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EX-31.2 - EXHIBIT 31.2 - APCO OIL & GAS INTERNATIONAL INCapcoex31210q1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q
(Mark one)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended March 31, 2013

OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from           to          

Commission file number 0-8933

APCO OIL AND GAS INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
CAYMAN ISLANDS
 
(State or Other Jurisdiction of
EIN 98-0199453
Incorporation or Organization)
(I.R.S. Employer Identification No.)
 
 
ONE WILLIAMS CENTER, 35th FLOOR
 
TULSA, OKLAHOMA
74172
(Address of Principal Executive Offices)
(Zip Code)
 
 
(Registrant's Telephone Number, Including Area Code)
(539) 573-2164
NO CHANGE
(Former name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x     No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
  
Large Accelerated Filer o  Accelerated Filer x Non-Accelerated Filer ¨  Smaller Reporting Company ¨
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.
Class
Outstanding at April 26, 2013
Ordinary Shares, $0.01 Par Value
9,139,648 Shares
Class A Shares, $0.01 Par Value
20,301,592 Shares

1


APCO OIL AND GAS INTERNATIONAL INC.
INDEX               
PART I.   
FINANCIAL INFORMATION 
 
 
 
 
Page No.
 
Item 1.
Financial Statements - Unaudited
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 6.

FORWARD-LOOKING STATEMENTS

Certain matters contained in this report include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  These forward-looking statements relate to anticipated financial performance, management’s plans and objectives for future operations, business prospects, outcome of regulatory proceedings, market conditions and other matters.  We make these forward-looking statements in reliance on the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995.

All statements, other than statements of historical facts, included in this report that address activities, events or developments that we expect, believe or anticipate will exist or may occur in the future, are forward-looking statements.  Forward-looking statements can be identified by various forms of words such as “anticipates,” “believes,” "seeks," “could,” “may,” “should,” “continues,” “estimates,” “expects,” “forecasts,” “intends,” “might,” “objectives,” “planned,” “potential,” “projects,” “scheduled,” “will” or other similar expressions.  These forward-looking statements are based on management’s beliefs and assumptions and on information currently available to management and include, among others, statements regarding:
Amounts and nature of future capital expenditures;
Volumes of future oil, gas and liquefied petroleum gas (“LPG”) production;
Expansion and growth of our business and operations;
Financial condition and liquidity;
Business strategy;
Estimates of proved oil and gas reserves;
Reserve potential;
Development drilling potential;

2


Cash flow from operations or results of operations;
Seasonality of natural gas demand; and
Oil and natural gas prices and demand for those products.

Forward-looking statements are based on numerous assumptions, uncertainties, and risks that could cause future events or results to be materially different from those stated or implied in this report.  Many of the factors that will determine these results are beyond our ability to control or predict.  Specific factors that could cause actual results to differ from results contemplated by the forward-looking statements include, among others, the following:
Availability of supplies (including the uncertainties inherent in assessing, estimating, acquiring and developing future oil and natural gas reserves), market demand, volatility of prices and the availability and cost of capital;
Inflation, interest rates, fluctuation in foreign exchange rates, tax rate changes, and general economic conditions (including future disruptions and volatility in the global credit markets and the impact of these events on our customers and suppliers);
The strength and financial resources of our competitors;
Development of alternative energy sources;
The impact of operational and development hazards;
Costs of, changes in, or the results of laws, government regulations (including climate change regulation and/or potential additional regulation of drilling and completion of wells), environmental liabilities and litigation;
Political conditions in Argentina, Colombia, and other parts of the world;
The failure to renew participation in hydrocarbon concessions granted by the Argentine government on reasonable terms;
Risks related to strategy and financing, including restrictions stemming from our loan agreement and the availability and cost of credit;
Risks associated with future weather conditions, volcanic activity and earthquakes;
Acts of terrorism; and
Additional risks described in our filings with the Securities and Exchange Commission (“SEC”).

Given the uncertainties and risk factors that could cause our actual results to differ materially from those contained in any forward-looking statement, we caution investors not to unduly rely on our forward-looking statements.  We disclaim any obligations to and do not intend to update the above list or to announce publicly the result of any revisions to any of the forward-looking statements to reflect future events or developments.

In addition to causing our actual results to differ, the factors listed above and referred to below may cause our intentions to change from those statements of intention set forth in this report.  Such changes in our intentions may also cause our results to differ.  We may change our intentions at any time and without notice, based upon changes in such factors, our assumptions, or otherwise.

Because forward-looking statements involve risks and uncertainties, we caution that there are important factors, in addition to those listed above, that may cause actual results to differ materially from those contained in the forward-looking statements.  For a detailed discussion of those factors, see Part I, Item 1A., “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012.


3


PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements
APCO OIL AND GAS INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 (Amounts in Thousands Except Share Amounts)
March 31,
2013
 
December 31,
2012
ASSETS

 
 
Current assets:
 
 
 
Cash and cash equivalents
$
35,043

 
$
32,669

Accounts receivable
17,666

 
19,208

Inventory
4,637

 
4,074

Restricted cash
170

 
3,749

Other current assets
11,156

 
4,877

Total current assets
68,672

 
64,577

Property and Equipment:
 

 
 

Cost, successful efforts method of accounting
325,057

 
313,323

Accumulated depreciation, depletion and amortization
(165,051
)
 
(157,907
)
 
160,006

 
155,416

Argentine investment, equity method
110,783

 
108,710

Deferred income tax asset
1,211

 
1,254

Restricted cash
5,170

 
5,170

Other assets (net of allowance of $474 at March 31, 2013 and $486 at December 31, 2012)
1,569

 
1,580

Total Assets
$
347,411

 
$
336,707

LIABILITIES AND SHAREHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
12,612

 
$
13,983

Affiliate payables
2,216

 
1,764

Accrued liabilities
8,088

 
7,742

Income taxes payable
5,944

 
4,647

Total current liabilities
28,860

 
28,136

Long-term debt
7,500

 
7,500

Long-term liabilities
4,132

 
4,095

Contingent liabilities and commitments (Note 9)


 


Equity:
 

 
 

Shareholders' equity
 

 
 

Share capital, 60,000,000 shares authorized, par value $0.01 per share;
 

 
 

Ordinary shares, 9,139,648 shares issued and outstanding
91

 
91

Class A shares, 20,301,592 shares issued and outstanding
203

 
203

Additional paid-in capital
9,106

 
9,106

Accumulated other comprehensive loss
(1,597
)
 
(1,597
)
Retained earnings
298,864

 
288,931

Total shareholders' equity
306,667

 
296,734

Noncontrolling interests in consolidated subsidiaries
252

 
242

Total equity
306,919

 
296,976

Total liabilities and equity
$
347,411

 
$
336,707


The accompanying notes are an integral part of these consolidated financial statements.

4


APCO OIL AND GAS INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
(Amounts in Thousands Except Per Share Amounts)
Three months ended
 
March 31,
 
2013
 
2012
REVENUES:
 
 
 
Oil revenues
$
27,418

 
$
24,936

Natural gas revenues
4,181

 
3,738

LPG revenues
572

 
779

Other
3,108

 
623

Total revenues
35,279

 
30,076

COSTS AND OPERATING EXPENSES:
 

 
 

Production and lifting costs
8,865

 
6,025

Taxes other than income
5,718

 
5,277

Transportation and storage
613

 
310

Selling and administrative
3,468

 
3,036

Depreciation, depletion and amortization
7,161

 
5,453

Exploration expense
774

 
5,061

Foreign exchange losses (gains)
351

 
(460
)
Other expense
321

 
324

Total costs and operating expenses
27,271

 
25,026

TOTAL OPERATING INCOME
8,008

 
5,050

INVESTMENT INCOME:
 

 
 

Interest and other income
135

 
87

Equity income from Argentine investment
5,330

 
8,251

Total investment income
5,465

 
8,338

Income before income taxes
13,473

 
13,388

Income taxes
3,530

 
3,296

NET INCOME
9,943

 
10,092

Less: Net income attributable to noncontrolling interests
10

 
16

Net income attributable to Apco Oil and Gas International Inc.
$
9,933

 
$
10,076

OTHER COMPREHENSIVE INCOME:
 

 
 

Comprehensive income attributable to Apco Oil and Gas International Inc.
$
9,933

 
$
10,076

Amounts attributable to Apco Oil and Gas International Inc.:
 

 
 

Earnings per share – basic and diluted:
 

 
 

NET INCOME PER SHARE
$
0.34

 
$
0.34

Average ordinary and Class A shares outstanding – basic and diluted
29,441

 
29,441

Cash dividends declared per ordinary share
$

 
$
0.02

Cash dividends declared per Class A share
$

 
$
0.02


The accompanying notes are an integral part of these consolidated financial statements.

5


APCO OIL AND GAS INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)

 
For the three month period ended March 31,
(Amounts in Thousands)
2013
 
2012
 
Shareholders' Equity
 
Noncontrolling Interests
 
Total
 
Shareholders' Equity
 
Noncontrolling Interests
 
Total
Beginning Balance
$
296,734

 
$
242

 
$
296,976

 
$
258,409

 
$
229

 
$
258,638

Net income
9,933

 
10

 
9,943

 
10,076

 
16

 
10,092

Total comprehensive net income
9,933

 
10

 
9,943

 
10,076

 
16

 
10,092

Cash dividends declared

 

 

 
(589
)
 

 
(589
)
Dividends and distributions to
 

 
 

 
 

 
 

 
 

 
 

noncontrolling interests

 

 

 

 
(2
)
 
(2
)
Ending Balance
$
306,667

 
$
252

 
$
306,919

 
$
267,896

 
$
243

 
$
268,139


The accompanying notes are an integral part of these consolidated financial statements.


6


APCO OIL AND GAS INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

 
Three months ended
(Amounts in Thousands )
March 31,
 
2013
 
2012
CASH FLOW FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
9,943

 
$
10,092

Adjustments to reconcile to net cash provided by operating activities:
 

 
 

Equity income from Argentine investment
(5,330
)
 
(8,251
)
Dividends received from Argentine investment

 
2,938

Deferred income tax expense
3

 
2

Depreciation, depletion and amortization
7,161

 
5,453

Provision for loss on property, plant & equipment
632

 

Changes in accounts receivable
1,542

 
(1,532
)
Changes in inventory
(580
)
 
(646
)
Changes in other current assets
(3,022
)
 
398

Changes in accounts payable
122

 
(1,124
)
Changes in affiliate payables, net
452

 
128

Changes in accrued liabilities
(213
)
 
(1,566
)
Changes in income taxes payable
1,297

 
867

Other, including changes in noncurrent assets and liabilities
88

 
162

Net cash provided by operating activities
12,095

 
6,921

CASH FLOW FROM INVESTING ACTIVITIES:
 

 
 

Property plant and equipment:
 

 
 

Capital expenditures *
(13,300
)
 
(9,387
)
Changes in restricted cash
3,579

 

Net cash used in investing activities
(9,721
)
 
(9,387
)
CASH FLOW FROM FINANCING ACTIVITIES:
 

 
 

Proceeds from long-term debt

 
6,000

Dividends paid to noncontrolling interest

 
(2
)
Dividends paid

 
(589
)
Net cash provided by financing activities

 
5,409

Increase in cash and cash equivalents
2,374

 
2,943

Cash and cash equivalents at beginning of period
32,669

 
36,899

Cash and cash equivalents at end of period
$
35,043

 
$
39,842

________________________
 

 
 

*  Increases to property plant and equipment, net of asset dispositions
$
(11,734
)
 
$
(16,416
)
Provision for loss on PP&E
(632
)
 

Changes in related accounts payable
(934
)
 
7,029

Capital expenditures
$
(13,300
)
 
$
(9,387
)

The accompanying notes are an integral part of these consolidated financial statements.



7

APCO OIL AND  GAS INTERNATIONAL INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(UNAUDITED)


(1)
Basis of Presentation and Summary of Accounting Policies

General Information and Principles of Consolidation

Apco Oil and Gas International Inc. (“Apco”) is an international oil and gas exploration and production company with a focus on South America.  Exploration and production will be referred to as “E&P” in this document.

Apco began E&P activities in Argentina in the late 1960s, and as of March 31, 2013, had interests in nine oil and gas producing concessions and two exploration permits in Argentina.  E&P activities in Colombia began in 2009 where we have three exploration and production contracts.  Our producing operations are located in the Neuquén, Austral, and Northwest basins in Argentina, and in the Llanos basin in Colombia.  We also have exploration activities currently ongoing in both Argentina and Colombia.

The consolidated financial statements include the accounts of Apco Oil and Gas International Inc. (a Cayman Islands limited company) and its subsidiaries, Apco Properties Ltd. (a Cayman Islands limited company), Apco Austral S.A. (an Argentine corporation), and Apco Argentina S.A. (an Argentine corporation), which as a group are at times referred to in the first person as “we,” “us,” or “our.”  We also sometimes refer to Apco as the “Company.” The Company proportionately consolidates its direct interest of the accounts of its joint ventures into its consolidated financial statements. All intercompany balances and transactions between Apco and its subsidiaries have been eliminated in consolidation.

WPX Energy, Inc. (“WPX”), an independent exploration and production company with operations primarily in North America, owns 68.96 percent of our aggregate Class A and ordinary shares.  We are managed by employees of WPX, and all of our executive officers and three of our directors are employees of WPX. Pursuant to an administrative services agreement, WPX Energy provides us with administrative, legal, and management services, as well as office space.  We have branch offices in Buenos Aires, Argentina and Bogotá, Colombia. These offices are staffed by employees of Apco and/or contractors retained by us.

Our core operations are located in the Neuquén basin and include our 23 percent working interests in the Entre Lomas, Bajada del Palo and Charco del Palenque concessions and the Agua Amarga exploration permit, and a 40.72 percent equity interest in Petrolera Entre Lomas S.A. (“Petrolera”, a privately owned Argentine corporation), which is accounted for using the equity method (see Note 3).  Petrolera is the operator and owns a 73.15 percent working interest in the same properties.  Consequently, Apco’s combined direct consolidated and indirect equity interests in the properties underlying the joint ventures total 52.79 percent. In the Neuquén basin we also participate in the Coirón Amargo block in which we hold a 45 percent interest. We sometimes refer to these areas in a group as our “Neuquén basin properties.”

The unaudited, consolidated financial statements of Apco included herein do not include all footnote disclosures normally included in annual financial statements and, therefore, should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012.

In our opinion, all normal recurring adjustments have been made to present fairly the results of the three-month period ended March 31, 2013 and 2012.  The results for the periods presented are not necessarily indicative of the results for the respective complete years.

Other Revenues - Government Tax Credit Certificates

Apco is eligible to earn producer export tax credit certificates as a result of our oil and gas producing activities in Argentina, where the government created various hydrocarbon subsidy programs to promote increased oil production and reserves. The programs grant qualifying companies economic benefits in the form of tax credit certificates which can be utilized to offset export taxes on hydrocarbon exports or can be transferred to third parties at face value. Realized and unrealized gains from these certificates are reported in Other revenues in our Consolidated Statements of Income and Comprehensive Income. See Note 10 for additional discussion about these programs.



8

APCO OIL AND  GAS INTERNATIONAL INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(UNAUDITED)

Restricted Cash

At March 31, 2013, we had $5.3 million of restricted cash which is collateral for letters of credit related to exploration blocks in Colombia.  The letters of credit expire on various dates in 2014 and 2015. As of December 31, 2012, a total of $8.9 million was used as collateral for letters of credit and was considered restricted cash.

Inventory Valuation

Our inventory includes hydrocarbons of $1.1 million at March 31, 2013, and $1.1 million at December 31, 2012, which are accounted for at production cost, and spare-parts materials of $3.5 million at March 31, 2013 and $3.0 million at December 31, 2012, which are accounted for at cost.

Property and Equipment

We use the successful-efforts method of accounting for oil and gas exploration and production operations, whereby costs of acquiring non-producing acreage and costs of drilling successful exploration wells and development costs are capitalized. Geological and geophysical costs, including three dimensional (“3D”) seismic survey costs and costs of unsuccessful exploratory drilling are expensed as incurred.

Oil and gas properties are depreciated over their concession lives using the units of production method based on proved and proved developed reserves. Our proved reserves are limited to the concession life even though a concession’s term may be extended for ten years based on terms to be agreed with the Argentine government.  Non oil and gas property is recorded at cost and is depreciated on a straight-line basis, using estimated useful lives of three to 15 years.

We evaluate our long-lived assets for impairment when we believe events or changes in circumstances indicate that the carrying value of an asset (or asset group) may not be recoverable. Typical indicators of a possible impairment include declining oil and gas prices, unfavorable revisions to our reserve estimates, drilling results, or future drilling plans. Depending upon the results of future exploration activities, we could determine that certain properties need to be impaired as we drill and evaluate those areas.  For example, see discussion in Note 5 about our exploratory wells in progress and wells pending the determination of proved reserves.

Nonmonetary Transactions

We account for nonmonetary transactions based on the fair values of the assets involved, which is the same basis as that used in monetary transactions.  During the first three months of 2013 and 2012, we delivered a volume of our oil and natural gas to third parties to satisfy a portion of our provincial production tax obligation.  The crude oil inventory and natural gas that was transferred to satisfy this obligation was recognized at fair value.  We recorded approximately $257 thousand in oil and natural gas revenues and taxes other than income as a result of this transaction in the first three months of 2013, and $604 thousand in the first three months of 2012.

Recently Adopted Accounting Standards

In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update, or ASU, 2013-02, Comprehensive Income (Topic 220), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This update requires companies to provide information regarding the amounts reclassified out of accumulated other comprehensive income by component. In addition, companies are required to present, either on the face of the statement where net income is presented or in the accompanying notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income.  We adopted the requirements of ASU 2013-02 in our consolidated financial statements for the quarter ended March 31, 2013. The adoption of ASU 2013-02 had no impact on the our consolidated financial statements.

9

APCO OIL AND  GAS INTERNATIONAL INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(UNAUDITED)


(2)
Income Taxes

We recorded expenses for income taxes as presented in the following table:
 
Three months ended March 31,
 
(in Thousands)
 
2013
 
2012
Income taxes:
 
 
 
Current
$
3,527

 
$
3,294

Deferred
3

 
2

Income tax expense
$
3,530

 
$
3,296


We are domiciled in the Cayman Islands where the income tax rate is zero.  However, we are required to pay income taxes in Argentina and in Colombia.  We currently pay income tax only in Argentina where most of our oil and gas income generating activities are presently located. Equity income from our investment in Petrolera is recorded on an after tax basis. We have incurred tax losses related to exploration and production activity in Colombia. We have not recorded any benefit to income tax expense for these losses since there is uncertainty about when, if ever, our activities in Colombia will generate sufficient taxable income in Colombia to realize the benefit from these tax losses.

The effective income tax rate for the three-month periods ended March 31, 2013 and 2012 is lower than the statutory rate in Argentina due primarily to our equity income from Argentine investment in Petrolera partially offset by losses in Colombia for which no tax benefit has been recorded.

As of March 31, 2013 and December 31, 2012, we had no unrecognized tax benefits or reserve for uncertain tax positions.

Our policy is to recognize tax related interest and penalties as interest and other expense, respectively. The statute of limitations for income tax audits in Argentina is six years, and begins on December 31 in the year in which the tax return is filed, therefore the tax years 2006 through 2012 remain open to examination.

(3)
Investment in Petrolera Entre Lomas S.A.

As described in Note 1, we use the equity method to account for our 40.72 percent investment in Petrolera. Petrolera’s only business is its operatorship and 73.15 percent interest in the Entre Lomas, Bajada del Palo and Charco del Palenque concessions and the Agua Amarga exploration permit.

Under the equity method of accounting, our share of net income (loss) from Petrolera is reflected as an increase (decrease) in our investment account and is also recorded as equity income (loss) from Argentine investment. Dividends from Petrolera are recorded as reductions of our investment.

The carrying amount of our investment in Petrolera is greater than our proportionate share of Petrolera’s net equity by $717 thousand.  The reasons for this basis difference are: (i) goodwill recognized on our acquisition of additional Petrolera shares in 2002 and 2003; (ii) certain costs expensed by Petrolera but capitalized by us; (iii) recognition of a provision for a doubtful account associated with a receivable held by Petrolera; and (iv) a difference from periods prior to 1991 when we accounted for our interest in Petrolera under the cost recovery method, which will be recognized upon full recovery of our investment.


10

APCO OIL AND  GAS INTERNATIONAL INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(UNAUDITED)

Summarized unaudited financial position and results of operations of Petrolera are presented in the following tables.

Petrolera’s financial position at March 31, 2013 and December 31, 2012 is as follows:
 
March 31,
2013
 
December 31,
2012
 
(in Thousands)
Current assets
$
98,202

 
$
84,435

Non current assets
277,585

 
282,497

Current liabilities
74,033

 
72,164

Non current liabilities
31,015

 
30,105


Included in Petrolera’s current assets as of March 31, 2013, is approximately $38 million of cash denominated in Argentine pesos.

Petrolera’s results of operations for the three months ended March 31, 2013 and 2012 are as follows:
 
Three months ended March 31,
 
2013
 
2012
 
(in Thousands)
Revenues
$
74,041

 
$
78,359

Expenses other than income taxes
52,778

 
47,134

Net income
13,062

 
20,221


The comparative decrease in Petrolera’s net income for the three-month period in 2013 is primarily a result of lower revenues driven by lower volumes and greater operating costs.  Petrolera declared a dividend of $16.4 million pesos net to Apco (approximately $3.2 million US dollars at March 31, 2013) during the first quarter of 2013. The payment of this dividend was pending Central Bank and AFIP (Argentina's tax authority) approval per exchange control restrictions as of the end of the quarter, and was recorded in our other current assets accordingly. Consequently, during the first three months of 2013, we did not receive any dividends from Petrolera compared with $2.9 million during the same period in 2012.  


(4)
Exploration Expense
 
Three Months Ended March 31,
 
2013
 
2012
 
  (in Thousands)
Geologic and geophysical costs
$
142

 
$
5,061

Dry hole costs
632

 

Total exploration expense
$
774

 
$
5,061

 
Our geologic and geophysical costs primarily consist of the acquisition cost of 3D or 2D seismic information. Our dry hole costs are related to the impairment or expensing of unsuccessful exploratory wells or well re-completions of an exploratory nature. During the first quarter of 2013, $632 thousand was expensed as dry hole costs related to our Colombian operations. 


(5)
Exploratory Wells and Exploratory Well Costs Pending the Determination of Proved Reserves

We had exploratory wells in progress of approximately $9.8 million at March 31, 2013, and $6.1 million as of December 31, 2012. If the exploratory wells are determined to be productive, the appropriate related costs will be transferred to

11

APCO OIL AND  GAS INTERNATIONAL INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(UNAUDITED)

proved oil and gas properties.  Included in the balance of exploratory wells in progress are certain exploratory wells that have been drilled but are pending the determination of proved reserves. The amount of exploratory wells pending the determination of proved reserves was $8.5 million as of March 31, 2013, representing an increase due to additions of approximately $3.9 million during the first quarter of 2013 compared with the balance of $4.6 million as of December 31, 2012. The balance as of March 31, 2013, includes costs of three wells that have been capitalized for less than one year, and costs of $2.4 million for one well that has been capitalized for greater than one year. We have firm plans and contractual commitments including the drilling of additional exploratory wells or fracture stimulations during 2013 to assess the reserves related to this well and their potential development.

In addition to the wells mentioned above, we had capitalized exploratory drilling costs net to our equity interest (which is presented on an after tax basis) pending the determination of proved reserves of approximately $1.3 million as of March 31, 2013, compared with $795 thousand as of December 31, 2012.
 
(6)
Other Current Assets

The balance of other current assets consisted of the following:
 
March 31, 2013
 
December 31, 2012
 
(in Thousands)
Prepaid expense
$
1,404

 
$
1,415

Dividend receivable
3,206

 

Value added tax advances
2,951

 
2,327

Hydrocarbon subsidy receivable
2,150

 

Advances with joint venture partners
281

 
356

Interest receivable
95

 
105

Other current assets
1,069

 
674

 
$
11,156

 
$
4,877


(7)
Accrued Liabilities

The balance of accrued liabilities consisted of the following:
 
March 31, 2013
 
December 31, 2012
 
(in Thousands)
Taxes other than income
$
2,653

 
$
2,870

Payroll and other general and administrative expenses
1,979

 
2,205

Advances from joint venture partners
2,038

 
1,425

Current portion of long-term debt
500

 
500

Other
918

 
742

 
$
8,088

 
$
7,742



(8)
Debt and Banking Arrangements

We have borrowed $8 million under our banking agreement.  Our ability to draw funds from the line of credit under this agreement ended in March 2012.  Borrowings under this facility are unsecured and bear interest at the six-month Libor rate plus three percent per annum. Principal amounts will be repaid in four equal semi-annual installments from each borrowing date after a two and a half year grace period.  This debt agreement contains covenants that restrict or limit, among other things,

12

APCO OIL AND  GAS INTERNATIONAL INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(UNAUDITED)

our ability to create liens supporting indebtedness, purchase or sell assets outside the ordinary course of business, and incur additional debt.  


Aggregate minimum maturities of our long-term debt are as follows:
 
(in Thousands)
2013
$
500

2014
2,500

2015
3,500

2016
1,500

Total
$
8,000



(9)
Contingencies

In the third quarter of 2012, we and our partners in Tierra del Fuego reached agreements with the provincial government to extend the term of our concessions by the ten years provided for in Hydrocarbon Law 17,319.  The ten-year extensions for all three concessions run through August 17, 2026.  The agreements have been signed by us and our partners and representatives of the province.  The agreements will become effective upon legislative approval, which is still pending as of March 31, 2013.

In the third quarter of 2011, we received a claim from the Dirección General de Rentas (the “DGR,” or provincial taxation authority) in the province of Chubut, Argentina, for alleged deficiencies in exploitation canon payments applicable to the Cañadón Ramírez concession during the years 2009 and 2010.  The DGR has claimed that we owe an additional $4.3 million pesos (approximately $840 thousand U.S. dollars).  In making this assessment, the DGR has failed to acknowledge that we relinquished portions of the original surface area of the concession during those periods. Therefore, we believe this claim has no merit and that the exploitation canon payments made are correct.  We initiated an administrative proceeding with the province to challenge the DGR claim in the fourth quarter of 2011.  In February 2012, the province rejected our motion for reconsideration.  We filed an administrative appeal with the Provincial Ministry of Economy in March 2012.  We sold our interest in Cañadón Ramírez at the end of 2010. As of March 31, 2013 we have not been notified of any decision related to our appeal.


(10)
Fair Value Measurements

Fair value is the amount received to sell an asset or the amount paid to transfer a liability in an orderly transaction between market participants (an exit price) at the measurement date.  Fair value is a market-based measurement considered from the perspective of a market participant.  We use market data or assumptions that we believe market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation.  The fair value hierarchy prioritizes the inputs used to measure fair value.  Level 3 measurements consist of inputs that are not observable or for which there is little, if any, market activity for the asset or liability being measured.  These inputs reflect management’s best estimate of the assumptions market participants would use in determining fair value.  

Our Level 3 measurements consist of financial instruments related to benefits from the Argentine government hydrocarbon subsidy program known as Oil Plus. We are eligible to earn producer export tax credit certificates based on production and reserve replacement measurements as provided by government regulations. We apply for the certificates and receive them at the discretion of the government. The certificates can be utilized to offset export taxes on hydrocarbon exports from our direct joint venture interests or can be transferred to third parties at face value.

 In February 2012, the Argentine government suspended benefits under the Oil Plus program and ceased granting subsidies to producers. Consequently, we did not realize any benefit from this program in 2012 and we considered all of our unused certificates to be unrealizable as of December 31, 2012.


13

APCO OIL AND  GAS INTERNATIONAL INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(UNAUDITED)


In early 2013, the government altered its regulations to allow smaller producing companies to resume receiving benefits from the program. Consequently, certain third parties of ours were allowed to utilize tax certificates that had originally been granted to us and we realized $2.9 million during the three month period ended March 31, 2013.  Realized and unrealized gains from the benefits of these programs included in Income before income taxes are reported in Other revenues in our Consolidated Statements of Income and Comprehensive Income. 

As of March 31, 2013, our fair value estimate of financial instruments related to hydrocarbon subsidies is zero. Our estimate is based on a market approach and considers various market participant assumptions, including various levels of required governmental approval, the likelihood of the export of hydrocarbons to generate export taxes for which the subsidies can be utilized since we are only able to export a limited amount of our production, the legal requirement to transfer the certificates to other parties at nominal value and the expected duration of the government export tax regime and subsidy programs based on current factors. 


(11)
Subsequent Events

In the second quarter of 2013, we executed a farm-out agreement under which we will assign a portion of our working interest in one of our Colombian properties subject to governmental approval. Terms of the agreement include a reimbursement of past seismic and drilling costs incurred by us for approximately $8.4 million and a carry of future exploration investments. During the second quarter we expect to record a recovery of unproved capitalized costs associated with the farm-out of approximately $4.8 million and a gain of $3.6 million for costs previously recorded as exploration expense.

Additionally, in April Petrolera received approval to pay a portion of our dividend receivable. Petrolera used approximately $5.2 million pesos to pay $1.0 million US dollars of the dividend. We also collected $2.2 million of hydrocarbon subsidy receivable. Both of these items were recorded in other current assets as of March 31, 2013.

Also in April, the government allowed a third party to utilize an additional $2.4 million of tax certificates that had originally been granted to Apco, and we transferred an additional $3.5 million of tax certificates to a third party. We believe there is significant uncertainty related to realization of the transferred certificates and we cannot predict if we will realize any additional benefits from this program.


14


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis explains the significant factors that have affected our results of operations for the three-month period ended March 31, 2013, compared with the same period ended March 31, 2012, and our financial condition since December 31, 2012. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and notes thereto included in Part I, Item 1, “Financial Statements,” of this document and our Annual Report on Form 10-K for the year ended December 31, 2012.
 
Overview of Three Months Ended March 31, 2013

During the first quarter of 2013, net income attributable to Apco Oil and Gas International Inc. was $9.9 million compared with $10.1 million for the first quarter of 2012.  Net income was slightly lower quarter-to-quarter as the benefits of higher operating revenues were more than offset by the combination of greater operating expenses, lower equity income and higher income tax expense.

Since the beginning of 2012, oil prices in Argentina have stabilized at approximately $75 per barrel. In April of 2013, the government froze gasoline prices for six months, which we expect will limit our oil prices at current levels throughout 2013. Inflation in Argentina has been a persistent problem for some time.  In contrast, the Argentine peso has not experienced a commensurate level of devaluation resulting in considerable increases in our U.S. dollar cost of operations and capital expenditures.  Consequently, the combination of flat oil prices and inflation in Argentina without peso devaluation has resulted in lower operating margins and lower operating income generated in Argentina for both Apco and Petrolera.

Net cash provided by operating activities during the first three months of 2013 was $12.1 million, an increase of $5.2 million compared with the first three months of 2012.  We ended the first quarter with cash and cash equivalents of $35 million, or ten percent of total assets.  We believe we have sufficient liquidity and capital resources to fund our ongoing operations and planned capital expenditures during 2013.

See additional discussion about these items in Results of Operations and Financial Condition below.

Neuquén Basin Properties

Our drilling activities in our Neuquén basin properties continued during the first quarter including four development and two exploration wells drilled. However, our 2013 development drilling campaign is behind schedule due to the longer than anticipated time required to drill exploration wells during the quarter. One of the exploration wells completed is an exploration discovery in our Agua Amarga exploration permit. The other exploratory well was drilled in our exploration permit of Coirón Amargo and was put on a natural-flow production test from the Tordillo formation. Production from this well has been modest and plans to stimulate the well and its economic recoverability are under evaluation. We have incurred approximately $2.5 million for this well as of March 31, 2013. At the end of the quarter, an additional four development wells were in various stages of drilling or completion.

Colombian Properties

During the first quarter, we drilled two wells in the Llanos 32 block. The first well, the Bandola #1, was drilled near the Maniceño discovery drilled in 2012. The well was completed in April and put on production from the Mirador formation at a natural flow rate of 2,600 gross barrels of oil per day. The second well, the Llanita #1, was drilled on a prospect in the southern half of the block. After evaluating electric logs from the well, we determined that the well could not economically produce hydrocarbons and did not participate in casing operations to further investigate the well. We recorded dry hole expense of $632 thousand for costs incurred for this well as of March 31, 2013. We have a 20 percent working interest in the Llanos 32 block.

Concession Contracts in Argentina

The concession terms for the portion of the Entre Lomas concession located in Río Negro and for our Tierra del Fuego concessions currently end in 2016.  Approximately one half of the Entre Lomas concession, including our largest producing field, is located in the province of Río Negro.  The primary terms of the concessions can be extended for ten years based on terms to be agreed with the government. The requirements for extension generally include the negotiation of a cash bonus payment, an increase to provincial production taxes, and a future expenditure program.  In March of 2013, the province of Río Negro began the official process to conduct the extension negotiations. We expect to obtain all required approvals during 2013. Our extension agreements signed with the province of Tierra del Fuego in 2012 are still pending legislative approval, which we also expect to obtain in 2013.

15


Results of Operations

The following table and discussion is a summary of our consolidated results of operations for the three months ended March 31, 2013, compared with the three months ended March 31, 2012.  Please read this information in conjunction with the Consolidated Statements of Income and Comprehensive Income.
 
 
For the Three Months Ended March 31,
 
2013
 
2012
 
$ Change
from 2012
 
% Change from 2012
 
(in Thousands)
 
 

Total revenues
$
35,279

 
$
30,076

 
$
5,203

 
17
 %
Total costs and operating expenses
27,271

 
25,026

 
2,245

 
9
 %
Operating income
8,008

 
5,050

 
2,958

 
59
 %
Investment income
5,465

 
8,338

 
(2,873
)
 
(34
)%
Income taxes
3,530

 
3,296

 
234

 
7
 %
Less: Net income attributable to noncontrolling interests
10

 
16

 
(6
)
 
(38
)%
Net income attributable to Apco
$
9,933

 
$
10,076

 
$
(143
)
 
(1
)%
 
Total Revenues
 
Total revenues for the first quarter of 2013 increased by $5.2 million, or 17 percent compared with first quarter of 2012.  The quarter-over-quarter increase is due to the combination of higher product sales revenues driven by the impact of our Colombian operations and higher other operating revenues. The first quarter of 2013 included the positive impact of benefits from the Oil Plus hydrocarbon subsidy program in Argentina. Absent the impact of these benefits, we estimate that Total revenues - including Other revenues - would have increased by approximately eight percent. Subsequent to the end of the first quarter, we realized another $2.4 million of revenues from the subsidy program. We have approximately $3.5 million of additional government tax credit certificates issued by the government but we cannot predict if they will be allowed to be utilized in the future. The following tables and discussion explain the components and variances in operating revenues.


16


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,
 
2013
 
2012
 
% Change
Sales Volumes
 
 
 
 
 
Oil (bbls)
359,248

 
335,293

 
7%
Natural Gas (mcf)
1,360,096

 
1,468,611

 
(7)%
LPG (tons)
2,499

 
2,741

 
(9)%
Oil, Natural Gas and LPG (boe)
615,257

 
612,228

 
—%
 
 
 
 
 
 
Average Sales Prices
 

 
 

 
 
Oil (per bbl)
$
76.32

 
$
74.37

 
3%
Natural Gas (per mcf)
3.07

 
2.55

 
21%
LPG (per ton)
228.70

 
284.20

 
(20)%
 
 
 
 
 
 
Revenues ($ in thousands)
 

 
 

 
 
Oil revenues
$
27,418

 
$
24,936

 
10%
Natural Gas revenues
4,181

 
3,738

 
12%
LPG revenues
572

 
779

 
(27)%
 
$
32,171

 
$
29,453

 
9%

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, 2013 and 2012.
 
Three months ended March 31,
 
Oil
 
Gas
 
LPG
 
Total
 
(in Thousands)
2012 Sales
$
24,936

 
$
3,738

 
$
779

 
$
29,453

Changes due to volumes
1,828

 
(334
)
 
(55
)
 
1,439

Changes due to prices
654

 
777

 
(152
)
 
1,279

2013 Sales
$
27,418

 
$
4,181

 
$
572

 
$
32,171


Oil Revenues

The ten percent increase in Oil revenues during the first quarter of 2013 is primarily due to greater sales volumes and slightly higher oil prices.  The quarter-over-quarter increase in oil volumes and prices is primarily attributable to the positive impact of our Colombian operations. Although the change in total sales volumes on a barrel of equivalent basis was flat during first quarter 2013 compared with first quarter 2012, the relative value of the increase in oil revenues due to higher volumes more than offset the lower revenues from decreased natural gas and LPG volumes.

Other Revenues

During the first quarter of 2013, Other revenues increased by $2.5 million compared with the first quarter of 2012. The increase is due to the utilization of government tax credit certificates in Argentina from the Oil Plus hydrocarbon subsidy program. For further explanation regarding the hydrocarbon subsidy programs, see "MD&A - Oil and Natural Gas marketing - Hydrocarbon Subsidy Programs" in Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2012.







17


Total Costs and Operating Expenses

During the first quarter of 2013, Total costs and operating expenses increased by $2.2 million compared with first quarter 2012 primarily due to greater production and lifting costs and depreciation, depletion and amortization expense, partially offset by lower exploration expense.  Notable variances for the comparable quarters include the following:
Production and lifting costs increased by $2.8 million due to the impact of inflation in Argentina on our operations, increased costs associated with the growth of our operations in Coirón Amargo, and the impact of our Colombian operations which did not begin to incur operating costs until production began in the third quarter of 2012. Additionally, we incurred significant off-site water disposal costs in Colombia during the first quarter of 2013 due to down time associated with our Maniceño water-injection well;
Depreciation, depletion and amortization expense increased by $1.7 million due primarily to higher depreciation rates (see additional discussion below);
Exploration expense decreased by $4.3 million due to lower exploration activity in 2013 compared with 2012; and
Foreign exchange loss (gains) increased by $811 thousand compared to the same period in 2012. During the first quarter of 2012, exchanges losses in Argentina were more than offset by exchange gains in Colombia. We did not experience any exchange gains in Colombia to offset the exchange losses in Argentina during the first quarter of 2013.


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, 2013 and 2012 are shown in the following table:

 
Three months ended March 31,
 
Change from 2012
 
% Change from 2012
 
2013
 
2012
 
 
Consolidated Sales Volumes (Boe)
615,257

 
612,228

 
3,029

 
%
DD&A Rate per Boe
$
11.53

 
$
8.88

 
$
2.65

 
30
%
DD&A Expense (In thousands)
$
7,092

 
$
5,437

 
$
1,655

 
30
%
 

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, 2013 and 2012:
 
Three months ended March 31,
 
(in Thousands)
2012 DD&A
$
5,437

Changes due to volumes
36

Changes due to rates
1,619

2013 DD&A
$
7,092

 
Our weighted average DD&A rate increased in the first quarter of 2013 compared with the same period in 2012 due to the impact of 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 2012.
 
We are working to obtain the ten-year concession extension for our properties in Río Negro, and are waiting on legislative approval for our extensions in Tierra del Fuego.  We expect to experience a favorable effect on future DD&A rates if the extensions are obtained as wells whose productive lives extend beyond 2016 will result in the addition of proved developed reserves.



18


Investment Income

Total investment income decreased by $2.9 million for the first three months of 2013 compared with the same periods of 2012 due to lower Equity income from Argentine investment.  The decrease in our equity income for the period in 2013 is due to lower net income of our equity investee, Petrolera.  The comparative decrease in Petrolera’s net income is primarily a result of lower revenues driven by lower sales volumes, flat oil prices, increases in production and lifting costs and greater depreciation, depletion and amortization expense.


19


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
 
 
2013
 
2012
Sales Volumes (1):
 
 
 
 
Consolidated interests
 
 
 
 
Crude oil and condensate (Bbls)
 
359,248

 
335,293

Gas (Mcf)
 
1,360,096

 
1,468,611

LPG (tons)
 
2,499

 
2,741

Barrels of oil equivalent (Boe)
 
615,257

 
612,228

Equity interests (2)
 
 

 
 

Crude oil and condensate (Bbls)
 
369,141

 
392,604

Gas (Mcf)
 
556,363

 
709,246

LPG (tons)
 
2,697

 
2,839

Barrels of oil equivalent (Boe)
 
493,517

 
544,127

Total volumes
 
 

 
 

Crude oil and condensate (Bbls)
 
728,389

 
727,897

Gas (Mcf)
 
1,916,459

 
2,177,858

LPG (tons)
 
5,196

 
5,580

Barrels of oil equivalent (Boe)
 
1,108,774

 
1,156,355

 
 
 
 
 
Total volumes by basin
 
 

 
 

Neuquén
 
897,715

 
970,212

Austral
 
153,625

 
140,974

Llanos
 
22,434

 

Others
 
35,000

 
45,169

Barrels of oil equivalent (Boe)
 
1,108,774

 
1,156,355

 
 
 
 
 
Average Sales Prices:
 
 

 
 

Consolidated interests
 
 

 
 

Oil (per bbl)
 
$
76.32

 
$
74.37

Gas (per Mcf)
 
3.07

 
2.55

LPG (per ton)
 
228.70

 
284.20

Equity interests (2)
 
 

 
 

Oil (per bbl)
 
$
74.94

 
$
74.81

Gas (per Mcf)
 
3.38

 
2.75

LPG (per ton)
 
206.63

 
280.73

Average Production Costs per Boe (3):
 
 

 
 

Production and lifting cost
 
$
14.41

 
$
9.84

Taxes other than income
 
$
9.29

 
$
8.62

DD&A
 
$
11.53

 
$
8.88

 (1) Volumes presented in the above table have not been reduced by the approximately 12 to 18.5 percent provincial production tax that we accounted for as an expense.  
(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 our revenues. See our consolidated financial statements and Note 1-Basis of Presentation and Summary of Accounting Policies and Note 3-Investment in Petrolera

20


Entre Lomas S.A. to our consolidated financial statement in Item 1 of this report 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.

Financial Condition

Outlook

Our cash flow from operations is highly sensitive to fluctuations in our oil price realizations. We derive more than 80 percent of our total product revenues from the sale of oil. Oil price realizations for crude produced and sold in Argentina are significantly influenced by Argentine governmental actions. Since the beginning of 2012, oil prices in Argentina have stabilized at approximately $75 per barrel. In April of 2013, the government froze gasoline prices for six months, which we expect will limit our oil prices to current levels throughout 2013. Oil price realizations in Argentina continue to be negotiated on a short-term basis.

Inflation in Argentina has been a persistent problem for some time.  In contrast, the Argentine peso has not experienced a commensurate level of devaluation resulting in considerable increases in our U.S. dollar cost of operations and capital expenditures.  Consequently, the combination of flat oil prices mentioned above and inflation in Argentina without a commensurate level of peso devaluation has resulted in lower operating margins and lower operating income generated in Argentina for both Apco and Petrolera.

In addition, dividends received from our equity investee, Petrolera, are a significant contributor to our cash flow generated by operating activities. 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, debt and interest payments, and the Argentine government’s foreign exchange control policies.

Since the fourth quarter of 2011, the Argentine government has implemented various regulations restricting access to foreign exchange markets, or the purchase of foreign currency through the Central Bank of Argentina at the official rate of exchange for the purpose of depositing funds in foreign accounts. These new restrictions require both Central Bank and AFIP (Argentina’s taxing authority) approvals. As a result, the current movement of funds out of Argentina through the Central Bank at the official exchange rate has been obstructed. In the first quarter of 2013, Petrolera declared a dividend of $16.4 million pesos net to Apco (or approximately $3.2 million US dollars). Subsequent to the end of the quarter, Petrolera received approval to pay a portion of the dividend. In April, Petrolera used approximately $5.2 million pesos to pay $1.0 million US dollars of the dividend to Apco. For additional discussion about the government's regulations, see "Quantitative and Qualitative Disclosures about Market Risk-Inflation, Foreign Currency and Operations Risk" in Item 3 of this report.

In the second quarter of 2013, we executed a farm-out agreement under which we will assign a portion of our working interest in one of our Colombian properties subject to governmental approval. The terms of the agreement include a reimbursement of past seismic and drilling costs incurred by us for approximately $8.4 million and a carry of future exploration investments. Consequently, our original planned capital expenditure budget of $66 million for 2013 was reduced by $5 million.

We will continue to monitor our capital programs as necessary to provide Apco with the financial resources and liquidity needed to continue development drilling in our 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.

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. Additionally, in the third quarter of 2012 we began producing oil from our operations in Colombia, creating a source of cash flow outside of Argentina. Although we generally fund our capital programs with internally generated cash flow, successful exploration efforts in Argentina or Colombia could lead to development capital needs that are currently beyond our ability to fund from operations.

As a result of the current exchange control restrictions that have obstructed the ability to move funds out of Argentina at the official rate of exchange, we have received fewer dividends from our investment in Petrolera during the last 12 months, and

21


none during the first quarter of 2013.  We continue to operate our business under the assumption that the receipt of dividends abroad from our investment in Petrolera will contribute to the funding of our operations outside of Argentina.  However, because of the current regulatory environment, the receipt of dividends abroad from our investment in Petrolera may not be a reliable source of funding for our operations outside of Argentina in the near term, and consequently we may need other sources of funding, including drawing down our existing cash reserves or farm-outs, to meet our plans and exploration commitments outside of Argentina.

With our cash and cash equivalents balance at March 31, 2013, of $35.0 million, or ten percent of total assets, and the ability to generally adjust capital spending as necessary, we believe we have sufficient liquidity and capital resources to effectively manage our business throughout the remainder of 2013.

Our liquidity is affected by restricted cash balances that are pledged as collateral for letters of credit for exploration activities in Colombia.  As of March 31, 2013, $5.3 million of cash is considered restricted.  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,
 
2013
 
2012
 
(in Thousands)
Net cash provided (used) by:
 
 
 
Operating activities
$
12,095

 
$
6,921

Investing activities
(9,721
)
 
(9,387
)
Financing activities

 
5,409

Increase in cash and cash equivalents
$
2,374

 
$
2,943


Operating Activities

Our net cash provided by operating activities totaled $12.1 million for the first three months of 2013, compared with $6.9 million during the same period in 2012.  The increase in cash provided by operating activities compared to the same period in 2012 was primarily due to the positive impact of our operations in Colombia, and lower exploration activity including the acquisition of 3D seismic information in the first three months of 2013 compared with the same period of 2012. These positive variances were partially offset by lower dividends from our Argentine investment. See additional discussion of dividends from our Argentine investment in “Financial Condition” and “Liquidity.”

Investing Activities

During the first three months of 2013, capital expenditures totaled $13.3 million, most of which was invested in drilling in our Neuquén basin properties and exploration drilling in Colombia, compared with $9.4 million of capital expenditures in 2012.  Additionally, we received $3.6 million during the first three months of 2013 as a return of collateral previously used for letters of credit, compared with none during the same period of 2012.

Financing Activities

During the first three months of 2013, we paid no dividends to shareholders and non-controlling interests compared with $591 thousand during the same period in 2012, and we had no bank borrowings in 2013 compared with $6 million in borrowings from our banking agreement during the same period in 2012.



Contractual Obligations


22


Our contractual obligations have decreased by approximately $10.8 million from our total obligations as reported in our Annual Report on Form 10-K for the year ended December 31, 2012, as a result of drilling and exploration activities during the first three months of 2013 and the farm-out of a portion of our working interest in one of our Colombian properties in the second quarter of 2013.  

Off-Balance Sheet Arrangements

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


23


Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Our operations are exposed to market risks as a result of changes in commodity prices and foreign currency exchange rates.

Commodity Price Risk

We have historically not used derivatives to hedge price volatility. Oil sales price realizations for oil produced and sold in Argentina are significantly influenced by Argentine governmental actions. In the current regulatory environment, the combination of hydrocarbon export taxes and strict government controls over Argentine gasoline prices directly impacts price realizations for the sale of crude oil in the domestic Argentine market. As a result, our price is impacted more by government controls than changes in world oil prices.  Because our oil prices are negotiated on a short-term basis, we cannot accurately predict our future sales prices, and it is difficult for us to determine what effect increases or decreases in world oil prices may have on our results of operations.

Furthermore, although our oil prices in Argentina are negotiated and denominated in US dollars, we are paid in pesos.  This could make our oil price realizations sensitive to currency devaluation depending on the manner in which any possible devaluation is implemented by the government.

Inflation, Foreign Currency and Operations Risk

The majority of our operations are located in Argentina.  Historically Argentina has struggled through extended periods of inflation that have eventually led to a sudden devaluation of the Argentine peso similar to what occurred during the Argentine economic crisis of 2001 and 2002.

Since the economic crisis of 2001 and 2002, when the value of the peso was suddenly reduced from an exchange rate of one peso to one US dollar to an exchange rate of three pesos to one US dollar, the Argentine economy has generally grown at strong rates ranging from two to ten percent annually. However, actual inflation escalated during this same period at rates ranging from 15 to 30 percent annually over the last several years. As a result of government efforts to support the value of the peso in this environment, the peso’s value has not declined in proportion to the level of actual inflation thereby substantially increasing the cost of living in Argentina and the US dollar cost of our operations and capital expenditures in the country. Because the peso has not been permitted to devalue in proportion to the actual inflation experienced in the country, there has been, in the recent past, capital flight out of Argentina due to a lack of confidence in the value of the peso at the official exchange rate.

In October of 2011 and July of 2012, the government implemented regulations restricting access to foreign exchange markets, including the purchase of foreign currency (US dollars) through the Central Bank of Argentina at the official rate of exchange. These regulations were augmented by formal and informal restrictions including approvals from both the Central Bank and AFIP.  As a result, movement of funds out of Argentina through the Central Bank at the official exchange rate has been obstructed. The purchase of foreign currency for transactions such as the repayment of debt is not limited. Companies that are generating free cash flow find themselves accumulating local currency in Argentina.

An alternative way for companies to send money out of Argentina exists and consists of purchasing marketable securities in Argentina with pesos and selling them abroad in foreign currency. As of March 31, 2013, the implicit exchange rate derived from this type of transaction was approximatly 64 percent above the official exchange rate. The resulting spread between such implicit exchange rate and the official rate of exchange could be an indicator that an official devaluation of the Argentine peso may be required at some point.

A devaluation of the Argentine peso could result in foreign exchange losses to the extent of net monetary assets held by us in Argentine pesos that are translated on the balance sheet at the closing exchange rate.  A devaluation could also lower our product price realizations and reduce our peso-denominated costs. Although we cannot predict the outcome of any future peso devaluation, a devaluation could have a negative impact on our results of operations.

At December 31, 2012, the peso to US dollar official rate of exchange rate was 4.92:1.  At March 31, 2013, the official exchange rate was 5.13:1 and our net monetary assets denominated in Argentine pesos was $5.3 million.  Additionally, Petrolera had a balance of net monetary assets denominated in pesos of approximately $4.7 million as of March 31, 2013.




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Economic and Political Environment

Argentina has a history of economic and political instability.  Because our operations are predominately located in Argentina, our operations and financial results have been, and could be in the future, adversely affected by economic, market, currency, and political instability in Argentina, as well as measures taken by its government in response to such instability.  Argentina’s economic and political situation continues to evolve, and the Argentine government may enact future regulations or policies that may materially impact, among other items, (i) the realized prices we receive for the commodities we produce and sell; (ii) the timing of repatriations of cash to the Cayman Islands; (iii) our asset valuations; (iv) the dollar value of peso-denominated monetary assets and liabilities; and (v) restrictions on imports of materials necessary for our operations.

In October 2011, President Cristina Kirchner was re-elected for a second term.  Her first term was highlighted by energy policies that controlled prices of hydrocarbons, in particular natural gas prices, subsidies for the import of natural gas at prices far higher than those permitted for the sale of natural gas produced in Argentina, close alliances with labor unions, and a monetary policy designed to support the value of the peso. Additionally, the government has taken various measures to assert greater state control over different areas of the country’s economy, including nationalizing an airline and private pension funds.

Since the presidential election in late 2011, the government has increasingly used foreign-exchange, trade, price and capital controls to manage the economic challenges faced by the country.  During 2012, the government issued numerous decrees to regulate investments and profits and exert its influence in private sector operations in the energy industry, including the expropriation of 51 percent of the shares of YPF from Repsol. These actions have created an unpredictable political and business environment in the country. During 2013, the government has frozen supermarket and gasoline prices, and has proposed legislation to alter the judiciary assignment process.

The stated objective of the Argentine government is to increase both conventional and unconventional oil and natural gas production in Argentina through increased investments by YPF, now majority owned by the Argentine government. YPF has announced an aggressive multi-year investment plan designed to achieve that objective and various potential joint venture partnerships to help fund this program. In addition, in 2013 the government announced the creation of a trust fund of up to $2.0 billion for financing oil and gas companies in which the government has an equity interest. As a result of these actions and events, and in spite of the YPF announcement, the share price of YPF and many other public companies with oil and gas interests in Argentina have fallen off precipitously, as have the shares of Apco.

Although we cannot predict the impact of these events on our business, we have historically reinvested most of our earnings into the exploration and development of our properties in Argentina with positive results to both oil and natural gas production and proved reserves.



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Item 4.  Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act) (“Disclosure Controls”) or our internal controls over financial reporting (“Internal Controls”) will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. We monitor our Disclosure Controls and Internal Controls and make modifications as necessary; our intent in this regard is that the Disclosure Controls and Internal Controls will be modified as systems change and conditions warrant.

Evaluation of Disclosure Controls and Procedures

An evaluation of the effectiveness of the design and operation of our Disclosure Controls was performed as of the end of the period covered by this report. This evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these Disclosure Controls are effective at a reasonable assurance level.

First-Quarter 2013 Changes in Internal Controls

There have been no changes during the first quarter of 2013 that have materially affected, or are reasonably likely to materially affect, our Internal Controls.

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PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

The additional information called for by this item is provided in Note 9-Contingencies to our consolidated financial statements in Part I, Item 1 of this report, which information is incorporated by reference into this item.

Item 1A.  Risk Factors

Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012, includes certain risk factors that could materially affect our business, financial condition or future results. Those risk factors have not materially changed.




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Item 6. Exhibits
 
3.1 – Memorandum of Association of Apco Oil and Gas International Inc., as amended, (incorporated by reference to Exhibit 3.2 to our Quarterly Report on Form 10-Q filed with the SEC on August 7, 2007).
 
 
 
3.2 – Articles of Association of Apco Oil and Gas International Inc. as amended, (incorporated by reference to Exhibit 3.2 to our Quarterly Report on Form 10-Q filed with the SEC on August 8, 2011).
 
 
 
4.1 – Specimen Ordinary Share Certificate of Apco Oil and Gas International Inc. (incorporated by reference to Exhibit 4.1 to our Quarterly Report on Form 10-Q filed with the SEC on August 7, 2009).
 
 
 
10.1 – Amended and Restated Administrative Services Agreement, dated May 7, 2013, between Apco Oil and Gas International Inc. and WPX Energy, Inc.*
 
 
 
31.1 – Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.*
 
 
 
31.2 – Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.*
 
 
 
32 – Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.**
 
 
 
101 .INS  – XBRL Instance Document**
 
 
 
101 .SCH  – XBRL Schema Document**
 
 
 
101 .CAL  – XBRL Calculation Linkbase Document**
 
 
 
101 .LAB  – XBRL Label Linkbase Document**
 
 
 
101 .PRE  – XBRL Presentation Linkbase Document**
 
 
 
101 .DEF  – XBRL Definition Linkbase Document**
 
_____________________
 
* Filed herewith.
 
**Furnished herewith.


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SIGNATURE


Pursuant to the requirements 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.



APCO OIL AND GAS INTERNATIONAL INC.   
(Registrant)




By:      /s/ Benjamin A. Holman         
Chief Accounting Officer and Controller
(Duly Authorized Officer
and Principal Accounting Officer)




May 7, 2013

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INDEX TO EXHIBITS

EXHIBIT
NUMBER 
DESCRIPTION
 
 
3.1
Memorandum of Association of Apco Oil and Gas International Inc., as amended, (incorporated by reference to Exhibit 3.2 to our Quarterly Report on Form 10-Q filed with the SEC on August 7, 2007).
 
 
3.2
Articles of Association of Apco Oil and Gas International Inc. as amended, (incorporated by reference to Exhibit 3.2 to our Quarterly Report on Form 10-Q filed with the SEC on August 8, 2011).
 
 
4.1
Specimen Ordinary Share Certificate of Apco Oil and Gas International Inc. (incorporated by reference to Exhibit 4.1 to our Quarterly Report on Form 10-Q filed with the SEC on August 7, 2009).
 
 
10.1
Amended and Restated Administrative Services Agreement, dated May 7, 2013, between Apco Oil and Gas International Inc. and WPX Energy, Inc.*
 
 
31.1
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.*
 
 
31.2
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.*
 
 
32
Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.**
 
 
101 .INS
XBRL Instance Document**
 
 
101 .SCH
XBRL Schema Document**
 
 
101 .CAL
XBRL Calculation Linkbase Document**
 
 
101 .LAB
XBRL Label Linkbase Document**
 
 
101 .PRE
XBRL Presentation Linkbase Document**
 
 
101 .DEF
XBRL Definition Linkbase Document**
_____________________
 
*      Filed herewith.
**      Furnished herewith.


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