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| APAGF > SEC Filings for APAGF > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
Quarterly Report
The following discussion and analysis explains the significant factors that have affected our results of operations for the three and six-month periods ended June 30, 2009, compared with the three and six-month periods ended June 30, 2008, and our financial condition since December 31, 2008. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and notes thereto included in Item 1 of this document and our 2008 Annual Report on Form 10-K.
Overview
During the second quarter and first six months of 2009, net income attributable to Apco Oil and Gas International Inc. was $5.4 million and $10.4 million, respectively, representing decreases of $1.8 million and $3.2 million compared with the same periods in 2008.
The decrease in net income for the second quarter of 2009 is reflective of:
· The absence of a $1.2 million benefit to operating revenues recorded in the second quarter of 2008 associated with a retroactive oil price adjustment;
· Lower production and lifting costs and lower exploration expense which combined to more than offset higher depreciation and general and administrative costs; and
· Lower equity income from Argentine investments.
The decrease in net income for the first six months of 2009 is reflective of:
· The benefits of higher oil and natural gas sales volumes were offset by lower oil and LPG sales prices and the absence of a benefit to revenues for a retroactive oil price adjustment;
· Lower production and lifting costs and lower exploration expense which were more than offset by higher depreciation, greater general and administrative costs, and higher foreign exchange losses; and
· Lower investment income.
See additional discussion in Results of Operations.
Additionally, net cash provided by operating activities for the six months ended June 30, 2009, was $5.0 million, representing an $8.6 million decrease compared with the first six months of 2008 primarily due to the decrease in our operating results and a lack of dividends received from Argentine investments during the period. See additional discussion in Management's Discussion and Analysis of Financial Condition.
Recent Events
Corporate Name Change
Consistent with management's stated intention to diversify the Company into other countries in South America, in July of 2009 the shareholders of Apco Argentina Inc. approved changing the name of the company from Apco Argentina Inc. to Apco Oil and Gas International Inc. ("Apco"). The name change became effective on July 13, 2009.
Concession Extensions
In July 2009, the Argentine province of Neuquén agreed to extend the concession terms for the Company's operations in the Bajada del Palo and Entre Lomas concessions for 10 years. The Bajada del Palo concession was extended to September 6, 2025, and the Entre Lomas concession was extended to January 21, 2026. The extensions were effective on July 23, 2009.
Under the extensions, Apco and its partners agreed to pay a total bonus of $12.5 million ($2.9 million net to our direct interest and $3.7 million net to our equity interest) and spend a gross amount of $237 million ($54.4 million net to our direct interest and $70 million net to our equity interest) for future exploitation and exploration activities over a period of approximately 17 years. In addition, the provincial production tax increases from the current level of 12 percent to 15 percent effective from August 2009 and could increase up to a maximum of 18 percent depending on future increases in product price realizations.
The Bajada del Palo concession is located entirely in the province of Neuquén. The Entre Lomas concession straddles the provinces of Neuquén and Río Negro. This extension agreement does not apply to the portion of the Entre Lomas concession located in Río Negro province. Petrolera Entre Lomas S.A. ("Petrolera"), the operator of both concessions that represents the joint venture partners in the negotiations, will now try to secure the extension for the portion of Entre Lomas located in Río Negro province, and we expect that those negotiations will commence in the second half of 2009.
Agua Amarga Commerciality
In the second quarter of 2009, Apco and its partners in the Agua Amarga exploration permit initiated the formal process to convert a portion of the permit, or approximately 18,000 acres, into a 25-year producing concession. We expect this process to conclude in the third quarter of 2009. The remaining acreage, or approximately 77,000 acres, will continue to be subject to the terms of the exploration permit, which is scheduled to expire in May of 2010.
Business Development Efforts in Colombia
Apco is actively pursuing investment opportunities in Colombia. Our initial strategy is to acquire interests in exploration blocks via farm in agreements in which we invest in order to earn an interest. We are currently focusing our efforts on opportunities in the Llanos and Magdalena Valley basins.
In most cases, exploration contracts with the Agencia Nacional de Hidrocarburos ("ANH"), the Colombian government agency that manages and administers oil and gas properties not owned by the Colombian state energy company, Ecopetrol, require letters of credit to guaranty exploration investment commitments. As part of the requirements for participating in one such prospect, Apco issued a $4 million letter of credit in July. The letter of credit expires on January 12, 2011, and is collateralized by cash on hand. As a result, $4 million of the Company's cash will be considered as restricted cash and will be classified as other current or noncurrent assets on our future balance sheets while the letter of credit is outstanding. The restricted cash is invested in a short-term money market account with a financial institution.
The letters of credit required by the ANH exploration contract in which Apco will participate have been submitted to the ANH for acceptance. We plan to submit an application for formal assignment of our interest in the near future.
Product Volumes
During the second quarter of 2009, oil sales volumes, net to the Company's combined consolidated and equity interests, totaled 682 Mbbls, an increase of six percent compared with 643 Mbbls during the comparable quarter in 2008. Higher oil sales volumes are the result of successful exploration and development drilling in our Neuquén basin properties in addition to field re-activation activities in Bajada del Palo. During the second quarter, gross oil production in the Bajada del Palo concession reached 2,000 barrels of oil per day, up from 180 barrels of oil per day at the time of acquisition during the second half of 2007. Sales volumes from Tierra del Fuego were comparatively low as oil tanker loading delays resulted in a negative variance of 16,000 barrels of oil. These same factors resulted in a 10 percent net increase in oil sales volumes net to our consolidated and equity interests for the first six months of 2009 compared to the same period in 2008.
Natural gas sales volumes, net to the Company's combined consolidated and equity interests, totaled 1.869 billion cubic feet ("Bcf"), an increase of 15 percent compared with 1.628 Bcf during the second quarter of 2008. The increase in production is a result of having completed and put into operation production facility enhancements in our Tierra del Fuego operations in the fourth quarter of 2008 and additional flowlines and well-connections completed in the second quarter of 2009, which have enabled us to produce and sell greater natural gas volumes during 2009 compared with 2008. These same factors resulted in a 10 percent increase in natural gas sales volumes net to our consolidated and equity interests for the first six months of 2009 compared with the same period in 2008.
Liquefied petroleum gas ("LPG") sales volumes, net to the Company's consolidated and equity interest, totaled 4.9 thousand tons during the second quarter of 2009, a five percent increase compared with 4.7 thousand tons during the second quarter of 2008. During the first six months of 2009, LPG sales volumes increased by one percent compared with 2008.
Oil Prices
As mentioned in our Annual Report on Form 10-K for the year ended December 31, 2008, oil prices have a significant impact on our ability to generate earnings, fund capital projects, and pay shareholder dividends. In general, oil prices are affected by changes in market demands, global economic activity, political events, weather, inventory storage levels, refinery infrastructure capacity, OPEC production quotas, and other factors. More importantly to Apco, oil sales price realizations for oil produced and sold in Argentina are significantly influenced by Argentine governmental actions.
In Argentina, politically driven mechanisms have been in place for some time which significantly influence the sale price of oil produced and sold in the country. To alleviate the impact of higher crude oil prices on Argentina's economy, the Argentine government created an oil export tax and enacted price controls over gasoline prices to force producers and refiners to negotiate oil sales prices significantly below international market levels.
The spot market price of West Texas Intermediate crude oil ("WTI") continues to be the reference price for oil sold in Argentina. However, producers and refiners have incorporated reduction factors into pricing formulas that considerably reduce the sale price net back to Argentine producers such that net back reductions escalate to higher and higher levels as WTI increases. Conversely, our realized price as a percentage of WTI increases as WTI decreases.
Consequently, the volatility of world oil prices as experienced in the second quarter and first six months of 2009 compared with the same periods of 2008 is not reflected in our comparative results of operations for the two periods. The average WTI spot market price was $59.61 for the second quarter and $51.51 for the first six months of 2009 compared with $123.78 and $111.13 for the same periods in 2008. However, due to the price controls and marketing environment in Argentina, our average realized price for our direct working interests consolidated in our operating revenues was $41.89 per barrel in the second quarter and $41.42 for the first six months of 2009, compared with $45.81 in the second quarter and $45.17 for the first six months of 2008. The average oil sales price for our equity interests was $42.22 for the second quarter and $42.03 for the first six months of 2009 compared with $46.35 and $45.59 for the same periods in 2008.
As can be seen in the average WTI crude prices mentioned above, world oil prices have improved throughout 2009 and thus far into the third quarter. Additionally, oil price realizations in Argentina began to increase in the second quarter of the year. Our oil price realizations continue to be negotiated on a monthly basis, and as such, we cannot accurately predict how they will evolve throughout the year.
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