The following discussion and analysis explains the significant factors that have affected our results of operations for the three-month period ended March 31, 2012, compared with the three-month period ended March 31, 2011, and our financial condition since December 31, 2011. 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 2011 Annual Report on Form 10-K.

Overview of Three Months Ended March 31, 2012

During the first quarter of 2012, net income attributable to Apco Oil and Gas International Inc. was $10.1 million compared with $8.2 million for the first quarter of 2011. Net income increased quarter-to-quarter due to higher operating revenues and greater equity income which was partially offset by higher costs and operating expenses, including significantly higher exploration expense. During first quarter 2012, we incurred $4.6 million more exploration expense than in 2011 due to significant 3D seismic acquisition investments as a result of our prospecting efforts both in Colombia and Argentina.

Net cash provided by operating activities during the first three months of 2012 was $6.9 million, a decrease of $1.8 million compared with the first three months of 2011. We ended the first quarter with a cash and cash equivalents balance of $39.8 million, or 13 percent of total assets. We believe we have sufficient liquidity and capital resources to fund our ongoing operations and planned capital expenditures during 2012.

See additional discussion in "Results of Operations" and "Financial Condition" below.

On April 16, 2012, President Cristina Kirchner announced that she was submitting to Argentina's congress a draft law that provides for the expropriation of almost all of Repsol's shareholding in YPF S.A. ("YPF"). We do not expect negative repercussions to our operations in Argentina as a result of this action. For further discussion, see "Quantitative and Qualitative Disclosures about Market Risk - Economic and Political Environment" in Item 3 of this report.

Neuquén Basin Properties

During the first three months of 2012, we completed and put on production four development wells and one exploration well that commenced drilling in 2011. The successful exploration well is a natural gas discovery in our Charco del Palenque concession. For our 2012 drilling program, ten development wells were spudded during the quarter. Five of these wells were completed and put on production during the quarter and five wells were in various stages of drilling or completion at the end of the quarter.

In April, we performed a fracture stimulation of the Vaca Muerta shale in an existing well in the Bajada del Palo concession. This two stage fracture is significantly larger than the single stage fractures we executed in our three- well pilot program in the Bajada del Palo and Entre Lomas concessions in 2011. We expect to have final results from this fracture of the Vaca Muerta in the second quarter.

Coirón Amargo

In December 2011, we commenced a three stage fracture stimulation of the Vaca Muerta formation in the CAS x-1 well drilled earlier in 2011. During the production test in the first quarter 2012 which lasted 48 days, the well flowed intermittently for the equivalent of 20 days at an average rate of 173 barrels of oil per day ("bopd"). The well was put on production in April. Although this result is encouraging, it is not conclusive as exploration of the Vaca Muerta in this basin is in the very early stages and the productive behavior of the Vaca Muerta formation is not well understood.

Additional activities in the first quarter included drilling of the CAS x-4 well that spud in December 2011 in the southeastern portion of the area. A 453- foot core sample of the Vaca Muerta formation was taken from the CAS x-4 for laboratory analysis. We plan to perform a multi-stage fracture of this well after the core analysis is completed and we have finished evaluating production results from the CAS x-1 well. We have also drilled the CAS x-2 well that discovered oil in the Tordillo formation. The well also encountered a 433- foot section of the Vaca Muerta shale. At quarter's end, the well was being put into production from the Tordillo. In March, we spudded the CAN 5 well, our first development well in the northern sector of the block.

In March 2012, we received formal approval to convert approximately 26,700 acres into an exploitation concession with a term of 25 years. The exploration permit for the remaining portion of the block was extended for two years and has been deemed a "high-risk exploration area" that will require exploration drilling and seismic commitments of approximately $18 million net to Apco during 2012 and 2013 to continue our investigation of the Tordillo formation and unconventional potential from the Vaca Muerta and Molles formations in the block. After the two-year exploration period, we will determine how much of the area will be converted to an exploitation concession and how much acreage, if any, will have to be relinquished.

Colombia Exploration

During the first quarter of 2012, we spud our first exploration well in Colombia. Drilling of the Maniceño-1 well on the Llanos 32 block began in March. The well reached a measured depth of 11,027 feet in April. The well encountered approximately 50 feet of oil column at the top of the Mirador formation. It was then perforated across a 14-foot section, and over a period of four hours the well flowed oil, on jet pump, at a rate of 7,558 barrels of oil per day. In addition, the well flowed naturally at a rate of 3,036 barrels of oil per day over a subsequent six-hour period. After installing a high volume electric submersible pump in the Maniceño-1 well, the drilling rig will move to a second Llanos 32 exploration drilling location, the Samaria Norte-1 prospect. It is expected to spud in May. We have a 20 percent interest in the Llanos 32 block.

Also during the quarter, we received the first of two drilling permits required for the Turpial block. The approval of the second permit was received in April and we expect to drill our first well on the block by the third quarter. In the Llanos 40 block we began the acquisition of 305 square kilometers of 3D seismic.

Oil Prices

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 many factors, including changes in market demands, global economic activity, political events, weather, and OPEC production quotas. 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 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 and slow the rate of inflation, 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.

For the first quarter of 2012, our average realized price for our direct working interests consolidated in our operating revenues was $74.37 per barrel, compared with $56.66 in the first quarter of 2011. The average oil sales price for our equity interests was $74.81 per barrel for the first quarter of 2012 compared with $56.83 for the same period in 2011. Our oil price netbacks have been increasing since 2009 when we received approximately $43 per barrel. Gradual increases in gasoline prices in Argentina have enabled producers to negotiate higher oil sales prices with refiners. The combination of declining production in Argentina, increasing gasoline prices and tighter demand for our high-quality crude oil has resulted in higher oil price realizations. Nevertheless, as our oil price realizations continue to be negotiated on a short-term basis, and because policies regarding export taxes and price controls may change, we cannot accurately predict if the gradual trend of increasing prices we have experienced will continue throughout the year.

Results of Operations


The following table and discussion is a summary of our consolidated results of
operations for the three-months ended March 31, 2012, compared with the
three-months ended March 31, 2011. Please read this information in conjunction
with the Consolidated Statements of Income.



                                                      For the Three Months Ended March 31,
                                                                            $ Change        % Change
                                              2012            2011         from 2011*      from 2011*
                                                    ($ Amounts in Thousands)

Total revenues                             $   30,076       $  23,083     $      6,993              30 %
Total costs and operating expenses (1)         25,026          17,260           (7,766 )           -45 %
 Operating income                               5,050           5,823             (773 )           -13 %
Investment income                               8,338           4,866            3,472              71 %
Income taxes                                    3,296           2,521             (775 )           -31 %
 Less: Net income attributable to
noncontrolling interests                           16               8               (8 )          -100 %
Net income attributable to Apco            $   10,076       $   8,160     $      1,916              23 %

(1) Includes $4.6 million quarter-over-quarter increase in Exploration expense; see below for additional discussion.

Total Revenues

Total revenues for the first quarter of 2012 increased by $7.0 million, or 30
percent compared with first quarter 2011. The following tables and discussion
explain the components and variances in operating revenues.

The three-month comparisons of our oil, natural gas, and LPG sales volumes and
average sales prices for our consolidated interests accounted for as operating
revenues are shown in the following tables.

                                       Three Months Ended March 31,

                                    2012            2011         % Change

Sales Volumes
Oil (bbls)                           335,293         318,692             5 %
Natural Gas (mcf)                  1,468,611       1,562,729            -6 %
LPG (tons)                             2,741           2,604             5 %
Oil, Natural Gas and LPG (boe)       612,228         609,700             0 %

Average Sales Prices
Oil (per bbl)                    $     74.37     $     56.66            31 %
Natural Gas (per mcf)                   2.55            2.26            13 %
LPG (per ton)                         284.20          362.57           -22 %

Revenues ($ in thousands)
Oil revenues                     $    24,936     $    18,058            38 %
Natural Gas revenues                   3,738           3,530             6 %
LPG revenues                             779             944           -17 %
                                 $    29,453     $    22,532            31 %

The volume and price changes in the table above caused the following changes to our oil, natural gas and LPG revenues between the three months ended March 31, 2012 and 2011.

                                 Three Months Ended March 31,

                           Oil          Gas        LPG        Total
                                    (Amounts in Thousands)

2011 Sales               $ 18,058     $ 3,530     $  944     $ 22,532
Changes due to volumes      1,234        (240 )       39        1,034
Changes due to prices       5,644         448       (204 )      5,887
2012 Sales               $ 24,936     $ 3,738     $  779     $ 29,453

Oil Revenues

The increase in Oil revenues during the first quarter of 2012 is primarily due to higher average oil sales prices. Our average oil sales prices increased by 31 percent compared with first quarter of 2011 due to the factors previously discussed in "Oil Prices" in this report.

Total Costs and Operating Expenses

During the first quarter of 2012, Total costs and operating expenses increased by $7.8 million compared with first quarter 2011 primarily due to greater exploration expense. Notable variances for the comparable quarters include the following:

· Production and lifting costs increased by $1.6 million due to greater operation and maintenance expenses related to our Neuquén basin properties. These increases were driven primarily by the impact of inflation in Argentina;

· Taxes other than income increased by $441 thousand. The increase from first quarter 2011 is due primarily to higher provincial production taxes as a result of higher sales prices and greater operating revenues. The first quarter of 2011 included a one-time $572 thousand Colombian equity tax;

· Selling and administrative expense increased by $715 thousand due to increased salary and related benefit expense and higher administrative costs from our operators;

· Depreciation, depletion and amortization expense increased by $779 thousand primarily due to higher depreciation rates (see additional discussion below); and

· Exploration expense increased by $4.6 million due to greater exploration activity including 3D seismic acquisition costs in the Llanos 40 block in Colombia and in the Sur Río Deseado Este concession in Argentina.

Depreciation, Depletion and Amortization Expenses ("DD&A")

The changes in our total volumes, DD&A average rates per unit and DD&A expense of oil and gas properties between the three-months ended March 31, 2012 and 2011 are shown in the following table:

                                     Three Months Ended                            %
                                          March 31,              Change          Change
                                     2012          2011         from 2011      from 2011

Consolidated Sales Volumes (Boe)     612,228       609,700           2,528              0 %
DD&A Rate per Boe                  $    8.88     $    7.64     $      1.24             16 %
DD&A Expense (In thousands)        $   5,437     $   4,659     $       778             17 %

The following table details the changes in DD&A expense of oil and gas properties due to changes in volumes and average rates between the three-months ended March 31, 2012 and 2011.

                         Three Months Ended
                              March 31,
                           (In thousands)

2011 DD&A                $             4,659
Changes due to volumes                    22
Changes due to rates                     756
2012 DD&A                $             5,437

Our DD&A rate increased in the first quarter of 2012 compared with the same period in 2011 because in the Río Negro province, where our largest producing field with the largest proved reserves is located, we have been adding less proved reserves per well drilled for calculating DD&A with each year that passes without obtaining the remaining ten-year extension as our proved reserves are limited to the current concession life. Furthermore, as we develop our most mature fields, proved reserves added per well decrease over time. Additionally, our weighted average DD&A rate increased in 2012 due to a greater proportion of sales volumes on a barrel of oil equivalent basis from properties with DD&A rates that are higher than the weighted average rate experienced in the first quarter of 2011.

We are working to obtain the ten-year concession extensions for our properties in Río Negro and Tierra del Fuego which currently have concession terms ending in 2016. If any extensions are obtained, we expect to experience a favorable effect on future DD&A rates as wells whose productive lives extend beyond 2016 will result in the addition of proved developed reserves.

Investment Income

Total investment income increased by $3.5 million for the first quarter of 2012 compared with first quarter 2011 due to greater Equity income from Argentine investment. The increase in our equity income for the periods is due to higher net income of our equity investee, Petrolera. The comparative increase in Petrolera's net income is primarily a result of greater revenues driven by higher oil sales prices and volumes.

Summary of Total Volumes, Sales Prices and Production Costs

The following table reflects our total sales volumes, average sales prices, and
our average production costs per unit sold for the periods presented:

                                          Periods Ending March 31,
                                                Three Months

                                            2012             2011

Sales Volumes (1):
Consolidated interests
Crude oil and condensate (Bbls)               335,293         318,692
Gas (Mcf)                                   1,468,611       1,562,729
LPG (tons)                                      2,741           2,604
Barrels of oil equivalent (Boe)               612,228         609,700
Equity interests (2)
Crude oil and condensate (Bbls)               392,604         372,600
Gas (Mcf)                                     709,246         691,516
LPG (tons)                                      2,839           2,836
Barrels of oil equivalent (Boe)               544,127         521,130
Total volumes
Crude oil and condensate (Bbls)               727,897         691,292
Gas (Mcf)                                   2,177,858       2,254,246
LPG (tons)                                      5,580           5,439
Barrels of oil equivalent (Boe)             1,156,355       1,130,830

Total volumes by basin
Neuquén                                       970,212         927,362
Austral                                       140,974         156,100
Others                                         45,169          47,368
Barrels of oil equivalent (Boe)             1,156,355       1,130,830

Average Sales Prices:
Consolidated interests
Oil (per bbl)                           $       74.37     $     56.66
Gas (per Mcf)                                    2.55            2.26
LPG (per ton)                                  284.20          362.57
Equity interests (2)
Oil (per bbl)                           $       74.81     $     56.83
Gas (per Mcf)                                    2.75            2.61
LPG (per ton)                                  280.73          349.88


Average Production Costs per Boe (3):
Production and lifting cost             $        9.84     $      7.25
Taxes other than income                 $        8.62     $      7.93
DD&A                                    $        8.88     $      7.64

(1) Volumes presented in the above table have not been reduced by the approximately 12 to 18.5 percent provincial production tax that is accounted for as an expense by Apco. In calculating provincial production tax payments, Argentine producers are entitled to deduct gathering, storage, treatment, and compression costs.
(2) The equity interest presented above reflects our interest in our equity investee's sales volumes and prices. The revenues resulting from the equity interest sales volumes and prices are not consolidated within the Company's revenues. See the financial statements and Note 1 and Note 3 of Notes to Consolidated Financial Statements for additional explanation of the equity method of accounting for our investment in Petrolera.
(3) Average production and lifting costs, taxes other than income and depreciation costs are calculated using total costs divided by consolidated interest sales volumes expressed in barrels of oil equivalent ("Boe"). Six Mcf of gas are equivalent to one Boe and one ton of LPG is equivalent to 11.735 Boes. Absent a $572 thousand Colombian equity tax recorded in the first quarter of 2011, taxes other than income per Boe would have been $6.99 per Boe during the three months ended March 31, 2011.

Financial Condition

Outlook

Oil price realizations in Argentina have continued to gradually increase, reaching approximately $75 per barrel in March 2012. Higher oil prices also benefit Petrolera's cash flows from operations and its ability to pay dividends. Petrolera's ability to pay dividends is dependent upon numerous factors, including its cash flows provided by operating activities, levels of capital spending, changes in crude oil and natural gas prices, and debt and interest payments. Oil price realizations in Argentina continue to be negotiated on a short-term basis, and as such, we cannot accurately predict how they will evolve in the remainder of 2012.

Inflation in Argentina has been a persistent problem for some time. The annual inflation rate was 20 percent or higher in 2011; economists in Argentina are predicting similar levels of inflation for 2012. In contrast, the Argentine peso has not experienced a commensurate level of devaluation thereby causing considerable increases in our U.S. dollar cost of operations and capital expenditures. Consequently, there is no assurance that operating income will increase in line with the upward trend of our oil price realizations.

We will continue to monitor our capital programs and the quarterly shareholder dividend as necessary to provide Apco with the financial resources and liquidity needed to continue development drilling in its core properties over the long term, fund new investment opportunities, meet future working capital needs and fund any further cash bonus payments that may be negotiated to obtain concession extensions, if any, while maintaining sufficient liquidity to reasonably protect against unforeseen circumstances requiring the use of funds. To that end, in May 2012, our Board of Directors decided to suspend paying a regular quarterly dividend. Most recently, we had been paying a regular quarterly dividend of two cents per share on our shares. The reduction in the dividend compared with prior periods is designed to provide additional resources for potential investment opportunities and capital for expected development of recent exploration successes.

Liquidity

Although we have interests in several oil and gas properties in Argentina, our direct participation in those Neuquén basin properties in which we are partners with Petrolera and dividends from our equity interest in Petrolera are the largest contributors to our net cash provided by operating activities.

We have historically funded capital programs and past property acquisitions with internally generated cash flow. We have generally not relied on debt or equity as sources of capital due to the turmoil that periodically affects Argentina's economy which has made financing difficult to obtain on reasonable terms. Although we have not typically relied on debt or equity as sources of capital, successful exploration efforts in Argentina or Colombia could lead to development capital needs that are currently beyond our ability to fund from operations. Consequently, we may have to consider additional bank financing or some form of equity financing in the future. Such financing may not be available or available on acceptable terms.

With a cash and cash equivalents balance at March 31, 2012, of $39.8 million, or 13 percent of total assets, and the ability to adjust capital spending as necessary, we believe we have sufficient liquidity and capital resources to effectively manage our business throughout the remainder of 2012.

Our liquidity is affected by restricted cash balances that are pledged as collateral for letters of credit for exploration activities in Colombia. One of our letters of credit for $2.9 million expires in September of 2012. We expect to renew this upon expiration as our drilling efforts continue. A second letter of credit for $5.5 million collateralized with cash expires in 2013. Consequently, $8.4 million of cash is considered restricted as of March 31, 2012. The restricted cash is invested in a short-term money market account with a financial institution.

Cash Flow Analysis

The following table summarizes the change in cash and cash equivalents for the
periods shown.


                                           Three Months Ended March 31,
                                             2012                 2011
                                                    (Thousands)
Net cash provided (used) by:
Operating activities                    $        6,921       $        8,704
Investing activities                            (9,387 )             (4,023 )
Financing activities                             5,409                 (597 )
Increase in cash and cash equivalents   $        2,943       $        4,084

Operating Activities

Our net cash provided by operating activities totaled $6.9 million for the first three months of 2012, compared with $8.7 million during the same period in 2011. The change in cash provided by operating activities was primarily a result of lower dividends from our Argentine investment.

Investing Activities

During the first three months of 2012, capital expenditures totaled $9.4 million, most of which was invested in drilling in our Neuquén basin properties and Coirón Amargo, compared with $5 million in 2011.

Financing Activities

During the first three months of 2012, we paid $591 thousand of dividends to shareholders and non-controlling interests, and we received $6 million in borrowings from our banking agreement to fund capital expenditures.

Contractual Obligations

Our contractual obligations have decreased by approximately $9 million from our total obligations as reported in our Annual Report on Form 10-K for the year ended December 31, 2011, as a result of drilling and exploration activities during the first three months of 2012. Additionally, our obligations increased due to our borrowing $6 million under our banking agreement.

Off-Balance Sheet Arrangements

We do not currently use any off-balance sheet arrangements to enhance liquidity and capital resources.