdictions are as follows:
Jurisdiction
| | | | | |
| U.S. | 2014 |
| Egypt | 2005 |
| U.K. | 2020 |
11. COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company is party to various legal actions arising in the ordinary course of business, including litigation and governmental and regulatory control, which also may include controls related to the potential impacts of climate changes. As of December 31, 2021, the Company has an accrued liability of approximately $84 million for all legal contingencies that are deemed to be probable of occurring and can be reasonably estimated. The Company’s estimates are based on information known about the matters and its experience in contesting, litigating, and settling similar matters. Although actual amounts could differ from management’s estimate, none of the actions are believed by management to involve future amounts that would be material to the Company’s financial position, results of operations, or liquidity after consideration of recorded accruals. For material matters that the Company believes an unfavorable outcome is reasonably possible, the Company has disclosed the nature of the matter and a range of potential exposure, unless an estimate cannot be made at this time. It is management’s opinion that the loss for any other litigation matters and claims that are reasonably possible to occur will not have a material adverse effect on the Company’s financial position, results of operations, or liquidity.
Argentine Environmental Claims
On March 12, 2014, the Company and its subsidiaries completed the sale of all of the Company’s subsidiaries’ operations and properties in Argentina to YPF Sociedad Anonima (YPF). As part of that sale, YPF assumed responsibility for all of the past, present, and future litigation in Argentina involving Company subsidiaries, except that Company subsidiaries have agreed to indemnify YPF for certain environmental, tax, and royalty obligations capped at an aggregate of $100 million. The indemnity is subject to specific agreed conditions precedent, thresholds, contingencies, limitations, claim deadlines, loss sharing, and other terms and conditions. On April 11, 2014, YPF provided its first notice of claims pursuant to the indemnity. Company subsidiaries have not paid any amounts under the indemnity but will continue to review and consider claims presented by YPF. Further, Company subsidiaries retain the right to enforce certain Argentina-related indemnification obligations against Pioneer Natural Resources Company (Pioneer) in an amount up to $45 million pursuant to the terms and conditions of stock purchase agreements entered in 2006 between Company subsidiaries and subsidiaries of Pioneer.
Louisiana Restoration
Louisiana surface owners often file lawsuits or assert claims against oil and gas companies, including the Company, claiming that operators and working interest owners in the chain of title are liable for environmental damages on the leased premises, including damages measured by the cost of restoration of the leased premises to its original condition, regardless of the value of the underlying property. From time to time, restoration lawsuits and claims are resolved by the Company for amounts that are not material to the Company, while new lawsuits and claims are asserted against the Company. With respect to each of the pending lawsuits and claims, the amount claimed is not currently determinable or is not material. Further, the overall exposure related to these lawsuits and claims is not currently determinable. While adverse judgments against the Company are possible, the Company intends to actively defend these lawsuits and claims.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Starting in November of 2013 and continuing into 2021, several parishes in Louisiana have pending lawsuits against many oil and gas producers, including the Company. These cases were all removed to federal courts in Louisiana. In these cases, the Parishes, as plaintiffs, allege that defendants’ oil and gas exploration, production, and transportation operations in specified fields were conducted in violation of the State and Local Coastal Resources Management Act of 1978, as amended, and applicable regulations, rules, orders, and ordinances promulgated or adopted thereunder by the Parish or the State of Louisiana. Plaintiffs allege that defendants caused substantial damage to land and water bodies located in the coastal zone of Louisiana. Plaintiffs seek, among other things, unspecified damages for alleged violations of applicable law within the coastal zone, the payment of costs necessary to clear, re-vegetate, detoxify, and otherwise restore the subject coastal zone as near as practicable to its original condition, and actual restoration of the coastal zone to its original condition. While adverse judgments against the Company might be possible, the Company intends to vigorously oppose these claims.
Apollo Exploration Lawsuit
In a case captioned Apollo Exploration, LLC, Cogent Exploration, Ltd. Co. & SellmoCo, LLC v. Apache Corporation, Cause No. CV50538 in the 385th Judicial District Court, Midland County, Texas, plaintiffs alleged damages in excess of $200 million (having previously claimed in excess of $1.1 billion) relating to purchase and sale agreements, mineral leases, and area of mutual interest agreements concerning properties located in Hartley, Moore, Potter, and Oldham Counties, Texas. The trial court entered final judgment in favor of the Company, ruling that the plaintiffs take nothing by their claims and awarding the Company its attorneys’ fees and costs incurred in defending the lawsuit. The court of appeals affirmed in part and reversed in part the trial court’s judgment thereby reinstating some of plaintiff’s claims. Further appeal is pending.
Australian Operations Divestiture Dispute
Pursuant to a Sale and Purchase Agreement dated April 9, 2015 (Quadrant SPA), the Company and its subsidiaries divested their remaining Australian operations to Quadrant Energy Pty Ltd (Quadrant). Closing occurred on June 5, 2015. In April 2017, the Company filed suit against Quadrant for breach of the Quadrant SPA. In its suit, the Company seeks approximately AUD $80 million. In December 2017, Quadrant filed a defense of equitable set-off to the Company’s claim and a counterclaim seeking approximately AUD $200 million in the aggregate. The Company believes that Quadrant’s claims lack merit and will not have a material adverse effect on the Company’s financial position, results of operation, or liquidity.
Canadian Operations Divestiture Dispute
Pursuant to a Sale and Purchase Agreement dated July 6, 2017 (Paramount SPA), the Company and its subsidiaries divested their remaining Canadian operations to Paramount Resources LTD (Paramount). Closing occurred on August 16, 2017. On September 11, 2019, four ex-employees of Apache Canada LTD on behalf of themselves and individuals employed by Apache Canada LTD on July 6, 2017, filed an Amended Statement of Claim in a matter styled Stephen Flesch et. al. v Apache Corporation et. al., No. 1901-09160 Court of Queen’s Bench of Alberta against the Company and others seeking class certification and a finding that the Paramount SPA amounted to a Change of Control of the Company, entitling them to accelerated vesting under the Company’s equity plans. In the suit, the class seeks approximately $60 million USD and punitive damages. The Company believes that Plaintiffs’ claims lack merit and will not have a material adverse effect on the Company’s financial position, results of operation, or liquidity.
California and Delaware Litigation
On July 17, 2017, in three separate actions, San Mateo County, California, Marin County, California, and the City of Imperial Beach, California, all filed suit individually and on behalf of the people of the state of California against over 30 oil and gas companies alleging damages as a result of global warming. Plaintiffs seek unspecified damages and abatement under various tort theories. On December 20, 2017, in two separate actions, the City of Santa Cruz and Santa Cruz County and in a separate action on January 22, 2018, the City of Richmond, filed similar lawsuits against many of the same defendants. On November 14, 2018, the Pacific Coast Federation of Fishermen’s Associations, Inc. also filed a similar lawsuit against many of the same defendants. After removal of all such lawsuits to federal court, the district court remanded them back to state court. The 9th Circuit Court of Appeals’ affirmance of this remand decision was appealed to the U.S. Supreme Court. That appeal was decided by the U.S. Supreme Court ruling in a similar case, BP p.l.c. v. Mayor and City Council of Baltimore. As a result, the California cases have been sent back to the 9th Circuit for further appellate review of the decision to remand the cases to state court. Further activity in the cases has been stayed pending further appellate review.
On September 10, 2020, the State of Delaware filed suit, individually and on behalf of the people of the State of Delaware, against over 25 oil and gas companies alleging damages as a result of global warming. Plaintiffs seek unspecified damages and abatement under various tort theories. After removal of this lawsuit to federal court, the district court remanded it
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
back to state court. The remand order is being appealed to the 3rd Circuit Court of Appeals. Further activity in the case has been stayed pending this appellate review.
The Company believes that it is not subject to jurisdiction of the California courts and that claims made against it in the California and Delaware litigation are baseless. The Company intends to challenge jurisdiction in California and to vigorously defend the Delaware lawsuit.
Castex Lawsuit
In a case styled Apache Corporation v. Castex Offshore, Inc., et. al., Cause No. 2015-48580, in the 113th Judicial District Court of Harris County, Texas, Castex filed claims for alleged damages of approximately $200 million, relating to overspend on the Belle Isle Gas Facility upgrade, and the drilling of five sidetracks on the Potomac #3 well. After a jury trial, a verdict of approximately $60 million, plus fees, costs, and interest was entered against the Company. The Fourteenth Court of Appeals of Texas reversed the judgment, in part, reducing the judgment to approximately $13.5 million, plus fees, costs, and interest against the Company. Further appeal is pending.
Oklahoma Class Actions
The Company is a party to two purported class actions in Oklahoma styled Bigie Lee Rhea v. Apache Corporation, Case No. 6:14-cv-00433-JH, and Albert Steven Allen v. Apache Corporation, Case No. CJ-2019-00219. The Rhea case has been certified and includes a class of royalty owners seeking damages of approximately $200 million for alleged breach of the implied covenant to market relating to post-production deductions and alleged NGL uplift value. The Allen case has not been certified and seeks to represent a group of owners who have allegedly received late royalty and other payments under Oklahoma statutes. Without acknowledging or admitting any liability and solely to avoid the expense and uncertainty of future litigation, Apache has agreed to a settlement in the Rhea case under which Apache will pay $25 million to resolve all claims against the Company asserted by the class. The settlement is subject to court approval and is expected to be finalized in the first quarter of 2022.
Shareholder and Derivative Lawsuits
On February 23, 2021, a case captioned Plymouth County Retirement System v. Apache Corporation, et al. was filed in the United States District Court for the Southern District of Texas (Houston Division) against the Company and certain current and former officers. The complaint, which is a shareholder lawsuit styled as a class action, (1) alleges that the Company intentionally used unrealistic assumptions regarding the amount and composition of available oil and gas in Alpine High; (2) alleges that the Company did not have the proper infrastructure in place to safely and/or economically drill and/or transport those resources even if they existed in the amounts purported; (3) alleges that these statements and omissions artificially inflated the value of the Company’s operations in the Permian Basin; and (4) alleges that, as a result, the Company’s public statements were materially false and misleading. The Company believes that plaintiffs’ claims lack merit and intends to vigorously defend this lawsuit.
On March 16, 2021, a case captioned William Wessels, Derivatively and on behalf of APA Corporation v. John J. Christmann IV et al. was filed in the 334th District Court of Harris County, Texas. The case purports to be a derivative action brought against senior management and Company directors over many of the same allegations included in the Plymouth County Retirement System matter and asserts claims of (1) breach of fiduciary duty; (2) waste of corporate assets; and (3) unjust enrichment. The defendants believe the plaintiff’s claims lack merit and intend to vigorously defend this lawsuit.
Environmental Matters
The Company, as an owner or lessee and operator of oil and gas properties, is subject to various federal, state, local, and foreign country laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability on the lessee under an oil and gas lease for the cost of pollution clean-up resulting from operations and subject the lessee to liability for pollution damages. In some instances, the Company may be directed to suspend or cease operations in the affected area. The Company maintains insurance coverage, which it believes is customary in the industry, although the Company is not fully insured against all environmental risks.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company manages its exposure to environmental liabilities on properties to be acquired by identifying existing problems and assessing the potential liability. The Company also conducts periodic reviews, on a Company-wide basis, to identify changes in its environmental risk profile. These reviews evaluate whether there is a probable liability, the amount, and the likelihood that the liability will be incurred. The amount of any potential liability is determined by considering, among other matters, incremental direct costs of any likely remediation and the proportionate cost of employees who are expected to devote a significant amount of time directly to any possible remediation effort. As it relates to evaluations of purchased properties, depending on the extent of an identified environmental problem, the Company may exclude a property from the acquisition, require the seller to remediate the property to the Company’s satisfaction, or agree to assume liability for the remediation of the property. The Company’s general policy is to limit any reserve additions to any incidents or sites that are considered probable to result in an expected remediation cost exceeding $300,000. Any environmental costs and liabilities that are not reserved for are treated as an expense when actually incurred. In the Company’s estimation, neither these expenses nor expenses related to training and compliance programs are likely to have a material impact on its financial condition.
As of December 31, 2021, the Company had an undiscounted reserve for environmental remediation of approximately $2 million.
On September 11, 2020, the Company received a Notice of Violation and Finding of Violation, and accompanying Clean Air Act Information Request, from the U.S. Environmental Protection Agency (EPA) following site inspections in April 2019 at several of the Company’s oil and natural gas production facilities in Lea and Eddy Counties, New Mexico. The notice and information request involve alleged emissions control and reporting violations. The Company is cooperating with the EPA and has responded to the information request. The EPA has referred the notice for civil enforcement proceedings; however, at this time the Company is unable to reasonably estimate whether such proceedings will result in monetary sanctions and, if so, whether they would be more or less than $100,000, exclusive of interest and costs.
On December 29, 2020, the Company received a Notice of Violation and Opportunity to Confer, and accompanying Clean Air Act Information Request, from the EPA following helicopter flyovers in September 2019 of several of the Company’s oil and natural gas production facilities in Reeves County, Texas. The notice and information request involve alleged emissions control and reporting violations. The Company is cooperating with the EPA and has responded to the information request. The EPA has referred the notice for civil enforcement proceedings; however, at this time the Company is unable to reasonably estimate whether such proceedings will result in monetary sanctions and, if so, whether they would be more or less than $100,000, exclusive of interest and costs.
The Company is not aware of any environmental claims existing as of December 31, 2021 that have not been provided for or would otherwise have a material impact on its financial position, results of operations, or liquidity. There can be no assurance, however, that current regulatory requirements will not change or past non-compliance with environmental laws will not be discovered on the Company’s properties.
Potential Decommissioning Obligations on Sold Properties
In 2013, Apache sold its Gulf of Mexico (GOM) Shelf operations and properties and its GOM operating subsidiary, GOM Shelf LLC (GOM Shelf) to Fieldwood Energy LLC (Fieldwood). Under the terms of the purchase agreement, Apache received cash consideration of $3.75 billion and Fieldwood assumed the obligation to decommission the properties held by GOM Shelf and the properties acquired from Apache and its other subsidiaries (collectively, the Legacy GOM Assets). In respect of such abandonment obligations, Fieldwood posted letters of credit in favor of Apache (Letters of Credit) and established trust accounts (Trust A and Trust B) of which Apache was a beneficiary and which were funded by two net profits interests (NPIs) depending on future oil prices. 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 (i) accept bonds in exchange for certain of the Letters of Credit and (ii) amend the Trust A trust agreement and one of the NPIs to consolidate the trusts into a single Trust (Trust A) funded by both remaining NPIs. Currently, Apache holds two bonds (Bonds) and five Letters of Credit to secure Fieldwood’s asset retirement obligations on the Legacy GOM Assets as and when Apache is required to perform or pay for decommissioning any Legacy GOM Asset over the remaining life of the Legacy GOM Assets.
On August 3, 2020, Fieldwood again filed for protection under Chapter 11 of the U.S. Bankruptcy Code. On June 25, 2021, the United States Bankruptcy Court for the Southern District of Texas (Houston Division) entered an order confirming Fieldwood’s bankruptcy plan. On August 27, 2021, Fieldwood’s bankruptcy plan became effective. Pursuant to the plan, the Legacy GOM Assets were separated into a standalone company, which was subsequently merged into GOM Shelf. Under GOM Shelf’s limited liability company agreement, the proceeds of production of the Legacy GOM Assets will be used to fund decommissioning of Legacy GOM Assets.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In September 2021, GOM Shelf notified the Bureau of Safety and Environmental Enforcement (BSEE) that it was unable to fund the decommissioning obligations that it is currently obligated to perform on certain of the Legacy GOM Assets. As a result, Apache and other current and former owners in these assets have received orders from BSEE to decommission certain of the Legacy GOM Assets included in GOM Shelf’s notification to BSEE. Apache expects to receive such orders on the other Legacy GOM Assets included in GOM Shelf’s notification letter. Further, Apache anticipates that GOM Shelf may send additional such notices to BSEE in the future and that it may receive additional orders from BSEE requiring it to decommission other Legacy GOM Assets.
If Apache incurs costs to decommission any Legacy GOM Asset and GOM Shelf does not reimburse Apache for such costs, then Apache will obtain reimbursement from Trust A, the Bonds, and the Letters of Credit until such funds and securities are fully utilized. In addition, after such sources have been exhausted, Apache has agreed to provide a standby loan to GOM Shelf of up to $400 million to perform decommissioning (Standby Loan Agreement), with such standby loan secured by a first and prior lien on the Legacy GOM Assets.
If the combination of GOM Shelf’s net cash flow from its producing properties, the Trust A funds, the Bonds, and the remaining Letters of Credit are insufficient to fully fund decommissioning of any Legacy GOM Assets that Apache may be ordered by BSEE to perform, or if GOM Shelf’s net cash flow from its remaining producing properties after the Trust A funds, Bonds, and Letters of Credit are exhausted is insufficient to repay any loans made by Apache under the Standby Loan Agreement, then Apache may be forced to effectively use its available cash to fund the deficit.
As of December 31, 2021, Apache estimates that its potential liability to fund decommissioning of Legacy GOM Assets it may be ordered to perform ranges from $1.2 billion to $1.4 billion on an undiscounted basis. Management does not believe any specific estimate within this range is a better estimate than any other. Accordingly, during 2021, the Company recorded a contingent liability of $1.2 billion, representing the estimated costs of decommissioning it may be required to perform on Legacy GOM Assets. Of the total liability recorded, $1.1 billion is reflected under the caption “Decommissioning contingency for sold Gulf of Mexico properties,” and $100 million is reflected under “Other current liabilities” in the Company’s consolidated balance sheet. The Company also recorded a $740 million asset, which represents the amount the Company expects to be reimbursed from the Trust A funds, the Bonds, and the Letters of Credit for decommissioning it may be required to perform on Legacy GOM Assets. Of the total asset recorded, $640 million is reflected under the caption “Decommissioning security for sold Gulf of Mexico properties,” and $100 million is reflected under “Other current assets.” A “Loss on previously sold Gulf of Mexico properties” in the amount of $446 million was recognized in the third quarter of 2021 to reflect the net impact to the Company’s statement of consolidated operations. Changes in significant assumptions impacting Apache’s estimated liability, including expected decommissioning rig spread rates, lift boat rates, and planned abandonment logistics could result in a liability in excess of the amount accrued. In addition, significant changes in the market price of oil, gas, and NGLs could further impact Apache’s estimate of its contingent liability to decommission Legacy GOM Assets.
Leases and Contractual Obligations
On January 1, 2019, the Company adopted ASU 2016-02, “Leases (Topic 842),” which requires lessees to recognize separate right-of-use (ROU) assets and lease liabilities for most leases classified as operating leases under previous GAAP. As allowed under the standard, the Company applied practical expedients permitting an entity the option to not evaluate under ASU 2016-02 those existing or expired land easements that were not previously accounted for as leases, as well as permitting an entity the option to carry forward its historical assessments of whether existing agreements contain a lease, classification of existing lease agreements, and treatment of initial direct lease costs.
The Company determines if an arrangement is an operating or finance lease at the inception of each contract. If the contract is classified as an operating lease, the Company records an ROU asset and corresponding liability reflecting the total remaining present value of fixed lease payments over the expected term of the lease agreement. The expected term of the lease may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. If the Company’s lease does not provide an implicit rate in the contract, the Company uses its incremental borrowing rate when calculating the present value. In the normal course of business, the Company enters into various lease agreements for real estate, drilling rigs, vessels, aircrafts, and equipment related to its exploration and development activities, which are typically classified as operating leases under the provisions of the standard. ROU assets are reflected within “Deferred charges and other assets” on the Company’s consolidated balance sheet, and the associated operating lease liabilities are reflected within “Other current liabilities” and “Other” within “Deferred Credits and Other Noncurrent Liabilities,” as applicable.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Operating lease expense associated with ROU assets is recognized on a straight-line basis over the lease term. Lease expense is reflected on the statement of consolidated operations commensurate with the leased activities and nature of the services performed. Gross fixed operating lease expense, inclusive of amounts billable to partners and other working interest owners, was $128 million, $149 million, and $222 million for the full years of 2021, 2020, and 2019, respectively. The Company elected to exclude short-term leases (those with terms of 12 months or less) from the balance sheet presentation. Costs incurred for short-term leases, which is primarily related to drilling activities in Block 58 offshore Suriname, was $20 million, $80 million and $18 million in 2021, 2020, and 2019, respectively.
In addition, the Company periodically enters into finance leases that are similar to those leases classified as capital leases under previous GAAP. Finance lease assets are included in “Property, Plant, and Equipment” on the consolidated balance sheet, and the associated finance lease liabilities are reflected within “Current debt” and “Long-term debt,” as applicable. Depreciation on the Company’s finance lease asset was $2 million, $2 million, and $7 million in 2021, 2020, and 2019, respectively. Interest on the Company’s finance lease asset was $2 million, $2 million, and $3 million in 2021, 2020, and 2019, respectively.
The following table represents the Company’s weighted average lease term and discount rate as of December 31, 2021:
| | | | | | | | | | | | | | |
| | Operating Leases | | Finance Leases |
| Weighted average remaining lease term | | 3.4 years | | 11.7 years |
| Weighted average discount rate | | 3.7 | % | | 4.4 | % |
At December 31, 2021, contractual obligations for long-term operating leases, finance leases, and purchase obligations are as follows:
| | | | | | | | | | | | | | | | | | | | |
Net Minimum Commitments(1) | | Operating Leases(2) | | Finance Leases(3) | | Purchase Obligations(4)(5) |
| | (In millions) |
| 2022 | | $ | 106 | | | $ | 3 | | | $ | 226 | |
| 2023 | | 76 | | | 3 | | | 198 | |
| 2024 | | 58 | | | 3 | | | 161 | |
| 2025 | | 7 | | | 4 | | | 159 | |
| 2026 | | 7 | | | 4 | | | 3,637 | |
| Thereafter | | 18 | | | 25 | | | 473 | |
| Total future minimum payments | | 272 | | | 42 | | | $ | 4,854 | |
| Less: imputed interest | | (21) | | | (6) | | | N/A |
| Total lease liabilities | | 251 | | | 36 | | | N/A |
| Current portion | | 99 | | | 2 | | | N/A |
| Non-current portion | | $ | 152 | | | $ | 34 | | | N/A |
(1)Excludes commitments for jointly owned fields and facilities for which the Company is not the operator.
(2)Amounts represent future payments associated with oil and gas operations inclusive of amounts billable to partners and other working interest owners. Such payments may be capitalized as a component of oil and gas properties and subsequently depreciated, impaired, or written off as exploration expense.
(3)Amounts represent the Company’s finance lease obligation related to the Company’s Midland, Texas regional office building.
(4)Amounts represent any agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms. These include minimum commitments associated with take-or-pay contracts, NGL processing agreements, drilling work program commitments, and agreements to secure capacity rights on third-party pipelines. Amounts exclude certain product purchase obligations related to marketing and trading activities for which there are no minimum purchase requirements or the amounts are not fixed or determinable. Total costs incurred under take-or-pay and throughput obligations were $198 million, $120 million, and $111 million in 2021, 2020, and 2019, respectively.
(5)Under terms agreed to in the Egypt modernized PSC, the Company committed to spend a minimum of $3.5 billion on exploration, development, and operating activities by March 31, 2026. The Company believes it will be able to satisfy this obligation within its current exploration and development program.
The lease liability reflected in the table above represents the Company’s fixed minimum payments that are settled in accordance with the lease terms. Actual lease payments during the period may also include variable lease components such as common area maintenance, usage-based sales taxes and rate differentials, or other similar costs that are not determinable at the inception of the lease. Gross variable lease payments, inclusive of amounts billable to partners and other working interest owners were $64 million, $41 million, and $78 million in 2021, 2020, and 2019, respectively.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
12. RETIREMENT AND DEFERRED COMPENSATION PLANS
The Company provides retirement benefits to its U.S. employees through the use of multiple plans: a 401(k) savings plan, a money purchase retirement plan, a non-qualified retirement savings plan, and a non-qualified restorative retirement savings plan. The 401(k) savings plan provides participating employees the ability to elect to contribute up to 50 percent of eligible compensation, as defined, to the plan with the Company making matching contributions up to a maximum of 8 percent of each employee’s annual eligible compensation. In addition, the Company contributes 6 percent of each participating employee’s annual eligible compensation to a money purchase retirement plan. The 401(k) savings plan and the money purchase retirement plan are subject to certain annually-adjusted, government-mandated restrictions that limit the amount of employee and Company contributions. For certain eligible employees, the Company also provides a non-qualified retirement savings plan or a non-qualified restorative retirement savings plan. These plans allow the deferral of up to 50 percent of eligible employee’s base salary, up to 75 percent of each employee’s annual bonus (that accepts employee contributions) and the Company’s matching contributions in excess of the government mandated limitations imposed in the 401(k) savings plan and money purchase retirement plan.
Vesting in the Company’s contributions in the 401(k) savings plan, the money purchase retirement plan, the non-qualified retirement savings plan and the non-qualified restorative retirement savings plan occurs at the rate of 20 percent for every completed year of employment. Upon a qualifying change in control of ownership of APA, immediate and full vesting occurs.
Additionally, Apache North Sea Limited maintains a separate retirement plan, as required under the laws of the U.K.
The aggregate annual cost to the Company of all U.S. and international savings plans, the money purchase retirement plan, non-qualified retirement savings plan, and non-qualified restorative retirement savings plan was $31 million, $43 million, and $52 million for 2021, 2020, and 2019, respectively.
The Company also provides a funded noncontributory defined benefit pension plan (U.K. Pension Plan) covering certain employees of the Company’s North Sea operations in the U.K. The plan provides defined pension benefits based on years of service and final salary. The plan applies only to employees who were part of BP North Sea’s pension plan as of April 2, 2003, prior to the acquisition of BP North Sea by the Company effective July 1, 2003.
Additionally, the Company offers postretirement medical benefits to U.S. employees who meet certain eligibility requirements. Eligible participants receive medical benefits up until the age of 65 or at the date they become eligible for Medicare, provided the participant remits the required portion of the cost of coverage. The plan is contributory with participants’ contributions adjusted annually. The postretirement benefit plan does not cover benefit expenses once a covered participant becomes eligible for Medicare.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables set forth the benefit obligation, fair value of plan assets and funded status as of December 31, 2021, 2020, and 2019, and the underlying weighted average actuarial assumptions used for the U.K. Pension Plan and U.S. postretirement benefit plan. The Company uses a measurement date of December 31 for its pension and postretirement benefit plans.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2021 | | 2020 | | 2019 |
| | | Pension
Benefits | | Postretirement
Benefits | | Pension
Benefits | | Postretirement
Benefits | | Pension
Benefits | | Postretirement
Benefits |
| | | (In millions) |
| Change in Projected Benefit Obligation | | | | | | | | | | | | |
| Projected benefit obligation at beginning of year | | $ | 233 | | | $ | 20 | | | $ | 199 | | | $ | 20 | | | $ | 187 | | | $ | 27 | |
| Service cost | | 3 | | | 1 | | | 3 | | | 1 | | | 3 | | | 2 | |
| Interest cost | | 3 | | | — | | | 4 | | | — | | | 5 | | | 1 | |
| Foreign currency exchange rates | | (2) | | | — | | | 8 | | | — | | | 7 | | | — | |
| Actuarial losses (gains) | | (5) | | | 1 | | | 30 | | | 1 | | | 15 | | | (9) | |
| Plan settlements | | (17) | | | — | | | — | | | — | | | (14) | | | — | |
| Benefits paid | | (4) | | | (4) | | | (11) | | | (4) | | | (4) | | | (2) | |
| Retiree contributions | | — | | | 2 | | | — | | | 2 | | | — | | | 1 | |
| Projected benefit obligation at end of year | | 211 | | | 20 | | | 233 | | | 20 | | | 199 | | | 20 | |
| Change in Plan Assets | | | | | | | | | | | | |
| Fair value of plan assets at beginning of year | | 262 | | | — | | | 228 | | | — | | | 208 | | | — | |
| Actual return on plan assets | | 11 | | | — | | | 31 | | | — | | | 25 | | | — | |
| Foreign currency exchange rates | | (3) | | | — | | | 9 | | | — | | | 8 | | | — | |
| Employer contributions | | 5 | | | 2 | | | 5 | | | 2 | | | 5 | | | 1 | |
| Plan settlements | | (17) | | | — | | | — | | | — | | | (14) | | | — | |
| Benefits paid | | (4) | | | (4) | | | (11) | | | (4) | | | (4) | | | (2) | |
| Retiree contributions | | — | | | 2 | | | — | | | 2 | | | — | | | 1 | |
| Fair value of plan assets at end of year | | 254 | | | — | | | 262 | | | — | | | 228 | | | — | |
| Funded status at end of year | | $ | 43 | | | $ | (20) | | | $ | 29 | | | $ | (20) | | | $ | 29 | | | $ | (20) | |
| Amounts recognized in Consolidated Balance Sheet | | | | | | | | | | | | |
| Current liability | | $ | — | | | $ | (2) | | | $ | — | | | $ | (2) | | | $ | — | | | $ | (2) | |
| Non-current asset (liability) | | 43 | | | (18) | | | 29 | | | (18) | | | 29 | | | (18) | |
| | $ | 43 | | | $ | (20) | | | $ | 29 | | | $ | (20) | | | $ | 29 | | | $ | (20) | |
| Pre-tax Amounts Recognized in Accumulated Other Comprehensive Income (Loss) | | | | | | | | | | | | |
| Accumulated gain (loss) | | $ | 1 | | | $ | 14 | | | $ | (11) | | | $ | 16 | | | $ | (7) | | | $ | 19 | |
| | | | | | | | | | | | |
| Weighted Average Assumptions used as of December 31 | | | | | | | | | | | | |
| Discount rate | | 1.80 | % | | 2.57 | % | | 1.40 | % | | 2.06 | % | | 2.10 | % | | 3.00 | % |
| Salary increases | | 4.90 | % | | N/A | | 4.50 | % | | N/A | | 4.30 | % | | N/A |
| Expected return on assets | | 1.90 | % | | N/A | | 1.50 | % | | N/A | | 2.20 | % | | N/A |
| Healthcare cost trend | | | | | | | | | | | | |
| Initial | | N/A | | 6.25 | % | | N/A | | 6.00 | % | | N/A | | 6.25 | % |
| Ultimate in 2028 | | N/A | | 5.00 | % | | N/A | | 5.00 | % | | N/A | | 5.00 | % |
As of December 31, 2021, 2020, and 2019, the accumulated benefit obligation for the U.K. Pension Plan was $205 million, $207 million, and $181 million, respectively.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company’s defined benefit pension plan assets are held by a non-related trustee who has been instructed to invest the assets in a blend of equity securities and low-risk debt securities. The Company intends that this blend of investments will provide a reasonable rate of return such that the benefits promised to members are provided. The U.K. Pension Plan policy is to target an ongoing funding level of 100 percent through prudent investments and includes policies and strategies such as investment goals, risk management practices, and permitted and prohibited investments. A breakout of previous allocations for plan asset holdings and the target allocation for the Company’s plan assets are summarized below:
| | | | | | | | | | | | | | | | | | | | |
| | | Target
Allocation | | Percentage of
Plan Assets at
Year-End |
| | | 2021 | | 2021 | | 2020 |
| Asset Category | | | | | | |
| Equity securities: | | | | | | |
| | | | | | |
| Overseas quoted equities | | 15 | % | | 15 | % | | 19 | % |
| Total equity securities | | 15 | % | | 15 | % | | 19 | % |
| Debt securities: | | | | | | |
| U.K. government bonds | | 55 | % | | 54 | % | | 64 | % |
| U.K. corporate bonds | | 24 | % | | 25 | % | | 16 | % |
| Total debt securities | | 79 | % | | 79 | % | | 80 | % |
| Cash | | 6 | % | | 6 | % | | 1 | % |
| Total | | 100 | % | | 100 | % | | 100 | % |
The plan’s assets do not include any direct ownership of equity or debt securities of the Company. The fair value of plan assets at December 31, 2021 and 2020 are based upon unadjusted quoted prices for identical instruments in active markets, which is a Level 1 fair value measurement. The following tables present the fair values of plan assets for each major asset category based on the nature and significant concentration of risks in plan assets at December 31, 2021 and 2020:
| | | | | | | | | | | | | | |
| | December 31, |
| | | 2021 | | 2020 |
| | | (In millions) |
| Equity securities: | | | | |
| | | | |
| Overseas quoted equities | | $ | 38 | | | $ | 49 | |
| Total equity securities | | 38 | | | 49 | |
| Debt securities: | | | | |
| U.K. government bonds | | 138 | | | 168 | |
| U.K. corporate bonds | | 62 | | | 43 | |
| Total debt securities | | 200 | | | 211 | |
| Cash | | 16 | | | 2 | |
| Fair value of plan assets | | $ | 254 | | | $ | 262 | |
The expected long-term rate of return on assets assumptions are derived relative to the yield on long-dated fixed-interest bonds issued by the U.K. government (gilts). For equities, outperformance relative to gilts is assumed to be 3.5 percent per year.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables set forth the components of the net periodic cost and the underlying weighted average actuarial assumptions used for the pension and postretirement benefit plans as of December 31, 2021, 2020, and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2021 | | 2020 | | 2019 |
| | | Pension
Benefits | | Postretirement
Benefits | | Pension
Benefits | | Postretirement
Benefits | | Pension
Benefits | | Postretirement
Benefits |
| | | (In millions) |
| Components of Net Periodic Benefit Cost | | | | | | | | | | | | |
| Service cost | | $ | 3 | | | $ | 1 | | | $ | 3 | | | $ | 1 | | | $ | 3 | | | $ | 2 | |
| Interest cost | | 3 | | | — | | | 4 | | | — | | | 5 | | | 1 | |
| Expected return on assets | | (4) | | | — | | | (5) | | | — | | | (5) | | | — | |
| Amortization of loss | | — | | | (1) | | | — | | | (1) | | | — | | | (1) | |
| Settlement loss | | — | | | — | | | — | | | — | | | — | | | — | |
| Net periodic benefit cost | | $ | 2 | | | $ | — | | | $ | 2 | | | $ | — | | | $ | 3 | | | $ | 2 | |
| Weighted Average Assumptions Used to Determine Net Periodic Benefit Cost for the Years Ended December 31 | | | | | | | | | | | | |
| Discount rate | | 1.40 | % | | 2.06 | % | | 2.10 | % | | 3.00 | % | | 2.90 | % | | 4.13 | % |
| Salary increases | | 4.50 | % | | N/A | | 4.30 | % | | N/A | | 4.70 | % | | N/A |
| Expected return on assets | | 1.50 | % | | N/A | | 2.20 | % | | N/A | | 2.80 | % | | N/A |
| Healthcare cost trend | | | | | | | | | | | | |
| Initial | | N/A | | 6.00 | % | | N/A | | 6.25 | % | | N/A | | 6.50 | % |
| Ultimate in 2025 | | N/A | | 5.00 | % | | N/A | | 5.00 | % | | N/A | | 5.00 | % |
The Company expects to contribute approximately $5 million to its pension plan and $2 million to its postretirement benefit plan in 2022. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
| | | | | | | | | | | | | | |
| | Pension
Benefits | | Postretirement
Benefits |
| | | (In millions) |
| 2022 | | $ | 6 | | | $ | 2 | |
| 2023 | | 7 | | | 2 | |
| 2024 | | 6 | | | 2 | |
| 2025 | | 6 | | | 2 | |
| 2026 | | 6 | | | 2 | |
| Years 2027-2031 | | 39 | | | 6 | |
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
13. REDEEMABLE NONCONTROLLING INTEREST — ALTUS
Preferred Units Issuance
On June 12, 2019, Altus Midstream LP issued and sold Preferred Units for an aggregate issue price of $625 million in a private offering exempt from the registration requirements of the Securities Act of 1933, as amended (the Closing). Altus Midstream LP received approximately $611 million in cash proceeds from the sale after deducting transaction costs and discounts to certain purchasers. Pursuant to the partnership agreement of Altus Midstream LP:
•The Preferred Units bear quarterly distributions at a rate of 7 percent per annum, increasing to 10 percent per annum after the fifth anniversary of Closing and upon the occurrence of specified events. Altus Midstream LP may pay distributions in-kind for the first six quarters after the Preferred Units are issued.
•The Preferred Units are redeemable at Altus Midstream LP’s option at any time in cash at a redemption price (the Redemption Price) equal to the greater of an 11.5 percent internal rate of return (increasing after the fifth anniversary of Closing to 13.75 percent) and a 1.3x multiple of invested capital. The Preferred Units will be redeemable at the holder’s option upon a change of control or liquidation of Altus Midstream LP and certain other events, including certain asset dispositions.
•The Preferred Units will be exchangeable for shares of ALTM’s Class A common stock at the holder’s election after the seventh anniversary of Closing or upon the occurrence of specified events. Each Preferred Unit will be exchangeable for a number of shares of ALTM’s Class A common stock equal to the Redemption Price divided by the volume-weighted average trading price of ALTM’s Class A common stock on the Nasdaq Capital Market for the 20 trading days immediately preceding the second trading day prior to the applicable exchange date, less a 6 percent discount.
•Each outstanding Preferred Unit has a liquidation preference equal to the Redemption Price payable before any amounts are paid in respect of Altus Midstream LP’s common units and any other units that rank junior to the Preferred Units with respect to distributions or distributions upon liquidation.
•Preferred Units holders have rights to approve certain partnership business, financial, and governance-related matters.
•Altus Midstream LP is restricted from declaring or making cash distributions on its common units until all required distributions on the Preferred Units have been paid. In addition, before the fifth anniversary of Closing, aggregate cash distributions on, and redemptions of, Altus Midstream LP’s common units are limited to $650 million of cash from ordinary course operations if permitted under its credit facility. Cash distributions on, and redemptions of, Altus Midstream LP’s common units also are subject to satisfaction of leverage ratio requirements specified in its partnership agreement.
Classification
The Preferred Units are accounted for on the Company’s consolidated balance sheets as a redeemable noncontrolling interest classified as temporary equity based on the terms of the Preferred Units, including the redemption rights with respect thereto.
Initial Measurement
Altus recorded the net transaction price of $611 million, calculated as the negotiated transaction price of $625 million, less issue discounts of $4 million and transaction costs totaling $10 million.
Certain redemption features embedded within the terms of the Preferred Units require bifurcation and measurement at fair value. Altus bifurcated and recognized at fair value an embedded derivative related to the Preferred Units at inception of $94 million for a redemption option of the Preferred Unit holders. The derivative is reflected in “Other” within “Deferred Credits and Other Noncurrent Liabilities” on the Company’s consolidated balance sheet at its current fair value of $57 million as of December 31, 2021. The fair value of the embedded derivative, a Level 3 fair value measurement, was based on numerous factors including expected future interest rates using the Black-Karasinski model, Altus’ imputed interest rate, the timing of periodic cash distributions, and dividend yields of the Preferred Units. Refer to Note 4—Derivative Instruments and Hedging Activities for more detail.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The net transaction price was allocated to the preferred redeemable noncontrolling interest and the embedded features according to the associated initial fair value measurements as follows:
| | | | | | | | |
| | June 12, 2019 |
| | (In millions) |
| Redeemable noncontrolling interest - Altus Preferred Unit limited partners | | $ | 517 | |
| Preferred Units embedded derivative | | 94 | |
| | $ | 611 | |
Subsequent Measurement
Altus applies a two-step approach to subsequent measurement of the redeemable noncontrolling interest related to the Preferred Units by first allocating a portion of the net income of Altus Midstream LP in accordance with the terms of the partnership agreement. An additional adjustment to the carrying value of the Preferred Unit redeemable noncontrolling interest at each period end may be recorded, if applicable. The amount of such adjustment is determined based upon the accreted value method to reflect the passage of time until the Preferred Units are exchangeable at the option of the holder. Pursuant to this method, the net transaction price is accreted using the effective interest method to the Redemption Price calculated at the seventh anniversary of the Closing. The total adjustment is limited to an amount such that the carrying amount of the Preferred Unit redeemable noncontrolling interest at each period end is equal to the greater of (a) the sum of (i) the carrying amount of the Preferred Units, plus (ii) the fair value of the embedded derivative liability and (b) the accreted value of the net transaction price.
Activity related to the Preferred Units for the years ended December 31, 2021 and 2020 is as follows:
| | | | | | | | | | | | | | | |
| | Units Outstanding | | Financial Position(1) | |
| | (In millions, except unit data) | |
| Redeemable noncontrolling interest — Preferred Units: at December 31, 2019 | | 638,163 | | | $ | 555 | | |
| Distribution of in-kind additional Preferred Units | | 22,531 | | | — | | |
| Cash distributions paid to Preferred Unit limited partners | | — | | | (23) | | |
| Allocation of Altus Midstream net income | | N/A | | 76 | | |
| Redeemable noncontrolling interest - Altus Preferred Unit limited partners: at December 31, 2020 | | 660,694 | | | 608 | | |
| Cash distributions to Altus Preferred Unit limited partners | | — | | | (46) | | |
| Distributions payable to Altus Preferred Unit limited partners | | — | | | (12) | | |
| Allocation of Altus Midstream LP net income | | N/A | | 80 | | |
| Accreted value adjustment | | N/A | | 82 | | |
| Redeemable noncontrolling interest - Altus Preferred Unit limited partners: at December 31, 2021 | | 660,694 | | | 712 | | |
Preferred Units embedded derivative(2) | | | | 57 | | |
| | | | $ | 769 | | |
(1)The Preferred Units are redeemable at Altus Midstream LP’s option at a redemption price (the Redemption Price), which as of December 31, 2021 is calculated as the greater of (i) an 11.5 percent internal rate of return and (ii) a 1.3 times multiple of invested capital. As of December 31, 2021, the Redemption Price would have been based on an 11.5 percent internal rate of return, which would equate to a redemption value of $739 million.
(2)Certain redemption features embedded within the terms of the Preferred Units require bifurcation and measurement at fair value. Refer to Note 4—Derivative Instruments and Hedging Activities for discussion of the fair value changes in the embedded derivative liability during the period. N/A - not applicable.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
14. CAPITAL STOCK
Common Stock Outstanding
The following table provides changes to the Company’s common shares outstanding for the years ended December 31, 2021, 2020, and 2019:
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Balance, beginning of year | | 377,482,630 | | | 376,062,670 | | | 374,696,222 | |
| Shares issued for stock-based compensation plans: | | | | | | |
| Treasury shares issued | | 3,133 | | | 17,448 | | | 31,701 | |
| Common shares issued | | 649,231 | | | 1,402,512 | | | 1,334,747 | |
| Treasury shares acquired | | (31,204,229) | | | — | | | — | |
| Balance, end of year | | 346,930,765 | | | 377,482,630 | | | 376,062,670 | |
Net Income (Loss) per Common Share
The following table provides a reconciliation of the components of basic and diluted net income (loss) per common share for the years ended December 31, 2021, 2020, and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2021 | | 2020 | | 2019 |
| | | Income | | Shares | | Per Share | | Loss | | Shares | | Per Share | | Loss | | Shares | | Per Share |
| | | (In millions, except per share amounts) |
| Basic: | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Income (loss) attributable to common stock | | $ | 973 | | | 374 | | | $ | 2.60 | | | $ | (4,860) | | | 378 | | | $ | (12.86) | | | $ | (3,553) | | | 377 | | | $ | (9.43) | |
| Effect of Dilutive Securities: | | | | | | | | | | | | | | | | | | |
| Stock options and other | | $ | — | | | 1 | | | $ | (0.01) | | | $ | — | | | — | | | $ | — | | | $ | — | | | — | | | $ | — | |
| Diluted: | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Income (loss) attributable to common stock | | $ | 973 | | | 375 | | | $ | 2.59 | | | $ | (4,860) | | | 378 | | | $ | (12.86) | | | $ | (3,553) | | | 377 | | | $ | (9.43) | |
The diluted EPS calculation excludes options and restricted shares that were anti-dilutive totaling 3.3 million, 4.5 million, and 5.0 million for the years ended December 31, 2021, 2020, and 2019, respectively. The impact to net income (loss) attributable to common stock on an assumed conversion of the redeemable noncontrolling Preferred Units interest in Altus Midstream LP was anti-dilutive for the years ended December 31, 2021, 2020 and 2019.
Stock Repurchase Program
During 2018, the Company’s Board of Directors authorized the purchase of up to 40 million shares of the Company’s common stock. No shares were purchased under this authorization through December 31, 2020. During 2021, the Company’s Board of Directors authorized the purchase of an additional 40 million shares of the Company’s common stock. Shares may be purchased either in the open market or through privately held negotiated transactions.
In the fourth quarter of 2021, the Company repurchased 31.2 million shares at an average price of $27.14 per share, and as of December 31, 2021, the Company had remaining authorization to repurchase 48.8 million shares. The Company is not obligated to acquire any additional shares.
Common Stock Dividend
In the first quarter of 2020, the Company’s Board of Directors approved a reduction in the Company’s quarterly dividends from $0.25 per share to $0.025 per share, effective for all dividends payable after March 12, 2020. During the third quarter of 2021, the Company’s Board of Directors approved an increase in its quarterly dividend from $0.025 per share to $0.0625 per share, and in the fourth quarter of 2021, approved a further increase in its quarterly dividend to $0.125 per share. For the years ended December 31, 2021, 2020, and 2019, the Company declared common stock dividends totaling $0.2375 per share, $0.10 per share, and $1.00 per share, respectively.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Stock Compensation Plans
The Company maintains several stock-based compensation plans, which include stock options, restricted stock, and conditional restricted stock unit plans. In 2021, pursuant to the Holding Company Reorganization, Apache’s outstanding common shares were converted into equivalent corresponding shares of APA. APA assumed sponsorship of all stock compensation plans. All cash-settled awards previously indexed to Apache’s stock price were subsequently indexed to APA’s stock price, and all unvested stock-settled awards will be settled in APA stock upon vesting.
On May 12, 2016, the Company’s shareholders approved the 2016 Omnibus Compensation Plan (the 2016 Plan), which is used to provide eligible employees with equity-based incentives by granting incentive stock options, non-qualified stock options, performance awards, restricted stock awards, restricted stock units, stock appreciation rights, cash awards, or any combination of the foregoing. As of December 31, 2021, 11.0 million shares were authorized and available for grant under the 2016 Plan. Previously approved plans remain in effect solely for the purpose of governing grants still outstanding that were issued prior to approval of the 2016 Plan. All new grants are issued from the 2016 Plan. In 2018, the Company began issuing cash-settled awards (phantom units) under the restricted stock and conditional restricted stock unit plans. The phantom units represent a hypothetical interest in the Company’s stock and, once vested, are settled in cash.
Costs related to the plans are capitalized or expensed to “Lease operating expenses,” “Exploration,” or “General and administrative” in the Company’s statement of consolidated operations based on the nature of each employee’s activities. The following table summarizes the Company’s stock-settled and cash-settled compensation costs:
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | | (In millions) |
| Stock-settled and cash-settled compensation expensed | | $ | 157 | | | $ | 40 | | | $ | 110 | |
| Stock-settled and cash-settled compensation capitalized | | 18 | | | 7 | | | 28 | |
| Total stock-settled and cash-settled compensation costs | | $ | 175 | | | $ | 47 | | | $ | 138 | |
Stock Options
As of December 31, 2021, the Company had outstanding options to purchase shares of its common stock under the 2016 Plan, the 2011 Omnibus Equity Compensation Plan (the 2011 Plan), and the 2007 Omnibus Equity Compensation Plan (the 2007 Plan and, collectively with the 2016 Plan and the 2011 Plan, the Omnibus Plans). The Omnibus Plans were submitted to and approved by the Company’s shareholders. New shares of common stock will be issued for employee stock option exercises. Under the Omnibus Plans, the exercise price of each option equals the closing price of APA’s common stock on the date of grant. Options granted become exercisable ratably over a three-year period and expire 10 years after granted.
The following table summarizes stock option activity for the years ended December 31, 2021, 2020, and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2021 | | 2020 | | 2019 |
| | | Shares
Under Option | | Weighted Average
Exercise Price | | Shares
Under Option | | Weighted Average
Exercise Price | | Shares
Under Option | | Weighted Average
Exercise Price |
| | (In thousands, except exercise price amounts) |
| Outstanding, beginning of year | | 3,537 | | | $ | 72.10 | | | 4,298 | | | $ | 75.24 | | | 4,872 | | | $ | 75.95 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Forfeited | | — | | | — | | | (37) | | | 44.98 | | | (80) | | | 34.58 | |
| Expired | | (525) | | | 119.83 | | | (724) | | | 92.14 | | | (494) | | | 88.82 | |
Outstanding, end of year(1) | | 3,012 | | | 63.79 | | | 3,537 | | | 72.10 | | | 4,298 | | | 75.24 | |
| Expected to vest | | — | | | — | | | 150 | | | 45.77 | | | 495 | | | 49.11 | |
Exercisable, end of year(2) | | 3,012 | | | 63.79 | | | 3,387 | | | 73.26 | | | 3,803 | | | 78.64 | |
(1)As of December 31, 2021, options outstanding had a weighted average remaining contractual life of 3.1 years and no intrinsic value.
(2)As of December 31, 2021, options exercisable had a weighted average remaining contractual life of 3.1 years and no intrinsic value.
There were no options issued and no options exercised during the years ended December 31, 2021, 2020, and 2019.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Restricted Stock Units and Restricted Stock Phantom Units
The Company has restricted stock unit and restricted stock phantom unit plans for eligible employees, including officers. The value of the stock-settled restricted stock unit awards is established by the market price on the date of grant and is recorded as compensation expense ratably over the vesting terms. The restricted stock phantom unit awards represent a hypothetical interest in either the Company’s common stock or in ALTM’s common stock, as applicable, and, once vested, are settled in cash. Compensation expense related to the cash-settled awards is recorded as a liability and remeasured at the end of each reporting period over the applicable vesting term.
For the years ended December 31, 2021, 2020, and 2019, compensation costs charged to expense for the restricted stock units and restricted stock phantom units was $95 million, $39 million, and $104 million, respectively. As of December 31, 2021, 2020, and 2019, capitalized compensation costs for the restricted stock units and restricted stock phantom units were $15 million, $6 million, and $24 million, respectively.
The following table summarizes stock-settled restricted stock unit activity for the years ended December 31, 2021, 2020, and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| | Units | | Weighted
Average Grant-Date Fair Value | | Units | | Weighted
Average Grant-Date Fair Value | | Units | | Weighted
Average Grant-Date Fair Value |
| | (In thousands, except per share amounts) |
| Non-vested, beginning of year | | 1,552 | | | $ | 28.43 | | | 2,448 | | | $ | 46.65 | | | 3,153 | | | $ | 55.54 | |
| Granted | | 1,506 | | | 16.46 | | | 1,352 | | | 24.60 | | | 1,479 | | | 36.81 | |
Vested(3) | | (857) | | | 29.13 | | | (1,933) | | | 48.65 | | | (1,899) | | | 53.99 | |
| Forfeited | | (128) | | | 19.78 | | | (315) | | | 30.09 | | | (285) | | | 45.06 | |
Non-vested, end of year(1)(2) | | 2,073 | | | 19.98 | | | 1,552 | | | 28.43 | | | 2,448 | | | 46.65 | |
(1)As of December 31, 2021, there was $14 million of total unrecognized compensation cost related to 2,073,419 unvested stock-settled restricted stock units.
(2)As of December 31, 2021, the weighted-average remaining life of unvested stock-settled restricted stock units is approximately 0.8 years.
(3)The grant date fair values of the stock-settled awards vested during 2021, 2020, and 2019 were approximately $25 million, $94 million, and $103 million, respectively.
The following table summarizes cash-settled restricted stock phantom unit activity for the years ended December 31, 2021, 2020, and 2019:
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (In thousands) |
| Non-vested, beginning of year | | 4,423 | | | 5,384 | | | 1,818 | |
Adjustment for ALTM reverse stock split(1) | | — | | | (1,246) | | | — | |
Granted(2) | | 4,441 | | | 3,462 | | | 4,831 | |
| Vested | | (2,049) | | | (1,618) | | | (616) | |
| Forfeited | | (413) | | | (1,559) | | | (649) | |
Non-vested, end of year(3) | | 6,402 | | | 4,423 | | | 5,384 | |
(1)On June 30, 2020, ALTM executed a 1-for-20 reverse stock split of its outstanding common stock. Outstanding cash-settled awards are based on the per-share market price of ALTM stock.
(2)Restricted stock phantom units granted during 2021 and 2020 included 4,375,546 and 3,378,486 awards, respectively, based on the per-share market price of APA common stock and 65,327 and 83,239 awards, respectively, based on the per-share market price of ALTM common stock. The restricted stock phantom units granted during 2020 based on ALTM’s per-share market price reflect the 1-for-20 reverse stock split described above.
(3)The outstanding liability for the unvested cash-settled restricted stock phantom units that had not been recognized as of December 31, 2021 was approximately $74 million.
In January 2022, the Company awarded 775,942 restricted stock units and 2,512,602 restricted stock phantom units based on APA’s weighted-average per-share market price of $29.46 under the 2016 Plan to eligible employees. Total compensation cost for the restricted stock units and the restricted stock phantom units, absent any forfeitures, is estimated to be $23 million and $76 million, respectively, and was calculated based on the per-share fair market value of a share of the Company’s common stock as of the grant date. Compensation cost will be recognized over a three-year vesting period for both plans. The phantom units will be classified as a liability and remeasured at the end of each reporting period based on the change in fair value of one share of the Company’s common stock.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Also during January 2022, the Company awarded 27,643 restricted stock phantom units based on ALTM’s weighted-average per-share market price of $63.63. The restricted stock phantom units represent a hypothetical interest in ALTM’s common stock and, once vested, are settled in cash. Total compensation cost for these restricted stock phantom units, absent any forfeitures, is estimated to be $2 million and was calculated based on the fair market value of ALTM’s common stock as of the grant date. The restricted stock phantom units will be classified as a liability and remeasured at the end of each reporting period based on the change in fair value of one share of ALTM’s common stock.
Performance Program
To provide long-term incentives for the Company’s employees to deliver competitive shareholder returns, the Company makes annual grants of conditional restricted stock units to eligible employees. APA has a performance program for certain eligible employees with payout for 50 percent of the shares based upon measurement of total shareholder return (TSR) of APA common stock as compared to a designated peer group during a three-year performance period. Payout for the remaining 50 percent of the shares is based on performance and financial objectives as defined in the plan. The overall results of the objectives are calculated at the end of the award’s stated performance period and, if a payout is warranted, applied to the target number of restricted stock units awarded. The performance shares will immediately vest 50 percent at the end of the three-year performance period, with the remaining 50 percent vesting at the end of the following year. Grants from the performance programs outstanding at December 31, 2021, are as described below:
•In January 2017, the Company’s Board of Directors approved the 2017 Performance Program, pursuant to the 2016 Plan. Eligible employees received initial stock-settled conditional restricted stock unit awards totaling 620,885 units. A total of 1,868 restricted stock units were outstanding as of December 31, 2021. The results for the performance period yielded a payout of 54 percent of target.
•In January 2018, the Company’s Board of Directors approved the 2018 Performance Program, pursuant to the 2016 Plan. Eligible employees received initial cash-settled conditional phantom units totaling 931,049 units. A total of 97,645 phantom units were outstanding as of December 31, 2021. The results for the performance period yielded a payout of 23 percent of target.
•In January 2019, the Company’s Board of Directors approved the 2019 Performance Program, pursuant to the 2016 Plan. Eligible employees received initial cash-settled conditional phantom units totaling 1,679,832 units. A total of 1,247,706 phantom units were outstanding as of December 31, 2021. The results for the performance period yielded a payout of 100 percent of target.
•In January 2020, the Company’s Board of Directors approved the 2020 Performance Program, pursuant to the 2016 Plan. Eligible employees received initial cash-settled conditional phantom units totaling 1,687,307 units. The actual amount of phantom units awarded will be between zero and 200 percent of target. A total of 1,330,823 phantom units were outstanding as of December 31, 2021, from which a minimum of zero to a maximum of 2,661,646 phantom units could be awarded.
•In January 2021, the Company’s Board of Directors approved the 2021 Performance Program, pursuant to the 2016 Plan. Eligible employees received the initial cash-settled conditional phantom units totaling 1,959,856 units. The actual amount of phantom units awarded will be between zero and 200 percent of target. A total of 1,854,736 phantom units were outstanding as of December 31, 2021, from which a minimum of zero to a maximum of 3,709,472 units could be awarded.
The fair value cost of the stock-settled awards was estimated on the date of grant and is recorded as compensation expense ratably over the applicable vesting term. The fair value of the cash-settled awards is remeasured at the end of each reporting period over the applicable vesting term. Compensation costs charged to expense under the performance programs were an expense of $57 million, a credit of $8 million, and an expense of $24 million during 2021, 2020, and 2019, respectively. Capitalized compensation costs under the performance programs were an expense of $3 million, a credit of $1 million, and an expense of $3 million during 2021, 2020, and 2019, respectively.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table summarizes cash-settled conditional restricted stock unit activity for the year ended December 31, 2021:
| | | | | | | | |
| | Units |
| | | (In thousands) |
| Non-vested, beginning of year | | 3,417 | |
| Granted | | 1,782 | |
| Vested | | (76) | |
| Forfeited | | (240) | |
| Expired | | (352) | |
Non-vested, end of year(1) | | 4,531 | |
(1)As of December 31, 2021, the outstanding liability for the unvested cash-settled conditional restricted stock units that had not been recognized was approximately $36 million.
In January 2022, the Company’s board of directors approved the 2022 Performance Program, pursuant to the 2016 Plan. Payout for 50 percent of the shares is based upon measurement of TSR of APA common stock as compared to a designated peer group and the S&P 500 Index during a three-year performance period. Payout for the remaining 50 percent of the shares is based on performance and financial objectives as defined in the plan. Eligible employees received the initial cash-settled conditional phantom units totaling 1,093,034 units, with the ultimate number of phantom units to be awarded ranging from zero to a maximum of 2,186,068 units. These phantom units represent a hypothetical interest in the Company’s common stock, and, once vested, are settled in cash. The TSR component of the award had a grant date fair value per award of $41.88 based on a Monte Carlo simulation. The grant date fair value per award for the remaining 50 percent was $29.46 based on the weighted-average fair market value of a share of common stock of the Company as of the grant date. These phantom units will be classified as a liability and remeasured at the end of each reporting period.
15. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Components of accumulated other comprehensive income (loss) include the following:
| | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, |
| | | 2021 | | 2020 | | 2019 |
| | | (In millions) |
| Share of equity method interests other comprehensive loss | | $ | — | | | $ | (1) | | | $ | (1) | |
Pension and postretirement benefit plan (Note 12) | | 22 | | | 15 | | | 17 | |
| Accumulated other comprehensive income | | $ | 22 | | | $ | 14 | | | $ | 16 | |
16. MAJOR CUSTOMERS
The Company is exposed to credit risk in the event of nonpayment by counterparties, a significant portion of which are concentrated in energy-related industries. The creditworthiness of customers and other counterparties is subject to continuing review, including the use of master netting agreements, where appropriate. During 2021, sales to EGPC and CFE International accounted for approximately 14 percent and 10 percent, respectively, of the Company’s worldwide crude oil, natural gas, and NGLs production revenues. During 2020, sales to EGPC and Vitol accounted for approximately 17 percent and 14 percent, respectively, of the Company’s worldwide crude oil, natural gas, and NGLs production revenues. During 2019, sales to BP PLC and Sinopec, and their respective affiliates, each accounted for approximately 10 percent and 11 percent, respectively, of the Company’s worldwide crude oil, natural gas, and NGLs production revenues.
Management does not believe that the loss of any one of these customers would have a material adverse effect on the results of operations.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
17. BUSINESS SEGMENT INFORMATION
As of December 31, 2021, the Company is engaged in exploration and production (Upstream) activities across three operating segments: Egypt, North Sea, and the U.S. The Company also has active exploration and appraisal operations ongoing in Suriname, as well as interests in other international locations that may, over time, result in reportable discoveries and development opportunities. The Company’s Upstream business explores for, develops, and produces natural gas, crude oil and NGLs. The midstream business is operated by Altus, which owns, develops, and operates a midstream energy asset network in the Permian Basin of West Texas. Financial information for each segment is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Egypt(1) | | North Sea | | U.S. | | Altus Midstream | | Intersegment Eliminations & Other | | Total(2) |
| | Upstream | | | |
| | | (In millions) |
| 2021 | | | | | | | | | | | | |
| Oil revenues | | $ | 1,806 | | | $ | 929 | | | $ | 1,850 | | | $ | — | | | $ | — | | | $ | 4,585 | |
| Natural gas revenues | | 270 | | | 183 | | | 754 | | | — | | | — | | | 1,207 | |
| Natural gas liquids revenues | | 9 | | | 24 | | | 676 | | | — | | | (3) | | | 706 | |
| Oil, natural gas, and natural gas liquids production revenues | | 2,085 | | | 1,136 | | | 3,280 | | | — | | | (3) | | | 6,498 | |
| Purchased oil and gas sales | | — | | | — | | | 1,476 | | | 11 | | | — | | | 1,487 | |
| Midstream service affiliate revenues | | — | | | — | | | — | | | 127 | | | (127) | | | — | |
| | 2,085 | | | 1,136 | | | 4,756 | | | 138 | | | (130) | | | 7,985 | |
| Operating Expenses: | | | | | | | | | | | | |
| Lease operating expenses | | 469 | | | 383 | | | 391 | | | — | | | (2) | | | 1,241 | |
| Gathering, processing, and transmission | | 12 | | | 39 | | | 309 | | | 32 | | | (128) | | | 264 | |
| Purchased oil and gas costs | | — | | | — | | | 1,575 | | | 5 | | | — | | | 1,580 | |
| Taxes other than income | | — | | | — | | | 190 | | | 14 | | | — | | | 204 | |
| Exploration | | 63 | | | 34 | | | 28 | | | — | | | 30 | | | 155 | |
| Depreciation, depletion, and amortization | | 524 | | | 270 | | | 554 | | | 12 | | | — | | | 1,360 | |
| Asset retirement obligation accretion | | — | | | 79 | | | 30 | | | 4 | | | — | | | 113 | |
| Impairments | | 26 | | | 22 | | | — | | | 160 | | | — | | | 208 | |
| | 1,094 | | | 827 | | | 3,077 | | | 227 | | | (100) | | | 5,125 | |
| Operating Income (Loss) | | $ | 991 | | | $ | 309 | | | $ | 1,679 | | | $ | (89) | | | $ | (30) | | | 2,860 | |
| Other Income (Expense): | | | | | | | | | | | | |
| Gain on divestitures, net | | | | | | | | | | | | 67 | |
| Loss on previously sold Gulf of Mexico properties | | | | | | | | | | | | (446) | |
| Derivative instrument gain, net | | | | | | | | | | | | 94 | |
| Other | | | | | | | | | | | | 228 | |
| General and administrative | | | | | | | | | | | | (376) | |
| Transaction, reorganization, and separation | | | | | | | | | | | | (22) | |
| Financing costs, net | | | | | | | | | | | | (514) | |
| Income Before Income Taxes | | | | | | | | | | | | $ | 1,891 | |
| | | | | | | | | | | | |
Total Assets(3) | | $ | 2,796 | | | $ | 2,199 | | | $ | 6,269 | | | $ | 1,698 | | | $ | 341 | | | $ | 13,303 | |
| Net Property and Equipment | | $ | 1,720 | | | $ | 1,646 | | | $ | 4,507 | | | $ | 187 | | | $ | 275 | | | $ | 8,335 | |
| Additions to Net Property and Equipment | | $ | 319 | | | $ | 159 | | | $ | 523 | | | $ | 3 | | | $ | 151 | | | $ | 1,155 | |
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Egypt(1) | | North Sea | | U.S. | | Altus Midstream | | Intersegment Eliminations & Other | | Total(2) |
| | Upstream | | | |
| | | (In millions) |
| 2020 | | | | | | | | | | | | |
| Oil revenues | | $ | 1,102 | | | $ | 795 | | | $ | 1,209 | | | $ | — | | | $ | — | | | $ | 3,106 | |
| Natural gas revenues | | 280 | | | 67 | | | 251 | | | — | | | — | | | 598 | |
| Natural gas liquids revenues | | 8 | | | 21 | | | 304 | | | — | | | — | | | 333 | |
| Oil, natural gas, and natural gas liquids production revenues | | 1,390 | | | 883 | | | 1,764 | | | — | | | — | | | 4,037 | |
| Purchased oil and gas sales | | — | | | — | | | 394 | | | 4 | | | — | | | 398 | |
| Midstream service affiliate revenues | | — | | | — | | | — | | | 145 | | | (145) | | | — | |
| | 1,390 | | | 883 | | | 2,158 | | | 149 | | | (145) | | | 4,435 | |
| Operating Expenses: | | | | | | | | | | | | |
| Lease operating expenses | | 424 | | | 305 | | | 400 | | | — | | | (2) | | | 1,127 | |
| Gathering, processing, and transmission | | 38 | | | 50 | | | 291 | | | 38 | | | (143) | | | 274 | |
| Purchased oil and gas costs | | — | | | — | | | 354 | | | 3 | | | — | | | 357 | |
| Taxes other than income | | — | | | — | | | 108 | | | 15 | | | — | | | 123 | |
| Exploration | | 63 | | | 28 | | | 168 | | | — | | | 15 | | | 274 | |
| Depreciation, depletion, and amortization | | 601 | | | 380 | | | 779 | | | 12 | | | — | | | 1,772 | |
| Asset retirement obligation accretion | | — | | | 73 | | | 32 | | | 4 | | | — | | | 109 | |
| Impairments | | 529 | | | 7 | | | 3,963 | | | 2 | | | — | | | 4,501 | |
| | 1,655 | | | 843 | | | 6,095 | | | 74 | | | (130) | | | 8,537 | |
| Operating Income (Loss) | | $ | (265) | | | $ | 40 | | | $ | (3,937) | | | $ | 75 | | | $ | (15) | | | (4,102) | |
| Other Income (Expense): | | | | | | | | | | | | |
| Gain on divestitures, net | | | | | | | | | | | | 32 | |
| Derivative instrument losses, net | | | | | | | | | | | | (223) | |
| Other | | | | | | | | | | | | 64 | |
| General and administrative | | | | | | | | | | | | (290) | |
| Transaction, reorganization, and separation | | | | | | | | | | | | (54) | |
| Financing costs, net | | | | | | | | | | | | (267) | |
| Loss Before Income Taxes | | | | | | | | | | | | $ | (4,840) | |
| | | | | | | | | | | | |
Total Assets(3) | | $ | 3,003 | | | $ | 2,220 | | | $ | 5,540 | | | $ | 1,786 | | | $ | 197 | | | $ | 12,746 | |
| Net Property and Equipment | | $ | 1,955 | | | $ | 1,773 | | | $ | 4,760 | | | $ | 196 | | | $ | 135 | | | $ | 8,819 | |
| Additions to Net Property and Equipment | | $ | 454 | | | $ | 215 | | | $ | 345 | | | $ | 12 | | | $ | 136 | | | $ | 1,162 | |
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Egypt(1) | | North Sea | | U.S. | | Altus Midstream | | Intersegment Eliminations & Other | | Total(2) |
| | Upstream | | | |
| | (In millions) |
| 2019 | | | | | | | | | | | | |
| Oil revenues | | $ | 1,969 | | | $ | 1,163 | | | $ | 2,098 | | | $ | — | | | $ | — | | | $ | 5,230 | |
| Natural gas revenues | | 295 | | | 90 | | | 293 | | | — | | | — | | | 678 | |
| Natural gas liquids revenues | | 12 | | | 23 | | | 372 | | | — | | | — | | | 407 | |
| Oil, natural gas, and natural gas liquids production revenues | | 2,276 | | | 1,276 | | | 2,763 | | | — | | | — | | | 6,315 | |
| Purchased oil and gas sales | | — | | | — | | | 176 | | | — | | | — | | | 176 | |
| Midstream service affiliate revenues | | — | | | — | | | — | | | 136 | | | (136) | | | — | |
| | 2,276 | | | 1,276 | | | 2,939 | | | 136 | | | (136) | | | 6,491 | |
| Operating Expenses: | | | | | | | | | | | | |
| Lease operating expenses | | 484 | | | 320 | | | 645 | | | — | | | (2) | | | 1,447 | |
| Gathering, processing, and transmission | | 40 | | | 45 | | | 299 | | | 56 | | | (134) | | | 306 | |
| Purchased oil and gas costs | | — | | | — | | | 142 | | | — | | | — | | | 142 | |
| Taxes other than income | | — | | | — | | | 194 | | | 13 | | | — | | | 207 | |
| Exploration | | 100 | | | 2 | | | 688 | | | — | | | 15 | | | 805 | |
| Depreciation, depletion, and amortization | | 708 | | | 366 | | | 1,566 | | | 40 | | | — | | | 2,680 | |
| Asset retirement obligation accretion | | — | | | 76 | | | 29 | | | 2 | | | — | | | 107 | |
| Impairments | | — | | | — | | | 1,648 | | | 1,301 | | | — | | | 2,949 | |
| | 1,332 | | | 809 | | | 5,211 | | | 1,412 | | | (121) | | | 8,643 | |
| Operating Income (Loss) | | $ | 944 | | | $ | 467 | | | $ | (2,272) | | | $ | (1,276) | | | $ | (15) | | | (2,152) | |
| Other Income (Expense): | | | | | | | | | | | | |
| Gain on divestitures, net | | | | | | | | | | | | 43 | |
| Derivative instrument losses, net | | | | | | | | | | | | (35) | |
| Other | | | | | | | | | | | | 54 | |
| General and administrative | | | | | | | | | | | | (406) | |
| Transaction, reorganization, and separation | | | | | | | | | | | | (50) | |
| Financing costs, net | | | | | | | | | | | | (462) | |
| Loss Before Income Taxes | | | | | | | | | | | | $ | (3,008) | |
| | | | | | | | | | | | |
Total Assets(3) | | $ | 3,700 | | | $ | 2,473 | | | $ | 10,388 | | | $ | 1,479 | | | $ | 67 | | | $ | 18,107 | |
| Net Property and Equipment | | $ | 2,573 | | | $ | 1,956 | | | $ | 9,385 | | | $ | 206 | | | $ | 38 | | | $ | 14,158 | |
| Additions to Net Property and Equipment | | $ | 454 | | | $ | 183 | | | $ | 1,696 | | | $ | 308 | | | $ | 93 | | | $ | 2,734 | |
(1)Includes revenue from non-customers for the years ended December 31, 2021, 2020, and 2019 of:
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| | (In millions) |
| Oil | | $ | 420 | | | $ | 95 | | | $ | 410 | |
| Natural gas | | 47 | | | 14 | | | 40 | |
| Natural gas liquids | | 2 | | | — | | | 1 | |
(2)Includes a noncontrolling interest in Egypt and Altus Midstream.
(3)Intercompany balances are excluded from total assets.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
18. SUPPLEMENTAL OIL AND GAS DISCLOSURES (Unaudited)
Oil and Gas Operations
The following table sets forth revenue and direct cost information relating to the Company’s oil and gas exploration and production activities. The Company has no long-term agreements to purchase oil or gas production from foreign governments or authorities.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | United
States | | Egypt(1) | | North Sea | | Other
International | | Total(1) |
| | | (In millions, except per boe) |
| 2021 | | | | | | | | | | |
| Oil and gas production revenues | | $ | 3,280 | | | $ | 2,085 | | | $ | 1,136 | | | $ | — | | | $ | 6,501 | |
| Operating cost: | | | | | | | | | | |
Depreciation, depletion, and amortization(2) | | 511 | | | 477 | | | 267 | | | — | | | 1,255 | |
| Asset retirement obligation accretion | | 30 | | | — | | | 79 | | | — | | | 109 | |
| Lease operating expenses | | 391 | | | 469 | | | 383 | | | — | | | 1,243 | |
| Gathering, processing, and transmission | | 309 | | | 12 | | | 39 | | | — | | | 360 | |
| Exploration expenses | | 28 | | | 63 | | | 34 | | | 30 | | | 155 | |
| | | | | | | | | | |
Production taxes(3) | | 188 | | | — | | | — | | | — | | | 188 | |
| Income tax | | 383 | | | 479 | | | 134 | | | — | | | 996 | |
| | 1,840 | | | 1,500 | | | 936 | | | 30 | | | 4,306 | |
| Results of operations | | $ | 1,440 | | | $ | 585 | | | $ | 200 | | | $ | (30) | | | $ | 2,195 | |
| 2020 | | | | | | | | | | |
| Oil and gas production revenues | | $ | 1,764 | | | $ | 1,390 | | | $ | 883 | | | $ | — | | | $ | 4,037 | |
| Operating cost: | | | | | | | | | | |
Depreciation, depletion, and amortization(2) | | 726 | | | 540 | | | 377 | | | — | | | 1,643 | |
| Asset retirement obligation accretion | | 32 | | | — | | | 73 | | | — | | | 105 | |
| Lease operating expenses | | 400 | | | 424 | | | 305 | | | — | | | 1,129 | |
| Gathering, processing, and transmission | | 291 | | | 38 | | | 50 | | | — | | | 379 | |
| Exploration expenses | | 168 | | | 63 | | | 28 | | | 15 | | | 274 | |
| Impairments related to oil and gas properties | | 3,938 | | | 374 | | | 7 | | | — | | | 4,319 | |
Production taxes(3) | | 106 | | | — | | | — | | | — | | | 106 | |
| Income tax | | (818) | | | (22) | | | 17 | | | — | | | (823) | |
| | 4,843 | | | 1,417 | | | 857 | | | 15 | | | 7,132 | |
| Results of operations | | $ | (3,079) | | | $ | (27) | | | $ | 26 | | | $ | (15) | | | $ | (3,095) | |
| 2019 | | | | | | | | | | |
| Oil and gas production revenues | | $ | 2,763 | | | $ | 2,276 | | | $ | 1,276 | | | $ | — | | | $ | 6,315 | |
| Operating cost: | | | | | | | | | | |
Depreciation, depletion, and amortization(2) | | 1,508 | | | 641 | | | 363 | | | — | | | 2,512 | |
| Asset retirement obligation accretion | | 29 | | | — | | | 76 | | | — | | | 105 | |
| Lease operating expenses | | 645 | | | 484 | | | 320 | | | — | | | 1,449 | |
| Gathering, processing, and transmission | | 299 | | | 40 | | | 45 | | | — | | | 384 | |
| Exploration expenses | | 688 | | | 100 | | | 2 | | | 15 | | | 805 | |
| Impairments related to oil and gas properties | | 1,633 | | | — | | | — | | | — | | | 1,633 | |
Production taxes(3) | | 191 | | | — | | | — | | | — | | | 191 | |
| Income tax | | (468) | | | 455 | | | 188 | | | — | | | 175 | |
| | 4,525 | | | 1,720 | | | 994 | | | 15 | | | 7,254 | |
| Results of operations | | $ | (1,762) | | | $ | 556 | | | $ | 282 | | | $ | (15) | | | $ | (939) | |
(1)Includes a noncontrolling interest in Egypt.
(3)Reflects only amounts directly related to oil and gas producing properties and, therefore, does not agree with taxes other than income reflected on Note 17—Business Segment Information.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Costs Incurred in Oil and Gas Property Acquisitions, Exploration, and Development Activities
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | United
States | | Egypt(2) | | North Sea | | Other
International | | Total(2) |
| | | (In millions) |
| 2021 | | | | | | | | | | |
| Acquisitions: | | | | | | | | | | |
| Proved | | $ | — | | | $ | (157) | | | $ | — | | | $ | — | | | $ | (157) | |
| Unproved | | 9 | | | 20 | | | — | | | — | | | 29 | |
| Exploration | | 6 | | | 86 | | | 39 | | | 170 | | | 301 | |
| Development | | 545 | | | 404 | | | 135 | | | 2 | | | 1,086 | |
Costs incurred(1) | | $ | 560 | | | $ | 353 | | | $ | 174 | | | $ | 172 | | | $ | 1,259 | |
(1) Includes capitalized interest, asset retirement costs, and Egypt modernization impacts as follows: | | |
| Capitalized interest | | $ | — | | | $ | — | | | $ | — | | | $ | 9 | | | $ | 9 | |
| Asset retirement costs | | 130 | | | — | | | 19 | | | — | | | 149 | |
| Egypt PSC modernization impacts - Proved and Unproved | | — | | | (145) | | | — | | | — | | | (145) | |
| 2020 | | | | | | | | | | |
| Acquisitions: | | | | | | | | | | |
| Proved | | $ | — | | | $ | 7 | | | $ | — | | | $ | — | | | $ | 7 | |
| Unproved | | 4 | | | — | | | — | | | — | | | 4 | |
| Exploration | | 8 | | | 102 | | | 68 | | | 150 | | | 328 | |
| Development | | 332 | | | 378 | | | 162 | | | — | | | 872 | |
Costs incurred(1) | | $ | 344 | | | $ | 487 | | | $ | 230 | | | $ | 150 | | | $ | 1,211 | |
(1) Includes capitalized interest and asset retirement costs as follows: | | | |
| Capitalized interest | | $ | — | | | $ | — | | | $ | — | | | $ | 3 | | | $ | 3 | |
| Asset retirement costs | | 9 | | | — | | | 29 | | | — | | | 38 | |
| 2019 | | | | | | | | | | |
| Acquisitions: | | | | | | | | | | |
| Proved | | $ | 3 | | | $ | 5 | | | $ | — | | | $ | — | | | $ | 8 | |
| Unproved | | 47 | | | 10 | | | — | | | — | | | 57 | |
| Exploration | | 162 | | | 139 | | | 62 | | | 105 | | | 468 | |
| Development | | 1,500 | | | 374 | | | 119 | | | 3 | | | 1,996 | |
Costs incurred(1) | | $ | 1,712 | | | $ | 528 | | | $ | 181 | | | $ | 108 | | | $ | 2,529 | |
(1) Includes capitalized interest and asset retirement costs as follows: | | |
| Capitalized interest | | $ | 23 | | | $ | — | | | $ | 5 | | | $ | 4 | | | $ | 32 | |
| Asset retirement costs | | 14 | | | — | | | (111) | | | — | | | (97) | |
(2) Includes a noncontrolling interest in Egypt. |
In 2021, in connection with APA’s agreement to enter into a modernized PSC agreement with EGPC, as referenced in Note 1—Summary of Significant Accounting Policies, the Company recorded a reduction in proved properties totaling $165 million and an increase in unproved properties of $20 million, reflecting $247 million of incremental value due to the Company for the period between the effective date of April 1, 2021 and closing, partially offset by a $100 million signing bonus and $2 million of other post-closing adjustments.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Capitalized Costs
The following table sets forth the capitalized costs and associated accumulated depreciation, depletion, and amortization relating to the Company’s oil and gas acquisition, exploration, and development activities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | United
States | | | | Egypt(1) | | North
Sea | | Other
International | | Total(1) |
| | | (In millions) |
| 2021 | | | | | | | | | | | | |
| Proved properties | | $ | 18,732 | | | | | $ | 12,373 | | | $ | 8,954 | | | $ | — | | | $ | 40,059 | |
| Unproved properties | | 319 | | | | | 63 | | | 33 | | | 275 | | | 690 | |
| | 19,051 | | | | | 12,436 | | | 8,987 | | | 275 | | | 40,749 | |
| Accumulated DD&A | | (14,814) | | | | | (10,767) | | | (7,345) | | | — | | | (32,926) | |
| | $ | 4,237 | | | | | $ | 1,669 | | | $ | 1,642 | | | $ | 275 | | | $ | 7,823 | |
| | | | | | | | | | | | |
| 2020 | | | | | | | | | | | | |
| Proved properties | | $ | 20,343 | | | | | $ | 12,069 | | | $ | 8,805 | | | $ | — | | | $ | 41,217 | |
| Unproved properties | | 348 | | | | | 77 | | | 42 | | | 135 | | | 602 | |
| | 20,691 | | | | | 12,146 | | | 8,847 | | | 135 | | | 41,819 | |
| Accumulated DD&A | | (16,252) | | | | | (10,290) | | | (7,081) | | | — | | | (33,623) | |
| | $ | 4,439 | | | | | $ | 1,856 | | | $ | 1,766 | | | $ | 135 | | | $ | 8,196 | |
(1)Includes a noncontrolling interest in Egypt.
Oil and Gas Reserve Information
Proved oil and gas reserves are those quantities of natural gas, crude oil, condensate, and NGLs, which by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations. Estimated proved developed oil and gas reserves can be expected to be recovered through existing wells with existing equipment and operating methods. The Company reports all estimated proved reserves held under production-sharing arrangements utilizing the “economic interest” method, which excludes the host country’s share of reserves.
Estimated reserves that can be produced economically through application of improved recovery techniques are included in the “proved” classification when successful testing by a pilot project or the operation of an active, improved recovery program using reliable technology establishes the reasonable certainty for the engineering analysis on which the project or program is based. Economically producible means a resource that generates revenue that exceeds, or is reasonably expected to exceed, the costs of the operation. Reasonable certainty means a high degree of confidence that the quantities will be recovered. Reliable technology is a grouping of one or more technologies (including computational methods) that has been field-tested and has been demonstrated to provide reasonably certain results with consistency and repeatability in the formation being evaluated or in an analogous formation. In estimating its proved reserves, the Company uses several different traditional methods that can be classified in three general categories: (1) performance-based methods; (2) volumetric-based methods; and (3) analogy with similar properties. The Company will, at times, utilize additional technical analysis such as computer reservoir models, petrophysical techniques, and proprietary 3-D seismic interpretation methods to provide additional support for more complex reservoirs. Information from this additional analysis is combined with traditional methods outlined above to enhance the certainty of the Company’s reserve estimates.
There are numerous uncertainties inherent in estimating quantities of proved reserves and projecting future rates of production and timing of development expenditures. The reserve data in the following tables only represent estimates and should not be construed as being exact.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Crude Oil and Condensate |
| | | United
States | | Egypt(1) | | | | North
Sea | | | | Total(1) |
| | (Thousands of barrels) |
| Proved developed reserves: | | | | | | | | | | | | |
| December 31, 2018 | | 300,484 | | | 110,014 | | | | | 104,491 | | | | | 514,989 | |
| December 31, 2019 | | 278,145 | | | 103,573 | | | | | 101,712 | | | | | 483,430 | |
| December 31, 2020 | | 206,936 | | | 95,981 | | | | | 86,566 | | | | | 389,483 | |
| December 31, 2021 | | 180,968 | | | 106,646 | | | | | 77,073 | | | | | 364,687 | |
| Proved undeveloped reserves: | | | | | | | | | | | | |
| December 31, 2018 | | 45,182 | | | 9,484 | | | | | 11,278 | | | | | 65,944 | |
| December 31, 2019 | | 46,716 | | | 10,831 | | | | | 10,049 | | | | | 67,596 | |
| December 31, 2020 | | 25,516 | | | 11,228 | | | | | 7,273 | | | | | 44,017 | |
| December 31, 2021 | | 18,168 | | | 11,003 | | | | | 5,757 | | | | | 34,928 | |
| | | | | | | | | | | | |
| Total proved reserves: | | | | | | | | | | | | |
| Balance December 31, 2018 | | 345,666 | | | 119,498 | | | | | 115,769 | | | | | 580,933 | |
| Extensions, discoveries and other additions | | 52,297 | | | 21,039 | | | | | 9,017 | | | | | 82,353 | |
| | | | | | | | | | | | |
| Revisions of previous estimates | | (16,446) | | | 4,752 | | | | | 5,132 | | | | | (6,562) | |
| Production | | (38,344) | | | (30,885) | | | | | (18,157) | | | | | (87,386) | |
| Sales of minerals in-place | | (18,312) | | | — | | | | | — | | | | | (18,312) | |
| Balance December 31, 2019 | | 324,861 | | | 114,404 | | | | | 111,761 | | | | | 551,026 | |
| Extensions, discoveries and other additions | | 17,858 | | | 17,855 | | | | | 5,275 | | | | | 40,988 | |
| | | | | | | | | | | | |
| Revisions of previous estimates | | (69,247) | | | 2,541 | | | | | (4,756) | | | | | (71,462) | |
| Production | | (32,299) | | | (27,591) | | | | | (18,441) | | | | | (78,331) | |
| Sales of minerals in-place | | (8,721) | | | — | | | | | — | | | | | (8,721) | |
| Balance December 31, 2020 | | 232,452 | | | 107,209 | | | | | 93,839 | | | | | 433,500 | |
| Extensions, discoveries and other additions | | 17,869 | | | 13,390 | | | | | 2,288 | | | | | 33,547 | |
| Purchases of minerals in-place | | 126 | | | — | | | | | — | | | | | 126 | |
| Revisions of previous estimates | | (4,479) | | | 22,727 | | | | | (60) | | | | | 18,188 | |
| Production | | (27,450) | | | (25,677) | | | | | (13,237) | | | | | (66,364) | |
| Sales of minerals in-place | | (19,382) | | | — | | | | | — | | | | | (19,382) | |
| Balance December 31, 2021 | | 199,136 | | | 117,649 | | | | | 82,830 | | | | | 399,615 | |
(1)Includes proved reserves of 39 MMbbls, 36 MMbbls, 38 MMbbls, and 40 MMbbls as of December 31, 2021, 2020, 2019, and 2018, respectively, attributable to a noncontrolling interest in Egypt.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Natural Gas Liquids |
| | | United
States | | Egypt(1) | | | | North
Sea | | | | Total(1) |
| | (Thousands of barrels) |
| Proved developed reserves: | | | | | | | | | | | | |
| December 31, 2018 | | 197,574 | | | 502 | | | | | 1,938 | | | | | 200,014 | |
| December 31, 2019 | | 158,794 | | | 667 | | | | | 2,317 | | | | | 161,778 | |
| December 31, 2020 | | 150,599 | | | 716 | | | | | 2,053 | | | | | 153,368 | |
| December 31, 2021 | | 164,172 | | | 446 | | | | | 2,059 | | | | | 166,677 | |
| Proved undeveloped reserves: | | | | | | | | | | | | |
| December 31, 2018 | | 33,796 | | | 60 | | | | | 631 | | | | | 34,487 | |
| December 31, 2019 | | 23,569 | | | 90 | | | | | 660 | | | | | 24,319 | |
| December 31, 2020 | | 15,141 | | | 126 | | | | | 320 | | | | | 15,587 | |
| December 31, 2021 | | 16,380 | | | 30 | | | | | 275 | | | | | 16,685 | |
| | | | | | | | | | | | |
| Total proved reserves: | | | | | | | | | | | | |
| Balance December 31, 2018 | | 231,370 | | | 562 | | | | | 2,569 | | | | | 234,501 | |
| Extensions, discoveries and other additions | | 41,343 | | | 27 | | | | | 697 | | | | | 42,067 | |
| | | | | | | | | | | | |
| Revisions of previous estimates | | (32,569) | | | 508 | | | | | 345 | | | | | (31,716) | |
| Production | | (24,959) | | | (340) | | | | | (634) | | | | | (25,933) | |
| Sales of minerals in-place | | (32,822) | | | — | | | | | — | | | | | (32,822) | |
| Balance December 31, 2019 | | 182,363 | | | 757 | | | | | 2,977 | | | | | 186,097 | |
| Extensions, discoveries and other additions | | 11,435 | | | 97 | | | | | 312 | | | | | 11,844 | |
| | | | | | | | | | | | |
| Revisions of previous estimates | | (469) | | | 264 | | | | | (207) | | | | | (412) | |
| Production | | (27,133) | | | (276) | | | | | (709) | | | | | (28,118) | |
| Sales of minerals in-place | | (456) | | | — | | | | | — | | | | | (456) | |
| Balance December 31, 2020 | | 165,740 | | | 842 | | | | | 2,373 | | | | | 168,955 | |
| Extensions, discoveries and other additions | | 21,055 | | | 7 | | | | | 81 | | | | | 21,143 | |
| Purchases of minerals in-place | | 191 | | | — | | | | | — | | | | | 191 | |
| Revisions of previous estimates | | 22,724 | | | (180) | | | | | 318 | | | | | 22,862 | |
| Production | | (24,175) | | | (193) | | | | | (438) | | | | | (24,806) | |
| Sales of minerals in-place | | (4,983) | | | — | | | | | — | | | | | (4,983) | |
| Balance December 31, 2021 | | 180,552 | | | 476 | | | | | 2,334 | | | | | 183,362 | |
(1) Includes proved reserves of 159 Mbbls, 281 Mbbls, 252 Mbbls, and 187 Mbbls as of December 31, 2021, 2020, 2019, and 2018, respectively, attributable to a noncontrolling interest in Egypt.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Natural Gas |
| | | United
States | | Egypt(1) | | | | North
Sea | | | | Total(1) |
| | (Millions of cubic feet) |
| Proved developed reserves: | | | | | | | | | | | | |
| December 31, 2018 | | 1,626,403 | | | 476,132 | | | | | 95,347 | | | | | 2,197,882 | |
| December 31, 2019 | | 945,938 | | | 433,382 | | | | | 106,329 | | | | | 1,485,649 | |
| December 31, 2020 | | 1,052,756 | | | 409,035 | | | | | 68,159 | | | | | 1,529,950 | |
| December 31, 2021 | | 1,237,461 | | | 464,826 | | | | | 76,155 | | | | | 1,778,442 | |
| Proved undeveloped reserves: | | | | | | | | | | | | |
| December 31, 2018 | | 267,090 | | | 33,006 | | | | | 15,804 | | | | | 315,900 | |
| December 31, 2019 | | 115,040 | | | 24,704 | | | | | 16,604 | | | | | 156,348 | |
| December 31, 2020 | | 76,504 | | | 12,572 | | | | | 8,341 | | | | | 97,417 | |
| December 31, 2021 | | 184,441 | | | 9,899 | | | | | 7,124 | | | | | 201,464 | |
| | | | | | | | | | | | |
| Total proved reserves: | | | | | | | | | | | | |
| Balance December 31, 2018 | | 1,893,493 | | | 509,138 | | | | | 111,151 | | | | | 2,513,782 | |
| Extensions, discoveries and other additions | | 249,205 | | | 34,758 | | | | | 27,711 | | | | | 311,674 | |
| | | | | | | | | | | | |
| Revisions of previous estimates | | (509,753) | | | 18,570 | | | | | 4,015 | | | | | (487,168) | |
| Production | | (233,447) | | | (104,380) | | | | | (19,944) | | | | | (357,771) | |
| Sales of minerals in-place | | (338,520) | | | — | | | | | — | | | | | (338,520) | |
| Balance December 31, 2019 | | 1,060,978 | | | 458,086 | | | | | 122,933 | | | | | 1,641,997 | |
| Extensions, discoveries and other additions | | 60,965 | | | 83,718 | | | | | 8,140 | | | | | 152,823 | |
| | | | | | | | | | | | |
| Revisions of previous estimates | | 215,166 | | | (19,849) | | | | | (33,541) | | | | | 161,776 | |
| Production | | (205,594) | | | (100,348) | | | | | (21,032) | | | | | (326,974) | |
| Sales of minerals in-place | | (2,255) | | | — | | | | | — | | | | | (2,255) | |
| Balance December 31, 2020 | | 1,129,260 | | | 421,607 | | | | | 76,500 | | | | | 1,627,367 | |
| Extensions, discoveries and other additions | | 227,684 | | | 50,209 | | | | | 3,684 | | | | | 281,577 | |
| Purchases of minerals in-place | | 839 | | | — | | | | | — | | | | | 839 | |
| Revisions of previous estimates | | 279,610 | | | 99,143 | | | | | 17,171 | | | | | 395,924 | |
| Production | | (192,523) | | | (96,234) | | | | | (14,076) | | | | | (302,833) | |
| Sales of minerals in-place | | (22,968) | | | — | | | | | — | | | | | (22,968) | |
| Balance December 31, 2021 | | 1,421,902 | | | 474,725 | | | | | 83,279 | | | | | 1,979,906 | |
(1) Includes proved reserves of 158 Bcf, 141 Bcf, 153 Bcf, and 170 Bcf as of December 31, 2021, 2020, 2019, and 2018, respectively, attributable to a noncontrolling interest in Egypt.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total Equivalent Reserves |
| | | United
States | | Egypt(1) | | | | North
Sea | | | | Total(1) |
| | (Thousands barrels of oil equivalent) |
| Proved developed reserves: | | | | | | | | | | | | |
| December 31, 2018 | | 769,125 | | | 189,871 | | | | | 122,320 | | | | | 1,081,316 | |
| December 31, 2019 | | 594,595 | | | 176,470 | | | | | 121,751 | | | | | 892,816 | |
| December 31, 2020 | | 532,994 | | | 164,870 | | | | | 99,979 | | | | | 797,843 | |
| December 31, 2021 | | 551,384 | | | 184,563 | | | | | 91,825 | | | | | 827,772 | |
| Proved undeveloped reserves: | | | | | | | | | | | | |
| December 31, 2018 | | 123,493 | | | 15,045 | | | | | 14,543 | | | | | 153,081 | |
| December 31, 2019 | | 89,458 | | | 15,038 | | | | | 13,476 | | | | | 117,972 | |
| December 31, 2020 | | 53,408 | | | 13,449 | | | | | 8,983 | | | | | 75,840 | |
| December 31, 2021 | | 65,288 | | | 12,683 | | | | | 7,219 | | | | | 85,190 | |
| | | | | | | | | | | | |
| Total proved reserves: | | | | | | | | | | | | |
| Balance December 31, 2018 | | 892,618 | | | 204,916 | | | | | 136,863 | | | | | 1,234,397 | |
| Extensions, discoveries and other additions | | 135,174 | | | 26,859 | | | | | 14,333 | | | | | 176,366 | |
| | | | | | | | | | | | |
| Revisions of previous estimates | | (133,974) | | | 8,355 | | | | | 6,146 | | | | | (119,473) | |
| Production | | (102,211) | | | (48,622) | | | | | (22,115) | | | | | (172,948) | |
| Sales of minerals in-place | | (107,554) | | | — | | | | | — | | | | | (107,554) | |
| Balance December 31, 2019 | | 684,053 | | | 191,508 | | | | | 135,227 | | | | | 1,010,788 | |
| Extensions, discoveries and other additions | | 39,454 | | | 31,905 | | | | | 6,944 | | | | | 78,303 | |
| | | | | | | | | | | | |
| Revisions of previous estimates | | (33,854) | | | (502) | | | | | (10,554) | | | | | (44,910) | |
| Production | | (93,698) | | | (44,592) | | | | | (22,655) | | | | | (160,945) | |
| Sales of minerals in-place | | (9,553) | | | — | | | | | — | | | | | (9,553) | |
| Balance December 31, 2020 | | 586,402 | | | 178,319 | | | | | 108,962 | | | | | 873,683 | |
| Extensions, discoveries and other additions | | 76,871 | | | 21,765 | | | | | 2,983 | | | | | 101,619 | |
| Purchases of minerals in-place | | 457 | | | — | | | | | — | | | | | 457 | |
| Revisions of previous estimates | | 64,847 | | | 39,071 | | | | | 3,120 | | | | | 107,038 | |
| Production | | (83,712) | | | (41,909) | | | | | (16,021) | | | | | (141,642) | |
| Sales of minerals in-place | | (28,193) | | | — | | | | | — | | | | | (28,193) | |
| Balance December 31, 2021 | | 616,672 | | | 197,246 | | | | | 99,044 | | | | | 912,962 | |
(1) Includes total proved reserves of 66 MMboe, 59 MMboe, 64 MMboe, and 68 MMboe as of December 31, 2021, 2020, 2019, and 2018, respectively, attributable to a noncontrolling interest in Egypt.
During 2021, the Company added approximately 102 MMboe from extensions, discoveries, and other additions. The Company recorded 77 MMboe of exploration and development adds in the U.S., comprising 59 MMboe in the Permian Basin with the remaining 18 MMboe in the Texas Gulf Coast. The Permian Basin drilling programs targeted the Woodford, Barnett, Bone Springs, and Spraberry, while the Texas Gulf Coast focused on the Austin Chalk. International operations contributed 25 MMboe of exploration and development adds, with Egypt contributing 22 MMboe from onshore exploration and appraisal activity primarily in the Khalda Area concession post-PSC modernization. The North Sea contributed 3 MMboe. The Company had combined upward revisions of previously estimated reserves of 107 MMboe. Upward revisions related to changes in product prices accounted for 85 MMboe. Engineering and performance upward revisions accounted for 22 MMboe, with the modernized PSC in Egypt resulting in an increase of 57 MMboe, partially offset by other downward revisions of 35 MMboe across all of the Company’s geographic areas of operation. The Company also sold 28 MMboe of proved reserves associated with U.S. divestitures, primarily related to Permian Basin assets.
As previously discussed, in December 2021, the Egyptian government signed into law an agreement to modernize and consolidate a majority of the Company’s Egypt PSCs. The impact of the consolidated PSC to proved reserves based on the modernized terms is an estimated increase of 53 MMboe and 4 MMboe in developed and undeveloped reserves, respectively, and approximately $750 million in discounted future net cash flows. Approximately 96 percent of the Company’s Egypt reserves are now consolidated within the modernized PSC. These estimates include Sinopec’s noncontrolling interest in Egypt.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
During 2020, the Company added approximately 78 MMboe from extensions, discoveries, and other additions. The Company recorded 39 MMboe of exploration and development adds in the U.S., primarily in the Southern Midland Basin (26 MMboe) associated with the Wolfcamp and Spraberry drilling programs and the remainder in the Delaware Basin and Austin Chalk. The international operations contributed 39 MMboe of exploration and development adds during 2020, with Egypt contributing 32 MMboe from onshore exploration and appraisal activity primarily in the Khalda Area and Umbarka Area concessions. The North Sea contributed 7 MMboe from drilling success, primarily in the Beryl Field. The Company had combined downward revisions of previously estimated reserves of 45 MMboe. Downward revisions related to changes in product prices accounted for 70 MMboe, engineering and performance upward revisions accounted for 27 MMboe, and downward interest revisions accounted for 2 MMboe. The Company also sold 10 MMboe of proved reserves associated with U.S. divestitures, primarily related to Eastern Shelf and Magnet Withers/Pickett Ridge.
During 2019, the Company added approximately 176 MMboe from extensions, discoveries, and other additions. The Company recorded 135 MMboe of exploration and development adds in the U.S., primarily associated with Woodford, Bone Springs, Spraberry, Barnett, and Wolfcamp drilling programs in the Permian Basin (129 MMboe) and various offset drilling activity in the Midcontinent region (6 MMboe). The Company’s international assets contributed 41 MMboe of exploration and development adds during 2019. Egypt contributed 27 MMboe from onshore exploration and appraisal activity in the Khalda Extension 2, Khalda, Khalda Extension 3, East Bahariya Extension 3, and West Kanayis concessions. The North Sea contributed 14 MMboe from drilling success in the Beryl and Forties fields. The Company had combined downward revisions of previously estimated reserves of 119 MMboe. Downward revisions related to changes in product prices accounted for 139 MMboe and engineering and performance upward revisions accounted for 20 MMboe. The Company also sold 107 MMboe of proved reserves associated with U.S. divestitures, primarily related to the sale of the Company’s Woodford-SCOOP and STACK plays and Western Anadarko Basin assets.
Approximately 12 percent of the Company’s year-end 2021 estimated proved developed reserves are classified as proved not producing. These reserves relate to zones that are either behind pipe, or that have been completed but not yet produced, or zones that have been produced in the past, but are not now producing because of mechanical reasons. These reserves are considered to be a lower tier of reserves than producing reserves because they are frequently based on volumetric calculations rather than performance data. Future production associated with behind pipe reserves is scheduled to follow depletion of the currently producing zones in the same wellbores. Additional capital may have to be spent to access these reserves. The capital and economic impact of production timing are reflected in this Note 18, under “Future Net Cash Flows.”
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Future Net Cash Flows
Future cash inflows as of December 31, 2021, 2020, and 2019 were calculated using an unweighted arithmetic average of oil and gas prices in effect on the first day of each month in the respective year, except where prices are defined by contractual arrangements. Operating costs, production and ad valorem taxes and future development costs are based on current costs with no escalation. Future development costs include abandonment and dismantlement costs.
The following table sets forth unaudited information concerning future net cash flows for proved oil and gas reserves, net of income tax expense. Income tax expense has been computed using expected future tax rates and giving effect to tax deductions and credits available, under current laws, and which relate to oil and gas producing activities. This information does not purport to present the fair market value of the Company’s oil and gas assets, but does present a standardized disclosure concerning possible future net cash flows that would result under the assumptions used.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | United
States | | Egypt(1) | | North
Sea | | Total(1) |
| | | (In millions) |
| 2021 | | | | | | | | |
| Cash inflows | | $ | 22,852 | | | $ | 9,337 | | | $ | 6,832 | | | $ | 39,021 | |
| Production costs | | (8,323) | | | (1,712) | | | (2,343) | | | (12,378) | |
| Development costs | | (1,632) | | | (1,402) | | | (2,533) | | | (5,567) | |
| Income tax expense | | (134) | | | (1,887) | | | (768) | | | (2,789) | |
| Net cash flows | | 12,763 | | | 4,336 | | | 1,188 | | | 18,287 | |
| 10 percent discount rate | | (5,294) | | | (983) | | | 350 | | | (5,927) | |
Discounted future net cash flows(2) | | $ | 7,469 | | | $ | 3,353 | | | $ | 1,538 | | | $ | 12,360 | |
| 2020 | | | | | | | | |
| Cash inflows | | $ | 12,537 | | | $ | 5,560 | | | $ | 4,122 | | | $ | 22,219 | |
| Production costs | | (6,244) | | | (1,704) | | | (2,388) | | | (10,336) | |
| Development costs | | (1,555) | | | (633) | | | (2,448) | | | (4,636) | |
| Income tax expense | | — | | | (1,096) | | | 316 | | | (780) | |
| Net cash flows | | 4,738 | | | 2,127 | | | (398) | | | 6,467 | |
| 10 percent discount rate | | (1,829) | | | (437) | | | 1,111 | | | (1,155) | |
Discounted future net cash flows(2) | | $ | 2,909 | | | $ | 1,690 | | | $ | 713 | | | $ | 5,312 | |
| 2019 | | | | | | | | |
| Cash inflows | | $ | 21,694 | | | $ | 8,306 | | | $ | 7,454 | | | $ | 37,454 | |
| Production costs | | (10,642) | | | (1,847) | | | (2,730) | | | (15,219) | |
| Development costs | | (1,740) | | | (707) | | | (2,651) | | | (5,098) | |
| Income tax expense | | (27) | | | (1,930) | | | (784) | | | (2,741) | |
| Net cash flows | | 9,285 | | | 3,822 | | | 1,289 | | | 14,396 | |
| 10 percent discount rate | | (4,003) | | | (808) | | | 297 | | | (4,514) | |
Discounted future net cash flows(2) | | $ | 5,282 | | | $ | 3,014 | | | $ | 1,586 | | | $ | 9,882 | |
(1)Includes discounted future net cash flows of approximately $1.1 billion, $563 million, and $1.0 billion as of December 31, 2021, 2020, and 2019, respectively, attributable to a noncontrolling interest in Egypt.
(2)Estimated future net cash flows before income tax expense, discounted at 10 percent per annum, totaled approximately $15.3 billion, $7.1 billion, and $12.4 billion as of December 31, 2021, 2020, and 2019, respectively.
APA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table sets forth the principal sources of change in the discounted future net cash flows:
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| | | (In millions) |
| Sales, net of production costs | | $ | (4,707) | | | $ | (2,422) | | | $ | (4,291) | |
| Net change in prices and production costs | | 9,376 | | | (5,753) | | | (3,034) | |
| Discoveries and improved recovery, net of related costs | | 1,749 | | | 751 | | | 2,042 | |
| Change in future development costs | | (839) | | | 20 | | | (75) | |
| Previously estimated development costs incurred during the period | | 545 | | | 576 | | | 983 | |
| Revision of quantities | | 1,983 | | | (418) | | | (741) | |
| Purchases of minerals in-place | | 1 | | | — | | | — | |
| Accretion of discount | | 626 | | | 1,236 | | | 1,693 | |
| Change in income taxes | | (1,583) | | | 1,533 | | | 720 | |
| Sales of minerals in-place | | (116) | | | (104) | | | (817) | |
| Change in production rates and other | | 13 | | | 11 | | | (319) | |
| | $ | 7,048 | | | $ | (4,570) | | | $ | (3,839) | |
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