Market Risk Exposure Assessment: APA Corp

This report synthesizes the quantitative and qualitative disclosures regarding market risk exposure for APA Corp as detailed in the 10-K filing for the period ending December 31, 2023.

Commodity Price Risk (Oil, Gas, NGLs)

Magnitude of Exposure and Changes

The Company exhibits a high degree of sensitivity to commodity price volatility, which is cited as highly dependent on global factors including geopolitical conflicts, inflation, and supply/demand dynamics. The exposure magnitude was significantly impacted in 2023:

• Crude Oil: Average realized prices decreased by 19% (from $99.11 to $80.72 per barrel).
• Natural Gas: Average realized prices decreased sharply by 42% (from $4.98 to $2.91 per Mcf).
• NGLs: Average realized prices decreased by 38% (from $34.51 to $21.54 per barrel).

Quantitative Impact and Mitigation Strategies

The Company provides detailed sensitivity analysis demonstrating the potential impact on revenues: a $1.00/barrel change in weighted average oil price could alter revenues by approximately $\pm$74$ million, while a $0.10$/Mcf change in natural gas price could alter revenues by approximately $\pm$30$ million.

Mitigation: The Company employs derivative positions (futures contracts, swaps, and/or options) on projected production to manage cash flow fluctuations; it explicitly states these are not used for trading purposes.

• As of December 31, 2023, the Company held open natural gas derivatives (not designated as cash flow hedges) with a fair value of $6 million. A $\pm 10%$ change in natural gas prices would result in an approximate $\pm$1$ million change to this asset's fair value.

Assessment:

• Strength: The Company has established quantitative metrics (sensitivity tables) and utilizes hedging instruments to manage price volatility, demonstrating proactive risk management.
• Weakness: Despite the use of derivatives, the company remains highly exposed to commodity swings, as evidenced by the substantial revenue sensitivity figures ($\pm$74M$ for oil).

Interest Rate Sensitivity

Fixed vs. Variable Rate Exposure

The Company's primary debt structure is largely fixed-rate: $4.8 billion net in outstanding notes and debentures are all fixed-rate with a weighted average interest rate of 5.34 percent. This structure minimizes the risk of earnings or cash flow loss associated with near-term changes to this large portion of its debt.

However, exposure exists through variable instruments:

• Syndicated Credit Facilities: $372 million in borrowings are outstanding under revolving credit facilities.
• Cash Equivalents: Approximately $85%$ of the $87 million in cash and cash equivalents is invested in short-term investments subject to interest rate changes.

Quantitative Impact and Mitigation Strategies

The Company states that changes in rates applicable to its short-term investments and credit facility borrowings are expected to have an immaterial impact on current earnings and cash flows, though they could affect future debt issuance costs. No specific hedging instruments are disclosed for the variable portion of the debt or investments.

Assessment:

• Strength: The majority of long-term debt is fixed-rate, providing stability against interest rate fluctuations.
• Weakness: Exposure remains present in short-term borrowings and cash investments; while deemed "immaterial" currently, this exposure lacks specific hedging strategies disclosed in the filing.

Foreign Currency Exchange Rate Risk

Currencies Involved and Risk Types

The primary currencies involved are the U.S. Dollar (USD) and the British Pound (GBP). The risk encompasses both transaction risk (costs paid in GBP vs. sales in USD for North Sea production) and translation risk (monthly conversion of monetary assets/liabilities). Egypt operations are fully denominated in USD, mitigating that specific exposure.

Quantitative Impact and Mitigation Strategies

The Company monitors exchange rates and "may, from time to time, implement measures" to protect against risk. The quantitative impact is disclosed: a $10%$ weakening or strengthening of the British pound would result in a net foreign currency gain or loss of $\pm$3$ million.

Assessment:

• Strength: The Company has identified its specific exposure points (GBP costs vs. USD sales) and provided a clear quantitative measure ($\pm$3M$) for potential losses/gains due to exchange rate movement.
• Weakness: The disclosure of mitigation strategies is vague ("may, from time to time, implement measures"), lacking detail on the types or scale of hedging instruments used.

Equity Price Risk

Exposure and Disclosures

The provided market risk disclosures do not contain any information regarding investment portfolios, equity holdings, or associated mark-to-market impacts related to changes in stock prices.

Assessment:

• Weakness (Lack of Disclosure): There is no quantitative or qualitative disclosure available concerning the Company's exposure to equity price risk within this filing excerpt.

Summary of Quantitative Measures and Overall Assessment

Disclosed Quantitative Tools

The filing utilizes several quantitative tools:

1. Sensitivity Tables: Detailed revenue impact figures for changes in crude oil, natural gas, and NGL prices.
2. Derivative Fair Value: Specific disclosure of the $6 million fair value of open natural gas derivatives and their $\pm$1$ million sensitivity to price movements.

The filing does not disclose formal quantitative risk metrics such as Value-at-Risk (VaR) or specific results from stress testing scenarios.

Overall Assessment

Strengths: APA Corp demonstrates a strong commitment to quantifying its primary market risks, particularly commodity price volatility, through detailed sensitivity analysis and the use of derivatives for cash flow management. The fixed nature of most long-term debt provides significant financial stability against interest rate shocks.

Weaknesses: Mitigation strategies are often described qualitatively (e.g., "may implement measures" for FX risk), lacking specific detail on hedging instruments. Furthermore, while commodity price exposure is well quantified, the lack of disclosure regarding equity price risk and the absence of formal metrics like VaR limit a comprehensive view of the Company's total quantitative risk profile.