10-Q: APA Corporation Reports Q1 2024 Results, Completes Callon Acquisition

APA Corporation's first quarter 2024 results were impacted by higher expenses and a loss on previously sold assets, while the company completed its acquisition of Callon Petroleum.

Summary

• APA Corporation reported a net income attributable to common stock of $132 million, or $0.44 per diluted share, for the first quarter of 2024, compared to $242 million, or $0.78 per diluted share, in the same period of 2023.
• The company's Q1 2024 results were negatively impacted by higher depreciation, depletion, and amortization (DD&A) and dry hole expenses, as well as a $66 million loss on previously sold Gulf of Mexico properties.
• Operating cash flow for the first three months of 2024 was $368 million, a 10% increase compared to the same period in 2023, primarily due to the timing of working capital items.
• APA repurchased 3.0 million shares of its common stock for $101 million and paid $76 million in dividends during the first quarter of 2024.
• On April 1, 2024, APA completed its acquisition of Callon Petroleum Company in an all-stock transaction valued at approximately $4.5 billion, including Callon's debt.
• The Callon acquisition added approximately 120,000 net acres in the Delaware Basin and 25,000 net acres in the Midland Basin, with Callon's Q4 2023 production at 103,000 BOE per day.
• APA's U.S. production increased 6% year-over-year, with oil production up 16%, while international production in Egypt decreased by 8%.

Sentiment

Score: 5

Explanation: The document presents mixed results. While the company has made a strategic acquisition and increased U.S. production, the decrease in net income, increased expenses, and potential liabilities related to sold assets temper the positive aspects. The sentiment is neutral to slightly negative.

Positives

• Operating cash flow increased by 10% year-over-year, reaching $368 million.
• U.S. production volumes increased, with oil production up 16% year-over-year.
• The company completed the strategic acquisition of Callon Petroleum Company, expanding its Permian Basin footprint.
• APA generated $428 million from the sale of its remaining Kinetik shares.
• The company continues to return capital to shareholders through share repurchases and dividends.

Negatives

• Net income attributable to common stock decreased to $132 million in Q1 2024 from $242 million in Q1 2023.
• The company recorded a $66 million loss on previously sold Gulf of Mexico properties.
• Depreciation, depletion, and amortization (DD&A) expenses increased significantly.
• Exploration expenses increased due to dry hole costs in Alaska.
• International production in Egypt decreased by 8% year-over-year.

Risks

• The company is exposed to volatile commodity prices, which can impact revenues, earnings, and cash flows.
• The company faces risks related to the integration of the Callon acquisition, including potential delays and cost overruns.
• APA has potential decommissioning obligations on sold Gulf of Mexico properties, with a contingent liability of $847 million.
• The company is involved in various legal proceedings, including environmental claims and shareholder lawsuits.
• The company is exposed to counterparty risk in its derivative transactions.

Future Outlook

The company expects to average 10 drilling rigs in the U.S. for the remainder of 2024 as it integrates Callon operations and remains committed to its capital return framework for equity holders.

Management Comments

• APA believes energy underpins global progress, and the Company wants to be a part of the solution as society works to meet growing global demand for reliable and affordable energy.
• The Company remains committed to its capital return framework for equity holders to participate more directly and materially in cash returns.
• APA strives to meet those challenges while creating value for all its stakeholders.

Industry Context

The report reflects the ongoing volatility in the oil and gas industry, with fluctuating commodity prices and geopolitical uncertainties impacting financial results. The acquisition of Callon is a strategic move to consolidate assets in the Permian Basin, a key growth area for the industry. The company's focus on capital returns aligns with a broader trend of energy companies prioritizing shareholder value.

Comparison to Industry Standards

• APA's production growth in the U.S. is in line with other Permian Basin focused operators such as Pioneer Natural Resources and Diamondback Energy, although the company's international production decline is a concern.
• The company's DD&A rate increase is higher than some peers, potentially indicating a more aggressive approach to reserve depletion or a less efficient cost structure.
• The loss on previously sold Gulf of Mexico assets is a unique situation for APA, and not a common issue for most of its peers.
• The company's capital return framework of 60% of cash flow over capital investment is comparable to other large independent oil and gas companies, such as EOG Resources and ConocoPhillips.

Legal Proceedings

• The company is involved in various legal actions, including environmental claims, shareholder lawsuits, and disputes related to past divestitures.
• APA is defending against claims related to environmental damages in Louisiana and is involved in litigation related to the sale of its Argentinian operations.
• The company is also facing a class action lawsuit in New Mexico regarding alleged late oil and gas payments.

Related Party Transactions

• Prior to the sale of its remaining Kinetik shares, APA had related party sales and costs associated with Kinetik.

Stakeholder Impact

• Shareholders will be impacted by the decrease in net income and the potential risks associated with the Callon acquisition and decommissioning liabilities.
• Employees may be affected by the integration of Callon and any potential restructuring.
• Customers and suppliers may experience changes as a result of the merger and the company's evolving operational strategy.
• Creditors will be impacted by the company's debt levels and its ability to meet its financial obligations.

Next Steps

• The company will focus on integrating Callon's assets and operations.
• APA will continue to assess drilling activity across its portfolio and balance workover activity in Egypt.
• The company will continue to monitor hydrocarbon pricing fundamentals to reallocate capital as part of its ongoing planning process.
• APA will continue to pursue its claims against the sureties related to the Gulf of Mexico decommissioning obligations.

Key Dates

Keywords

Oil and Gas, Production, Acquisition, Permian Basin, Financial Results, Callon Petroleum, Capital Expenditures, Share Repurchase, Dividends, Decommissioning, Exploration