10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended September 30, 2010

OR

0TRANSITION 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)	(918) 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 o

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 o    No o

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 o  Smaller Reporting Company o

 (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 o  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 October 31, 2010
Ordinary Shares, $0.01 Par Value	29,441,240 Shares

APCO OIL AND GAS INTERNATIONAL INC.

INDEX

PART I.      FINANCIAL INFORMATION 

Item 1.	Financial Statements - Unaudited	Page No.
	Consolidated Balance Sheets – September 30, 2010 and
	December 31, 2009	5
	Consolidated Statements of Income – Three and Nine
	Months Ended September 30, 2010 and 2009	6
	Consolidated Statements of Changes in Equity – Three and Nine
	Months Ended September 30, 2010 and 2009	7
	Consolidated Statements of Cash Flows – Nine Months
	Ended September 30, 2010 and 2009	8
	Notes to Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial
	Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative
	Disclosures about Market Risk	25
Item 4.	Controls and Procedures	26

PART II OTHER INFORMATION

Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 6.	Exhibits	27

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 business 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,” “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 as sumptions and on information currently available to management and include, among others, statements regarding:

2

·   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;

·   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, 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 proposed climate change legislation), 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 associated with future weather conditions 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.

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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, 2009.

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 PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

APCO OIL AND GAS INTERNATIONAL INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(Amounts in Thousands Except Share Amounts)	September 30,			December 31,
	2010			2009
ASSETS
Current assets:
Cash and cash equivalents	$	35,006		$	32,404
Accounts receivable		11,392			9,984
Advances to joint venture partners		239			305
Affiliate receivables		-			156
Inventory		3,301			2,477
Dividend receivable from Argentine investment		-			2,448
Restricted cash and other current assets		7,333			2,429
Total current assets		57,271			50,203
Property and Equipment:
Cost, successful efforts method of accounting		210,375			184,168
Accumulated depreciation, depletion and amortization		(106,461	)		(94,354	)
		103,914			89,814
Argentine investment, equity method		81,577			78,028
Deferred income tax asset		1,149			1,078
Restricted cash and other assets (net of allowance of $618 at September 30, 2010 and
$623 at December 31, 2009)		1,117			5,068
	$	245,028		$	224,191
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	10,367		$	4,878
Affiliate payables		407			454
Accrued liabilities		6,028			5,662
Income taxes payable		2,765			3,724
Dividends payable		-			589
Total current liabilities		19,567			15,307
Long-term liabilities		3,036			3,047
Contingent liabilites and commitments (Note 5)
Equity:
Shareholders' equity
Ordinary shares, par value $0.01 per share; 60,000,000 shares authorized;
29,441,240 shares issued and outstanding		295			295
Additional paid-in capital		9,105			9,105
Accumulated other comprehensive loss		(1,336	)		(1,390	)
Retained earnings		214,148			197,623
Total shareholders' equity		222,212			205,633
Noncontrolling interests in consolidated subsidiaries		213			204
Total equity		222,425			205,837
Total liabilities and equity	$	245,028		$	224,191

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

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APCO OIL AND GAS INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(Amounts in Thousands Except Per Share Amounts)	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2010			2009		2010			2009
REVENUES:
Oil revenues	$	17,391		$	15,376	$	50,227		$	41,935
Natural Gas revenues		2,813			2,354		8,595			6,866
LPG revenues		721			626		2,562			1,742
Other		761			703		1,931			1,591
		21,686			19,059		63,315			52,134
COSTS AND OPERATING EXPENSES:
Production and lifting costs		4,888			4,470		12,710			10,892
Provincial production taxes		2,621			2,269		7,768			6,009
Transportation and storage		238			242		524			639
Selling and administrative		2,604			1,854		6,903			6,258
Depreciation, depletion and amortization		4,230			4,186		12,107			11,855
Exploration expense		577			47		5,900			173
Argentine taxes other than income		1,301			885		3,431			2,712
Foreign exchange losses (gains)		(58	)		146		(10	)		776
Other expense		400			602		1,369			1,557
Total costs and operating expenses		16,801			14,701		50,702			40,871
TOTAL OPERATING INCOME		4,885			4,358		12,613			11,263
INVESTMENT INCOME:
Interest and other income		78			150		336			310
Equity income from Argentine investments		3,459			3,435		11,590			10,049
Total investment income		3,537			3,585		11,926			10,359
Income before income taxes		8,422			7,943		24,539			21,622
Income taxes		1,827			1,615		6,813			4,871
NET INCOME		6,595			6,328		17,726			16,751
Less: Net income attributable to noncontrolling interests		6			9		24			20
Net income attributable to Apco Oil and Gas International Inc.	$	6,589		$	6,319	$	17,702		$	16,731
Amounts attributable to Apco Oil and Gas International Inc.:
Earnings per ordinary share – basic and diluted:
NET INCOME PER SHARE	$	0.22		$	0.21	$	0.60		$	0.57
Average ordinary shares outstanding – basic and diluted		29,441			29,441		29,441			29,441
Cash dividends declared per ordinary share	$	0.02		$	0.02	$	0.04		$	0.04

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

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APCO OIL AND GAS INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(UNAUDITED)

	For the nine months ended September 30,
(Amounts in Thousands)	2010									2009
	Shareholders' Equity			Noncontrolling Interests			Total			Shareholders' Equity			Noncontrolling Interests			Total
Beginning Balance	$	205,633		$	204		$	205,837		$	184,611		$	185		$	184,796
Net Income		17,702			24			17,726			16,731			20			16,751
Other comprehensive income, net of tax:
Pension plan liability adjustment in consolidated interests
(net of Argentine tax of $29 in 2010 and $129 in 2009)		54			-			54			239			-			239
Total comprehensive income		17,756			24			17,780			16,970			20			16,990
		223,389			228			223,617			201,581			205			201,786
Cash Dividends - ordinary shares		(1,177	)		-			(1,177	)		(1,177	)		-			(1,177	)
Dividends and distributions to
noncontrolling interests		-			(15	)		(15	)		-			(2	)		(2	)
Ending Balance	$	222,212		$	213		$	222,425		$	200,404		$	203		$	200,607

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

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APCO OIL AND GAS INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(Amounts in Thousands Except Per Share Amounts)	Nine Months Ended
	September 30,
	2010			2009
CASH FLOW FROM OPERATING ACTIVITIES:
Net income	$	17,726		$	16,751
Adjustments to reconcile to net cash provided by operating activities:
Equity income from Argentine investments		(11,590	)		(10,049	)
Dividends received from Argentine investments		10,489			4,315
Deferred income tax provision (benefit)		(99	)		123
Depreciation, depletion and amortization		12,107			11,855
Changes in accounts receivable		(1,408	)		(60	)
Changes in inventory		(824	)		218
Changes in other current assets		(902	)		310
Changes in accounts payable		1,897			(2,400	)
Changes in advances from joint venture partners		66			(6	)
Changes in affiliate payables, net		109			(1,048	)
Changes in accrued liabilities		1,728			(634	)
Changes in income taxes payable		(959	)		1,922
Other, including changes in noncurrent assets and liabilities		20			239
Net cash provided by operating activities		28,360			21,536
CASH FLOW FROM INVESTING ACTIVITIES:
Property plant and equipment:
Capital expenditures *		(23,977	)		(13,025	)
Changes in noncurrent restricted cash		-			(4,000	)
Net cash used in investing activities		(23,977	)		(17,025	)
CASH FLOW FROM FINANCING ACTIVITIES:
Dividends paid to noncontrolling interest		(15	)		(2	)
Dividends paid ($0.06 per share in 2010 and $0.1275 per share in 2009)		(1,766	)		(3,753	)
Net cash used in financing activities		(1,781	)		(3,755	)
Increase in cash and cash equivalents		2,602			756
Cash and cash equivalents at beginning of period		32,404			33,789
Cash and cash equivalents at end of period	$	35,006		$	34,545
________________________
*  Increases to property plant and equipment	$	(26,207	)	$	(16,170	)
Changes in related accounts payable and accrued liabilities		2,230			3,145
Capital expenditures	$	(23,977	)	$	(13,025	)

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

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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 September 30, 2010, had interests in nine oil and gas producing concessions and two exploration permits in Argentina.  E&P activities in Colombia began in 2009 with the addition of two exploration and production contracts.  A third exploration and production block in Colombia was awarded to Apco in the third quarter, and the contract for the area is expected to be signed by year end.  Our producing operations are located in the Neuquén, Austral, and Northwest basins in Argentina.  We also have exploration activities currently ongoing in both Argentina and Colombia.  As of September 30, 2010, all of our operating revenues and equity income, and all but $2.6 million of our long-lived assets for which we have c arrying values on our balance sheet, were in Argentina.

A wholly owned subsidiary of The Williams Companies, Inc. (“Williams”) currently owns 68.96 percent of the outstanding ordinary shares of Apco.

The consolidated financial statements include the accounts of Apco Oil and Gas International Inc. (a Cayman Islands company) and its subsidiaries, Apco Properties Ltd. (a Cayman Islands 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.

Our core operations are our 23 percent working interests in the Entre Lomas, Bajada del Palo and Charco del Palenque concessions and the Agua Amarga exploration permit in the Neuquén basin, and a 40.803 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 52.85 percent. The Charco del Palenque concession is the portion of the Agua Amarga exploration permit which was converted to a 25-year exploitation concession in the fourth quarter of 2009. We sometimes refer to thes e 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

All intercompany balances and transactions between Apco and its subsidiaries have been eliminated in consolidation.

In the opinion of the Company, all adjustments, consisting of only normal recurring adjustments, have been made to present fairly the results of the three and nine-month periods ended September 30, 2010 and 2009.  The results for the periods presented are not necessarily indicative of the results for the respective complete years.

Fair Value

The carrying amount reported in the balance sheet for cash equivalents, accounts receivable and accounts payable is equivalent to fair value.

Revenue Recognition

The Company recognizes revenues from sales of oil, gas, and plant products at the time the product is delivered to the purchaser and title has been transferred.

Restricted Cash

We have $4 million of restricted cash which is collateral for a letter of credit related to an exploration block in Colombia.  The letter of credit expires on January 12, 2011.

Property and Equipment

The Company uses 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 producing reserves. The Company’s proved reserves are limited to the concession life even though a concession’s term may be extended for 10 years with the consent of 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.

The Company reviews its proved and unproved properties for impairment on a property by property basis and recognizes an impairment whenever events or circumstances, such as declining oil and gas prices, indicate that a property’s carrying value may not be recoverable. The Company records a liability for future asset retirement obligations in accordance with the requirements of FASB ASC 410 (Asset Retirement and Environmental Obligations).

(2)   Income Taxes

As described in Note 8 of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, the Company’s earnings are currently not subject to U.S. income taxes, nor Cayman Islands income or corporation taxes.  Income derived by the Company from its Argentine operations is subject to Argentine income tax at a rate of 35 percent and is included in the Consolidated Statements of Income as Income taxes.

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APCO OIL AND GAS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The effective income tax rate reflected in the Consolidated Statements of Income differs from Argentina’s statutory rate of 35 percent. This is because the Company incurs income taxes only in Argentina, the country where all of its oil and gas income generating activities are presently located. It also generates income and incurs expenses outside of Argentina that are not subject to income taxes in Argentina or in any other jurisdiction and therefore these amounts do not affect the amount of income taxes paid by the Company.  Such items include interest income resulting from the Company’s cash and cash equivalents deposited in its Cayman Island and Bahamas banks, general and administrative expenses incurred by the Company in its headquar ters office in Tulsa, Oklahoma, equity income from Argentine investments that is recorded by the Company on an after tax basis, and foreign exchange gains and losses resulting from changes in the value of the peso which do not effect taxable income in Argentina. Additionally, the Company is incurring expenses related to exploration activity in Colombia that provide no benefit to income tax expense until these activities generate sufficient taxable income in Colombia.

Provision is made for deferred Argentine income taxes applicable to temporary differences between the financial statement and tax basis of the assets and liabilities. The table below summarizes the income tax expense for the periods shown. Amounts are stated in thousands:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2010			2009		2010			2009
Income taxes:
Current	$	1,852		$	1,615	$	6,912		$	4,748
Deferred		(25	)		-		(99	)		123
Income tax expense	$	1,827		$	1,615	$	6,813		$	4,871

The effective income tax rate is lower for the three months ended September 30, 2010, compared with the first nine months of 2010 due to the significant amounts of exploration expense incurred in Colombia during the first and second quarters of 2010 which provide no benefit to income tax expense during the period.

The effective income tax rate on the total provision for the first nine months of 2010 is greater than the effective income tax rate in the same period of 2009 primarily due to the greater amounts of exploration activity in Colombia which provide no benefit to income tax expense during the period.

As of September 30, 2010 and December 31, 2009, the Company had no unrecognized tax benefits or reserve for uncertain tax positions.

The Company’s policy is to recognize tax related interest and penalties as a component of income tax expense.  The statute of limitations for income tax audits in Argentina is five years, and begins on December 31 in the year in which the tax return is filed, therefore the tax years 2004 through 2009 remain open to examination.

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APCO OIL AND GAS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

The Company uses the equity method to account for its 40.803 percent investment in Petrolera Entre Lomas S.A., “Petrolera”a non-public Argentine corporation. Petrolera’s principal 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, the Company's share of net income (loss) from Petrolera is reflected as an increase (decrease) in its investment account and is also recorded as equity income (loss) from Argentine investments. Dividends received from Petrolera are recorded as reductions of the Company’s investment.

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

Petrolera’s financial position at September 30, 2010 and December 31, 2009 is as follows.  Amounts are stated in thousands:

	September 30,		December 31,
	2010		2009
Current assets	$	64,107	$	72,316
Non current assets		223,294		208,576
Current liabilities		48,386		47,106
Non current liabilities		40,957		44,175

Petrolera’s results of operations for the three and nine months ended September 30, 2010 and 2009 are as follows.  Amounts are stated in thousands:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009
Revenues	$	49,536	$	45,230	$	154,724	$	129,056
Expenses other than income taxes		32,324		32,836		103,985		90,738
Net income		8,469		7,758		28,417		23,800

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APCO OIL AND GAS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(4)   Accrued Liabilities

             The balance of accrued liabilities consisted of the following:

	September 30,		December 31,
(Amounts in thousands)	2010		2009
Taxes other than income payable	$	1,545	$	1,155
Accrued provincial production taxes		921		820
Accrued payroll and other general and adminstrative expenses		850		873
Advance from customer		1,441		-
Accrued oil and gas expenditures		739		1,872
Other		532		942
	$	6,028	$	5,662

(5)   Contingencies

In November of 2004, the Company received a formal notice from the Banco Central de la Republica Argentina (the Central Bank of Argentina or the “BCRA”), of certain proceedings based upon alleged violation of foreign currency regulations. Specifically, the BCRA claimed that between December of 2001 and November of 2002 the Company failed to bring into the country 100 percent of the foreign currency proceeds from its Argentine oil exports. In 1989, the government established guidelines that required most oil companies to bring into Argentina 30 percent of foreign currency proceeds from exports instead of 100 percent of such proceeds as was generally required of exporters in other industries. In 1991, all foreign exchange controls were lifted by the government.

In response to Argentina’s economic crisis of 2001 and 2002, the government reintroduced foreign exchange controls in 2002, and as a result the Company repatriated 30 percent of its proceeds from oil exports during 2002 following the 1989 guidelines. An opinion from Argentina’s Attorney General, however, declared that the benefits granted to the oil and gas industry in 1989 were no longer effective and, therefore, 100 percent of such funds had to be repatriated. This opinion supported the position taken by the Argentine government during 2002. The government then revised its position in 2003 and expressly clarified that oil companies are required to only repatriate 30 percent of such proceeds. The government’s departure from its 2002 position was effective January 1, 2003, leaving some uncertainty in the law with regard to 2002.

The BCRA audited the Company in 2004 and took the position that 100 percent of its foreign currency proceeds from its 2002 exports were required to be returned to the country rather than only 30 percent, as had been returned to the country by the Company in 2002. The difference for the Company totals $6.2 million. In December 2004, the Company filed a formal response disagreeing with the position taken by the BCRA. In addition, without admitting any wrongdoing, the Company brought into the country $6.2 million and exchanged this amount for Argentine pesos using the applicable exchange rates required by the regulation.

12

APCO OIL AND GAS INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

To date, this process has not advanced beyond what is described in the previous paragraphs.  The Company anticipates that this matter will remain open for some time. Under the pertinent foreign exchange regulations, the BCRA may impose significant fines on the Company; however, historically few fines have been made effective in those cases where the foreign currency proceeds were brought into the country and traded in the exchange market at the adequate exchange rate and the exporters had reasonable grounds to support their behavior. As a result, a conclusion as to the probability of an outcome or the amount of any loss to the Company that might result from this proceeding cannot be made at this time. There have been no new developments in this matter since the Company filed its formal response in December 2 004.

(6)   Subsequent Events

In October 2010, our Board of Directors approved a regular quarterly dividend of $.02 per share.

13

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 and nine-month periods ended September 30, 2010, compared with the three and nine-month periods ended September 30, 2009, and our financial condition since December 31, 2009. 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 2009 Annual Report on Form 10-K.

Overview of Three and Nine Months Ended September 30, 2010

During the third quarter and first nine months of 2010, net income attributable to Apco Oil and Gas International Inc. was $6.6 million and $17.7 million compared with $6.3 million and $16.7 million for the same periods in 2009.  During the first nine months of 2010, we incurred $5.7 million more exploration expense than in 2009 due to significant seismic acquisition investments in Argentina and Colombia.  This planned expenditure is an integral part of management’s strategy for growth in our core area in Argentina and our new blocks in Colombia.

Our results of operations for the third quarter and first nine months of 2010 compared with the same periods in 2009 include the favorable and unfavorable impacts of the following items:

· Higher oil, natural gas and LPG average sales prices;

·  Greater equity income from Argentine investments;

·  Lower oil sales volumes due to the timing of deliveries;

·  Higher exploration expense due to the acquisition of seismic information in both Argentina and Colombia; and

·  Greater income tax expense.

Additionally, net cash provided by operating activities for the nine months ended September 30, 2010, was $28.4 million, representing a $6.8 million increase compared with the first nine months of 2009 primarily due to higher dividends received from Argentine investments during the period. We ended the third quarter with a cash and cash equivalents balance of $35 million, or 14 percent of total assets, and no bank debt.  We believe we have sufficient liquidity and capital resources to fund our ongoing operations, planned capital expenditures and dividend payments.

See additional discussion in Results of Operations and Financial Condition.

Business Development

In mid-2010, Apco participated in a public bidding process known as “ANH Miniround 2010” for the assignment of certain exploration properties by the government of Colombia.  Apco together with Ramshorn International Limited (“Ramshorn”), a subsidiary of Nabors Drilling, submitted the winning bid for the Llanos 40 block.  We will hold a 50 percent working interest in the block and Ramshorn will also hold 50 percent and will be the operator.  The block will be governed by an exploration and production contract executed with Colombia’s National Hydrocarbon Agency (the “ANH”).  We expect to sign the contract before th e end of 2010.  One of the requirements of the contract is to issue a letter of credit to guarantee the contract’s work commitments.  We anticipate issuing a $5.5 million letter of credit net to Apco in the fourth quarter and collateralizing it with cash.

The Llanos 40 block covers approximately 163,000 acres and is approximately 175 kilometers to the northeast of the Llanos 32 block in which we previously acquired an interest through a farm-in agreement.  Our three-year first phase exploration work commitments will include seismic reprocessing, acquisition of 300 square kilometers, or approximately 74,000 acres, of 3-D seismic and drilling of four exploration wells.  We anticipate spending between $15 and $20 million net to Apco for these work commitments over a three-year period.  We expect exploration activities and expenditures to begin in early 2011.

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Neuquén Basin Properties

During the third quarter of 2010, successful development drilling continued in our Neuquén basin properties.  During the first nine months of 2010, we completed and put on production four oil wells that commenced drilling in 2009, 21 wells were drilled, completed, and put on production, and six additional wells were in various stages of drilling or completion at the end of the third quarter.  Additional activities included production facility investments for gas compression and oil pipelines in the Charco del Palenque and Bajada del Palo concessions, and the acquisition of approximately 300 square kilometers of 3-D seismic information in the western portion of the Bajada del Palo concession for a cost of approximately $0.9 million net to Apco.

In our Agua Amarga exploration permit, we drilled the Jarilla Quemada x-1 exploration well.  Completion and production tests began in September and should finish in the fourth quarter.  Our total cost for this well is estimated to be approximately $0.9 million net to Apco’s consolidated interest.  This well completes the work commitment agreed to when we acquired our rights to the Agua Amarga exploration permit.

Further interpretation of 3-D seismic images of Agua Amarga has revealed another drillable prospect in the central part of the permit area. The structural characteristics of this prospect are consistent with the geologic model that has proven to be an excellent predictor of hydrocarbon accumulation over the past several years. Thus, we have modified our 2010 drilling program and plan to drill this exploration well before the end of 2010.  In addition, the province of Río Negro has extended the first exploration period by one year enabling Apco and its partner to retain the entire block until June 2011 before reaching a decision about acreage relinquishment.

Entre Lomas Concession Extension

During the third quarter 2010, the province of Río Negro approved a basic framework for the negotiation of the ten year concession extensions provided by Argentina’s hydrocarbon law.  Approximately one half of the Entre Lomas concession, including our largest producing field, is located in the province. The concession term for the portion of the Entre Lomas concession located in Río Negro province currently ends in January 2016. The province has invited current concession holders to register and present required information in preparation for negotiating the extensions with the province. Petrolera Entre Lomas S.A., the operator of the Entre Lomas concession and our equity investee, will negotiate with the province on behalf of the Entre Lomas partners. This formal process could continue into 2011.  The ten year concession extension for the portion of the Entre Lomas concession located in the province of Neuquén was obtained from that province in 2009.

Coirón Amargo

In February 2010, we entered into a farm-in agreement that allows us to acquire, through a “drill to earn” structure, up to a 45 percent net interest in the Coirón Amargo exploration permit in the Neuquén basin. The Coirón Amargo block covers approximately 100,000 acres and is adjacent to our core properties in the basin.

Under the agreement, Apco will earn a 22.5 percent non-operated net interest for funding the drilling of two exploration wells during 2010.  The primary objective of the first two wells is to investigate the Tordillo formation, the principal productive formation in our other properties in the Neuquén basin, and a secondary objective is to investigate the Vaca Muerta shale.  After drilling and completion of the first two wells, Apco will have an option to proceed to a second phase and drill two additional wells to increase our net interest to 45 percent.

The first two wells were drilled in the third quarter. Testing of the wells began in October and should be completed in the fourth quarter. We expect to spend approximately $6 million during the first phase of this agreement in 2010, and if we proceed to the second phase, we anticipate spending an additional $6 million in 2011.

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Shale and Tight Sands in the Neuquén Basin

In recent years, oil and gas companies operating in the Neuquén basin have been evaluating the possibility of unconventional sources for hydrocarbon production. The sub surface formations of interest comprise both shale and what is commonly referred to as “tight sands.” Apco’s interests in the Neuquén basin include exploitation concessions and exploration permits that are contiguous and comprise up to 245,000 net acres including our interest in Coirón Amargo. The formations of interest are present in all of the properties in which we participate. We are conducting technical studies to determine if any unconventional potential exists in our properties.

Austral & Northwest Basin Properties

We re-commenced development drilling in our Tierra del Fuego and Acambuco concessions in the first quarter of 2010. Since then, we have drilled ten gas wells in Tierra del Fuego, of which two were determined to be non-productive and two are awaiting completion.  In Acambuco, the Macueta 1006 well was spudded in February and is expected to be completed before the end of the year.

Colombia

In the Llanos 32 block in the Llanos basin of western Colombia, Apco and its partners completed the acquisition of 268 square kilometers, or 66,196 acres, of 3-D seismic information which commenced in December 2009.  The program is designed to cover several leads already identified by the partners.  Seismic processing is underway and is expected to be completed in the fourth quarter.  We have spent approximately $1.8 million net to Apco during 2010 for this program.  We also expect to drill two exploration wells on this block during 2011.  Recent exploration drilling results by other companies operating in the Llanos basin have been encouraging.

In the Turpial block, Apco and its partner completed a program to extend seismic coverage in the northern area of the block with 144 kilometers of 2-D seismic information. We have spent approximately $3.1 million net to Apco during 2010 for this program.  We anticipate initiating exploration drilling on the block during the second quarter of 2011.

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 reduce 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.

During the first nine months of 2010, gradual increases in gasoline prices have enabled producers to negotiate higher oil sales prices with refiners.  The trend of increasing gasoline prices combined with tighter demand for our high-quality crude oil has resulted in higher oil price realizations.  For the third quarter of 2010, our average realized price for our direct working interests consolidated in our operating revenues was $53.36 per barrel, compared with $44.41 in the third quarter of 2009.  The average oil sales price for our equity interests was $54.11 per barrel for the third quarter of 2010 compared with $45.22 for the same period in 2009.  We expect our Neuquén oil sales price to be at least $55 per barrel during the fourth quarter of 2010.  Our oil price realizations con tinue to be negotiated on a short-term basis, and as such, we cannot accurately predict how prices will evolve beyond 2010.

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Results of Operations

 The following table and discussion is a summary of our consolidated results of operations for the three and nine-months ended September 30, 2010, compared with the three and nine-months ended September 30, 2009.  Please read in conjunction with the Consolidated Statements of Income.

	For the Three Months Ended September 30,
					$ Change			% Change
	2010		2009		from 2009*			from 2009*
	($ Amounts in Thousands)
Total operating revenues	$	21,686	$	19,059	$	2,627			14	%
Total costs and operating expenses		16,801		14,701		(2,100	)		-14	%
Operating income		4,885		4,358		527			12	%
Investment income		3,537		3,585		(48	)		-1	%
Income taxes		1,827		1,615		(212	)		-13	%
Less: Net income attributable to noncontrolling interests		6		9		3			33	%
Net income attributable to Apco	$	6,589	$	6,319	$	270			4	%
	For the Nine Months Ended September 30,
					$ Change			% Change
		2010		2009	from 2009*			from 2009*
	($ Amounts in Thousands)
Total operating revenues	$	63,315	$	52,134	$	11,181			21	%
Total costs and operating expenses		50,702		40,871		(9,831	)		-24	%
Operating income		12,613		11,263		1,350			12	%
Investment income		11,926		10,359		1,567			15	%
Income taxes		6,813		4,871		(1,942	)		-40	%
Less: Net income attributable to noncontrolling interests		24		20		(4	)		-20	%
Net income attributable to Apco	$	17,702	$	16,731	$	971			6	%

*           + = Favorable change to net income; — = Unfavorable change.

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Total Operating Revenues

Operating revenues for the third quarter of 2010 increased by $2.6 million, or 14 percent compared with third quarter 2009.  For the first nine months of 2010, Operating revenues were $11.2 million greater than 2009.  The following tables and discussion explain the components and variances in operating revenues.

The three and nine-month month comparison 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 September 30,							Nine Months Ended September 30,
	2010		2009		% Change			2010		2009		% Change
Sales Volumes
Oil (bbls)		325,937		346,203		-6	%		980,548		987,434		-1	%
Natural Gas (mcf)		1,673,146		1,588,171		5	%		4,736,340		4,281,819		11	%
LPG (tons)		2,667		2,615		2	%		7,556		7,024		8	%
Oil, Natural Gas and LPG (boe)		636,092		641,588		-1	%		1,858,607		1,783,502		4	%
Average Sales Prices
Oil (per bbl)	$	53.36	$	44.41		20	%	$	51.22	$	42.47		21	%
Natural Gas (per mcf)		1.68		1.48		14	%		1.81		1.60		13	%
LPG (per ton)		270.34		239.36		13	%		339.07		247.99		37	%
Revenues ($ in thousands)
Oil revenues	$	17,391	$	15,376		13	%	$	50,227	$	41,935		20	%
Natural Gas revenues		2,813		2,354		19	%		8,595		6,866		25	%
LPG revenues		721		626		15	%		2,562		1,742		47	%
	$	20,925	$	18,356		14	%	$	61,384	$	50,543		21	%

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 September 30, 2010 and 2009.

	Three Months Ended September 30,
	Oil			Gas		LPG		Total
	(Amounts in Thousands)
2009 Sales	$	15,376		$	2,354	$	626	$	18,356
Changes due to volumes		(1,081	)		143		14		(924	)
Changes due to prices		3,096			316		81		3,493
2010 Sales	$	17,391		$	2,813	$	721	$	20,925

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The volume and price changes in the table above caused the following changes to our oil, natural gas and LPG revenues between the nine months ended September 30, 2010 and 2009.

	Nine Months Ended September 30,
	Oil			Gas		LPG		Total
	(Amounts in Thousands)
2009 Sales	$	41,935		$	6,866	$	1,742	$	50,543
Changes due to volumes		(353	)		825		180		652
Changes due to prices		8,645			904		640		10,189
2010 Sales	$	50,227		$	8,595	$	2,562	$	61,384

Oil Revenues

The increase in Oil revenues during the third quarter and first nine months of 2010 is due to higher average oil sales prices, partially offset by lower oil sales volumes.  Our average oil sales prices increased by 20 percent for the quarter and 21 percent for the first nine months due to the factors previously discussed on page 16 of this report.  Oil sales volumes for the quarter and first nine months were lower than the same periods in 2009 as a major customer is in the process of selling its refinery and the new owner was temporarily unable to take physical deliveries of oil produced in September, resulting in an unfavorable variance of approximately 35,000 barrels of oil.  However, the new refinery owner has prepaid us for the oil and the advance from that customer is included in accrued liabilities in our September 30, 2010 balance sheet.  Those barrels which were in inventory at the end of the quarter will be delivered and recognized as revenues in the fourth quarter of 2010.

Total Costs and Operating Expenses

During the third quarter of 2010, Total costs and operating expenses increased by $2.1 million compared with third quarter 2009, primarily due to the following:

·   Production and lifting costs increased by $418 thousand due to greater operation and maintenance expenses related to our Neuquén and Austral basin properties.  These increases were driven by the growth in our operations and the impact of inflation in Argentina;

·   Selling and administrative expense increased by $750 thousand due to the impact of inflation in Argentina on personnel costs, severance expenses and greater overhead expenses in Argentina and Colombia;

·   Exploration expense increased by $530 thousand due to greater exploration activity including expenses related to the acquisition and processing of seismic information in Colombia.

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During the first nine months of 2010, Total costs and operating expenses increased by $9.8 million compared with 2009, primarily due to the following:

·   Production and lifting costs increased by $1.8 million due to greater operation and maintenance expenses related to our Neuquén and Austral basin properties. These increases were driven by the growth in our operations and the impact of inflation in Argentina;

·   Provincial production taxes increased by $1.8 million due to higher sales revenues and higher tax rates per the terms of the concession extensions in the province of Neuquén;

·   Exploration expense increased by $5.7 million due to significant exploration activity in 2010 including expenses related to the acquisition and processing of seismic information in Colombia for $4.9 million and $0.8 million in our Neuquén basin properties.  Exploration activity in the same period in 2009 was minimal.

Depreciation, Depletion and Amortization Expenses (“DD&A”)

The changes in our total volumes, DD&A rates per unit and DD&A expense of oil and gas properties between the three and nine-months ended September 30, 2010 and 2009 are shown in the following table:

	Three Months Ended							%			Nine Months Ended							%
	September 30,				Change			Change			September 30,				Change			Change
	2010		2009		from 2009			from 2009			2010		2009		from 2009			from 2009
Consolidated Sales Volumes (boe)		636,092		641,588		(5,496	)		-1	%		1,858,607		1,783,502		75,105			4	%
DD&A Rate per boe	$	6.63	$	6.49	$	0.14			2	%	$	6.50	$	6.62	$	(0.12	)		-2	%
DD&A Expense (In thousands)	$	4,216	$	4,162	$	54			1	%	$	12,079	$	11,814	$	265			2	%

The following table details the changes in DD&A expense of oil and gas properties due to changes in volumes and rates between the three and nine-months ended September 30, 2010 and 2009.

	Three Months Ended			Nine Months Ended
	September 30,			September 30,
	(In thousands)
2009 DD&A	$	4,162		$	11,814
Changes due to volumes		(36	)		488
Changes due to rates		90			(223	)
2010 DD&A	$	4,216		$	12,079

Our DD&A expense is based on the units-of-production method, which in basic terms multiplies the percentage of estimated proved developed reserves produced each period times the net carrying value of our proved oil and gas properties.  Our proved developed reserves are limited to an area’s concession life even though a concession’s term can be extended for 10 years with the consent of the Argentine government.

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As discussed in our Annual Report on Form 10-K for the year ended December 31, 2009, various factors have contributed to our experiencing a lower weighted average DD&A rate since the second half of 2009, including receiving concession extensions for certain of our properties in the Neuquén basin, an increased proportion of sales volumes on a barrel of oil equivalent basis from our Tierra del Fuego concessions which have a lower DD&A rate than our Neuquén basin properties, and increased proved reserves from successful drilling in our Neuquén basin properties.  These factors resulted in a decrease of $223 thousand in DD&A expense for oil and gas properties during the first nine months of 2010 compared with the same period in 2009.

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 would expect to experience a favorable effect on future DD&A rates.

Investment Income

Total investment income was flat for the third quarter but increased by $1.6 million for the first nine months of 2010 compared with 2009 due to greater Equity income from Argentine investments.  The increase in our equity income for the first nine months of 2010 is due to hig her net income of our equity investee, Petrolera.  The comparative increase in Petrolera’s net income is a result of greater revenues driven by higher oil, natural gas and LPG average sales prices.  Petrolera’s revenues and net income for the third quarter and first nine months of 2010 were negatively impacted by the inability to deliver oil to the same customer that was unable to take physical delivery of Apco’s oil production volumes (see discussion of Oil Revenues on page 19).

Income Taxes

Income taxes increased by $212 thousand in the third quarter and $1.9 million for the first nine months of 2010 compared with the same periods in 2009.  Our Income taxes increased in the third quarter and the first nine months of 2010 compared with 2009 in direct relation to o ur increase in pre-tax income in Argentina.  See Note 2 in the Notes to Consolidated Financial Statements for further discussion of income taxes.

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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 for the periods presented:

	Periods Ending September 30,
	Three Months				Nine Months
	2010		2009		2010		2009
Sales Volumes (1):
Consolidated interests
Crude oil and condensate (bbls)		325,937		346,203		980,548		987,434
Gas (mcf)		1,673,146		1,588,171		4,736,340		4,281,819
LPG (tons)		2,667		2,615		7,556		7,024
Barrels of oil equivalent (boe)		636,092		641,588		1,858,607		1,783,502
Equity interests (3)
Crude oil and condensate (bbls)		351,932		376,797		1,123,737		1,128,415
Gas (mcf)		631,557		481,489		1,686,345		1,422,564
LPG (tons)		2,529		2,713		7,591		7,801
Barrels of oil equivalent (boe)		486,875		488,878		1,493,875		1,457,058
Total volumes
Crude oil and condensate (bbls)		677,869		722,999		2,104,286		2,115,849
Gas (mcf)		2,304,703		2,069,661		6,422,685		5,704,382
LPG (tons)		5,197		5,328		15,147		14,826
Barrels of oil equivalent (boe)		1,122,968		1,130,466		3,352,482		3,240,560
Total volumes by basin
Neuquén		862,055		865,601		2,645,036		2,579,848
Austral		198,957		196,701		524,826		460,237
Others		61,956		68,165		182,621		200,475
Barrels of oil equivalent (boe)		1,122,968		1,130,466		3,352,482		3,240,560
Average Sales Prices:
Consolidated interests
Oil (per bbl)	$	53.36	$	44.41	$	51.22	$	42.47
Gas (per mcf)		1.68		1.48		1.81		1.60
LPG (per ton)		270.34		239.36		339.07		247.99
Equity interests (3)
Oil (per bbl)	$	54.11	$	45.22	$	51.61	$	43.09
Gas (per mcf)		1.00		1.01		1.47		1.60
LPG (per ton)		278.37		210.85		350.15		238.76
Average Production Costs per BOE (2):
Production and lifting cost	$	7.68	$	6.97	$	6.84	$	6.11
Provincial production tax	$	4.12	$	3.54	$	4.18	$	3.37
DD&A	$	6.63	$	6.49	$	6.50	$	6.62

(1) Volumes presented in the above table represent those sold to customers and have not been reduced by the approximately 12 to 15 percent provincial production tax that is paid separately and 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) Average production and lifting costs, provincial production taxes, 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 barrel of oil equivalent and one ton of LPG is equivalent to 11.735 barrels of oil equivalent.

(3) 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.

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Financial Condition

Outlook

As previously discussed, the price of WTI crude oil and oil price realizations in Argentina have been on a steady upward trend since first quarter 2009, reaching an average price of $53.74 per barrel in September 2010.  For the remainder of 2010, operating results and cash flows from operations should be greater than 2009 levels as oil prices are expected to continue their gradual increase through the end of the year. Our oil price realizations continue to be negotiated on a short-term basis, and as such, we cannot accurately predict how they will evolve beyond 2010.

Higher oil prices also benefit Petrolera’s cash flows from operations and its ability to pay dividends.  Because of higher product prices, changes in capital spending projections and Petrolera’s current schedule of debt and interest payments, we have received more dividends from Petrolera in 2010 than in 2009.

Although capital expenditures during the first nine months of 2010 were $24 million, with increased activity planned in the remainder of the year we currently estimate capital expenditures net to our direct working interests will total approximately $38 million in 2010.  We expect to fund these investments with cash on hand and cash flows from operations. 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 rea sonably 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.

With a cash balance at September 30, 2010, of $35 million, or 14 percent of total assets, no bank debt, and the ability to adjust capital spending as necessary, we believe we have sufficient liquidity and capital resources to effectively manage our business for the foreseeable future.

We have historically funded capital programs and past property acquisitions with internally generated cash flow. We have not relied on debt or equity as sources of capital due to the turmoil that periodically affects Argentina’s economy which made financing difficult to obtain at reasonable terms. However, as has been the case with financing for Petrolera, we have observed an improvement in financing terms for companies doing business in Argentina.We believe that bank financings could be an additional source of liquidity if needed or deemed that financial leverage would improve our capital efficiency.

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Cash Flow Analysis

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

Sources (Uses) of Cash	Nine Months Ended September 30,
	2010			2009
	(Thousands)
Net cash provided (used) by:
Operating activities	$	28,360		$	21,536
Investing activities		(23,977	)		(17,025	)
Financing activities		(1,781	)		(3,755	)
Increase in cash and cash equivalents	$	2,602		$	756

Operating Activities

Our net cash provided by operating activities totaled $28.4 million for the nine months ended September 30, 2010, compared with $21.5 million during the same period in 2009. The increase in cash provided by operating activities is primarily a result of greater dividends from Argentine investments.

Investing Activities

During the first nine months of 2010, capital expenditures totaled $24 million, most of which was invested in development drilling in our Neuquén and Austral basin properties, compared with $13 million in 2009.  Additionally in 2009, $4 million was invested as collateral for a letter of credit for investments in Colombia.

Financing Activities

During the first nine months of 2010, $1.8 million of dividends was paid to shareholders and non-controlling interests compared with $3.8 million in 2009.

Contractual Obligations

As described elsewhere in this report, in mid-2010, we were awarded an exploration block through a public bidding process in Colombia.  As a result, we anticipate spending between $15 and $20 million net to Apco over a three-year period to fulfill the exploration work commitments of this block. We expect exploration activities and expenditures to begin in early 2011.

Off-Balance Sheet Arrangements

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

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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. As previously mentioned in MD&A, 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 net backs 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 and our netbacks have not been responsive to fluctuations 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 t o determine what effect increases or decreases in world oil prices may have on our results of operations.

Foreign Currency and Operations Risk

The majority of the Company’s operations and all of its current production is located in Argentina which has had a history of high levels of inflation and resultant currency devaluation. Therefore, the Company’s financial results may be affected by factors such as changes in foreign currency exchange rates, weak economic conditions, or changes in Argentina’s political climate.  During 2002 and 2003, the Company recorded sizeable foreign currency exchange losses due to the significant devaluation of the Argentine peso that occurred as a consequence of Argentina’s economic problems during 2001 and 2002.  Since 2003, the Argentine government used monetary policies to keep the peso to U.S. dollar exchange rate stable at approximately 3.00:1. Althoug h government policies, such as regulated gasoline prices and strict controls over natural gas prices, have attempted to reduce inflationary pressures in Argentina, inflation has accelerated to double digit rates during the last few years.  Throughout part of this period, the peso to US dollar exchange rate has not changed in proportion to these levels of inflation; however, around mid-2008, we began to experience a weakening in the value of the peso, and by December 31, 2009, the peso to US dollar exchange rate was 3.80:1. At September 30, 2010, the exchange rate was 3.96:1.

Economic and Political Environment

Argentina has a history of economic instability. Because the majority of the Company’s operations are located in Argentina, its operations and financial results have been, and could be in the future, adversely affected by economic, market, currency, and political instability in the country as well as measures taken by the government in response to such instability.

In October 2010, the former president of Argentina, Nestor Kirchner, passed away.  Former president Kirchner had remained very involved in the political environment alongside his wife and current president, Cristina Kirchner, since she was elected in 2007.  Presidential elections are currently scheduled for the fall of 2011.

Reference is made to the section “Argentine Economic and Political Environment” on page 48 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, for a description of Argentina’s economic crisis of 2002 and the government’s reaction to that crisis.

25

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-(e) of the Securities Exchange Act of 1934) (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 is sues 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 also is 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 the Internal Controls will be modified as systems change and conditions warra nt.

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.

Third Quarter 2010 Changes in Internal Controls

There have been no changes during the third-quarter 2010 that have materially affected, or are reasonably likely to materially affect, our Internal Controls.

26

PART II.  OTHER INFORMATION

Item 1.                      Legal Proceedings

The information called for by this item is provided in Note 5 Contingencies in the Notes to the Consolidated Financial Statements included under Part I, Item 1. Financial Statements 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, 2009, includes certain risk factors that could materially affect our business, financial condition or future results. Those risk factors have not materially changed.

Item 6.                      Exhibits

3.1 – Memorandum of Association of Apco Oil and Gas International Inc. (formerly known as Apco Argentina Inc.) as amended (including Certificate of Incorporation on Change of Name issued by the Registry of Companies, Cayman Islands, dated July 13, 2009), (filed on August 7, 2009 as Exhibit 3.1 to Apco Oil and Gas International Inc.’s Form 10-Q (File No. 0-8933)) and incorporated herein by reference.

3.2 – Articles of Association of Apco Oil and Gas International Inc. (formerly known as Apco Argentina Inc.) as amended, (filed on August 7, 2007 as Exhibit 3.2 to Apco Oil and Gas International Inc.’s Form 10-Q (File No. 0- 8933)) and incorporated herein by reference.

4.1 – Specimen Share Certificate of Apco Oil and Gas International Inc. (filed on August 7, 2009 as Exhibit 4.1 to Apco Oil and Gas International Inc.’s Form 10-Q (File No. 0-8933)) and incorporated herein by reference.

31.1 – Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

31.2 – Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32 – Certification of Chief Executive Officer and Chief Financial Officerpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

_____________________

* Filed herewith.

**Furnished herewith.

27

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/ Landy L. Fullmer         

Chief Financial Officer,

Chief Accounting Officer and Controller

(Duly Authorized Officer

and Principal Accounting Officer)

November 5, 2010

28

INDEX TO EXHIBITS

EXHIBIT

NUMBER                                                                DESCRIPTION

3.1 Memorandum of Association of Apco Oil and Gas International Inc. (formerly known as Apco Argentina Inc.) as amended (including Certificate of Incorporation on Change of Name issued by the Registry of Companies, Cayman Islands, dated July 13, 2009), (filed on August 7, 2009 as Exhibit 3.1 to Apco Oil and Gas International Inc.’s Form 10-Q (File No. 0-8933)) and incorporated herein by reference.

3.2 Articles of Association of Apco Oil and Gas International Inc. (formerly known as Apco Argentina Inc.) as amended, (filed on August 7, 2007 as Exhibit 3.2 to Apco Oil and Gas International Inc.’s Form 10-Q (File No. 0- 8933)) and incorporated herein by reference.

4.1 Specimen Share Certificate of Apco Oil and Gas International Inc. (filed on August 7, 2009 as Exhibit 4.1 to Apco Oil and Gas International Inc.’s Form 10-Q (File No. 0-8933)) and incorporated herein by reference.

31.1 Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

31.2 Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

_____________________

*        Filed herewith.

**      Furnished herewith.

29

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Ralph A. Hill, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Apco Oil and Gas International Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

(a)           Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)           Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)           Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)           Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a)           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)           Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 5, 2010

By:    /s/ Ralph A. Hill

  Ralph A. Hill

   Chief Executive Officer

   (Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Landy L. Fullmer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Apco Oil and Gas International Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

(a)           Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)           Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)           Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)           Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a)           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)           Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 5, 2010

By:    /s/ Landy L. Fullmer

  Landy L. Fullmer

   Chief Financial Officer

   (Principal Financial Officer)

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Apco Oil and Gas International Inc. (the "Company") on Form 10-Q for the period ending September 30, 2010 (the "Report"), each of the undersigned hereby certifies, in his capacity as an officer of the Company, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Ralph A. Hill

Ralph A. Hill

Chief Executive Officer

November 5, 2010

/s/ Landy L. Fullmer

Landy L. Fullmer

Chief Financial Officer

November 5, 2010

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

The foregoing certification is being furnished to the Securities and Exchange Commission as an exhibit to the Report and shall not be considered filed as part of the Report.