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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996,
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 0-13546
Apache Offshore Investment Partnership
A Delaware IRS Employer
General Partnership No. 41-1464066
One Post Oak Central
2000 Post Oak Boulevard, Suite 100
Houston, Texas 77056-4400
Telephone Number (713) 296-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
PARTNERSHIP UNITS
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 if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. X
----
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of Apache Corporation's proxy statement relating to its
1997 annual meeting of shareholders have been incorporated by reference
into Part III hereof.
- --------------------------------------------------------------------------
TABLE OF CONTENTS
DESCRIPTION
Item Page
- ---- ----
PART I
1. BUSINESS 1
2. PROPERTIES 4
3. LEGAL PROCEEDINGS 5
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 5
PART II
5. MARKET FOR THE REGISTRANT'S SECURITIES AND RELATED
SECURITY HOLDER MATTERS 6
6. SELECTED FINANCIAL DATA 6
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 7
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 12
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 26
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 27
11. EXECUTIVE COMPENSATION 27
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 27
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 27
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. 28
All defined terms under Rule 4-10(a) of Regulation S-X shall
have their statutorily-prescribed meanings when used in this report.
Quantities of natural gas are expressed in this report in terms of
thousand cubic feet (Mcf), million cubic feet (MMcf) or billion cubic
feet (Bcf). Oil is quantified in terms of barrels (bbls), thousands
of barrels (Mbbls) and millions of barrels (MMbbls). Natural gas is
compared to oil in terms of barrels of oil equivalent (boe) or
million barrels of oil equivalent (MMboe). Oil and natural gas
liquids are compared with natural gas in terms of million cubic feet
equivalent (MMcfe) and billion cubic feet equivalent (Bcfe). One
barrel of oil is the energy equivalent of six Mcf of natural gas.
Daily oil and gas production is expressed in terms of barrels of oil
per day (bopd) and thousands of cubic feet of gas per day (Mcfd),
respectively. With respect to information relating to the
Partnership's working interest in wells or acreage, "net" oil and gas
wells or acreage is determined by multiplying gross wells or acreage
by the Partnership's working interest therein. Unless otherwise
specified, all references to wells and acres are gross.
PART I
ITEM 1. BUSINESS
General
Apache Offshore Investment Partnership is a Delaware general
partnership organized in October 1983, with Apache Corporation (Apache), a
Delaware corporation, as Managing Partner and public investors as Investing
Partners. The Investing Partners purchased Units of Partnership Interests
(Units) at $150,000 per Unit with five percent down and the balance in
payments as called by the Registrant. As of December 31, 1996, a total of
$85,000 had been called for each Unit. In 1989, the Registrant determined
that the full $150,000 per Unit was not needed, fixed the total calls at
$85,000 per Unit, and released the Investing Partners from liability for
future calls. The Registrant invested, and will continue to invest, its
entire capital as the sole limited partner in Apache Offshore Petroleum
Limited Partnership, a Delaware limited partnership of which Apache is the
sole general partner. The limited partnership conducts operations on
behalf of the Registrant. The terms "Registrant" or "Partnership", as used
hereafter, refer to either the general or limited partnership, as the case
may be.
The Registrant's business is participation in oil and gas exploration,
development and production activities on federal lease tracts in the Gulf
of Mexico, offshore Louisiana and Texas. Except for the Matagorda Island
Block 681 and 682 interests, as described below, the Registrant acquired
its oil and gas interests through the purchase of 85 percent of the working
interests held by Apache as a participant in a venture (the Venture) with
Shell Oil Company (Shell) and certain other companies. The Registrant owns
working interests ranging from 4.92 percent to 7.08 percent in the
Venture's properties.
The Venture acquired substantially all of its oil and gas properties
through bidding for leases offered by the federal government. The Venture
members relied on Shell's knowledge and expertise in determining bidding
strategies for the acquisitions. When Shell was successful in obtaining
the properties, it generally billed participating members on a promoted
basis (one-third for one-quarter) for the acquisition of exploratory leases
and on a straight-up basis for the acquisition of leases defined as
drainage tracts. All such billings were proportionately reduced to each
members' working interest.
In November 1992, Apache and the Partnership formed a joint venture to
acquire Shell's 92.6 percent working interest in Matagorda Island Blocks
681 and 682 pursuant to a jointly-held contractual preferential right to
purchase. Apache and the Partnership previously owned working interests in
the blocks equal to 1.109 percent and 6.287 percent, respectively, and
revenue interests of .924 percent and 5.239 percent, respectively. To
facilitate the acquisition, Apache and the Partnership contributed all of
their interests in Matagorda Island Blocks 681 and 682 to a newly formed
joint venture, and Apache contributed $64.6 million ($55.6 million net of
purchase price adjustments) to the joint venture to finance the
acquisition. The Partnership had neither the cash nor access to additional
financing to fund its proportionate share of the acquisition and
participated only to the extent of an increased revenue interest in the
joint venture.
Under the terms of the joint venture agreement, the Partnership's
effective revenue interest in the Matagorda Island Block 681 and 682
properties increased as a result of the acquisition to 13.284 percent while
its working interest was unchanged. The acquisition added approximately
7.5 Bcf of natural gas and 16 Mbbls of oil to the Partnership's reserve
base without any incremental expenditures by the Partnership.
1
Since the Venture is not expected to acquire any additional
exploratory acreage, future acquisitions, if any, will be confined to
those leases defined as drainage tracts. The current Venture members
would pay their proportionate share of acquiring any drainage tracts on
a non-promoted basis.
Offshore exploration differs from onshore exploration in that
production from a prospect generally will not commence until a sufficient
number of productive wells have been drilled to justify the significant
costs associated with construction of a production platform. Exploratory
wells usually are drilled from mobile platforms until there are sufficient
indications of commercial production to justify construction of a permanent
production platform.
Apache, as Managing Partner, manages the Partnership's operations.
Apache uses a portion of its staff and facilities for this purpose and is
reimbursed for actual costs paid on behalf of the Registrant, as well as
for general, administrative and overhead costs properly allocable to the
Registrant.
1996 Business Development
The acquisition and evaluation phase of the Venture's activity is
almost complete. One development well was drilled, completed and began
production in the West Cameron 368 field during 1996. The drilling of a
water injection well for pressure maintenance at South Timbalier 295 was in
progress at year-end. Additionally, two developmental wells are approved
for drilling in 1997 at South Timbalier 295.
Since inception, the Registrant has acquired an interest in 49
prospects. As of December 31, 1996, 37 prospects have been surrendered.
The status of the Registrant's 49 original prospects is shown in the
following table:
As of December 31,
----------------------
Prospect Status 1996 1995
-------------------------------- -------- --------
Producing-Fully Developed 10 10
Producing-Partially Developed 1 2
----- -----
Total Discoveries 11 12
Surrendered/ Sold 38 37
----- -----
Total 49 49
===== =====
As of December 31, 1996, 107 wells have been drilled on the 11
remaining prospects. Of the 107 wells, 91 were indicated productive and of
those, 84 are currently producing. Twelve of the Registrant's producing
wells are dual completions. The Partnership had, at December 31, 1996,
estimated proved oil and gas reserves of 22.8 Bcfe, of which 72 percent was
natural gas.
During 1996, the Partnership sold its interest in the No-See-Um
prospect (Vermillion 226/237 unit).
2
Reserves Value Ceiling Test
Under the full cost accounting rules of the Securities and Exchange
Commission (SEC), the Partnership reviews the carrying value of its oil and
gas properties each quarter. Under the full cost accounting rules,
capitalized costs of oil and gas properties may not exceed the present
value of estimated future net revenues from proved reserves, discounted at
10 percent, plus the lower of cost or fair market value of unproved
properties. Application of these rules generally requires pricing future
production at the unescalated oil and gas prices in effect at the end of
each fiscal quarter and requires a writedown if the "ceiling" is exceeded,
even if prices declined for only a short period of time. The Partnership
had no writedowns due to ceiling test limitations in 1996, 1995 or 1994.
Marketing
Apache, on behalf of the Registrant, seeks and negotiates oil and gas
marketing arrangements with various marketers and purchasers. During 1996,
the Partnership's spot market gas was purchased primarily by Producers
Energy Marketing, LLC (ProEnergy) and the Partnership's oil and condensate
production was purchased primarily by Plains Petroleum Operating Co.
(Plains Petroleum). Apache held a 44 percent interest in ProEnergy at
December 31, 1996. The Partnership expects to receive prevailing spot
market prices at the relevant delivery points on an ongoing basis.
See Note (5), "Major Customer Information," to the Partnership's
financial statements under Item 8 below. Because the Registrant's oil and
gas products are commodities and the prices and terms of its sales reflect
those of the market, the Registrant does not believe that the loss of any
customer would have a material adverse affect on the Registrant's business
or results of operations. The Registrant is not in a position to predict
future oil and gas prices.
Environmental
The Partnership, as an owner or lessee of interests in oil and gas
properties, is subject to various federal, state and local laws and
regulations relating to the discharge of materials into, and protection of,
the environment. These laws and regulations may, among other things,
impose liability on the lessee under an oil and gas lease for the cost of
pollution clean-up resulting from operations, subject the lessee to
liability for pollution damages and require suspension or cessation of
operations in affected areas.
The Partnership has made and will continue to make expenditures in its
efforts to comply with these requirements. These costs are inextricably
connected to normal operating expenses such that the Partnership is unable
to separate the expenses related to environmental matters; however, the
Partnership does not believe such expenditures are material to its
financial position or results of operations.
The Partnership does not believe that compliance with federal, state
or local provisions regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment,
will have a material adverse effect upon the capital expenditures, earnings
and the competitive position of the Partnership, but there is no assurance
that changes in or additions to laws or regulations regarding the
protection of the environment will not have such an impact.
3
Competition
The Registrant is a very minor factor in the oil and gas industry in
the Gulf of Mexico area and faces strong competition from much larger
producers for the marketing of its oil and gas. The Partnership's ability
to compete for purchasers and favorable marketing terms will depend on the
general demand for oil and gas from Gulf of Mexico producers. More
particularly, it will depend largely on the efforts of Apache to find the
best markets.
ITEM 2. PROPERTIES
Acreage is held by the Registrant pursuant to the terms of various
leases. The Registrant does not anticipate any difficulty in retaining any
of its desirable leases. A summary of the Partnership's producing wells and
gross acreage as of December 31, 1996, is set forth below:
Producing
Oil/Gas Acres
Wells Average -----------------
----------- Working Dev. Undev.
Lease Block Prospect State Gross Net Interest Gross Gross
- ---------------------------- -------- ----- ----- --- -------- ----- -----
High Island A-6 Glenda TX 7 .3 .0491686 5,760 --
Ship Shoal 258, 259 Genesis LA 9 .6 .0628698 10,141 --
South Timbalier 276, 295 Grover LA 23 1.6 .0708333 10,000 --
North Padre Island 969, 976 Rosita TX 12 .9 .0708333 11,520 --
Matagorda Island 681, 682 Roberto TX 13 .8 .0628698 11,520 --
West Cameron 368 Krypton LA 3 .2 .0708333 5,000 --
Matagorda Island 588 Cortez TX 2 .0 ORRI 5,760 --
South Pass 83, 74 Manx LA 9 .6 .0678914 7,500 --
East Cameron 60, 51 East Aragonite LA 1 .1 .0708333 5,000 5,000
Vermillion 95 Topaz LA 1 .0 ORRI 5,000 --
Ship Shoal 201, 202 Bromeliad LA 4 .0 ORRI 10,000 --
--- --- ------ ------
84 5.1 87,201 5,000
=== === ====== ======
During 1996, the Partnership's interest in Vermillion 226/237 was sold
and a non-producing lease on High Island A-5 (a portion of the Glenda
Prospect) expired. See Note (4), "Oil and Gas Properties" and the
supplemental oil and gas disclosures to the Partnership's financial
statements, under Item 8 below, for costs incurred in oil and gas
development and production activities and related reserve information. On
a net revenue basis, the Partnership owns 5.1 wells.
Production and Pricing Data
The following table describes, for each of the last three fiscal
years, oil and gas production for the Partnership, average production costs
(excluding severance taxes) and average sales prices.
Production Average Sales Prices
-------------- Average --------------------
Year Ended Oil Gas Production Oil Gas
December 31, (Mbbls) (MMcf) Cost per Mcfe (per Bbl) (per Mcf)
- ----------- ------ ------ ------------- -------- --------
1996 164 5,651 $ .18 $ 20.73 $ 2.50
1995 210 6,052 .19 16.97 1.58
1994 250 7,140 .09 15.71 1.82
As it is not anticipated that the Partnership will acquire any
additional exploratory leases, or that significant exploratory drilling
will take place on leases in which the Partnership currently holds
interests, continued declines in production due to natural depletion can be
expected.
4
See the supplemental oil and gas disclosures under Item 8 below for
estimated oil and gas reserves quantities.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending to which the
Registrant is a party or to which the Registrant's interests are subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of 1996.
5
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S SECURITIES AND RELATED SECURITY HOLDER
MATTERS
As of December 31, 1996, there were 1,197.9 of the Registrant's Units
outstanding held by approximately 974 investors of record. There is no
other class of security outstanding or authorized. The Units are not traded
on any security market. Cash distributions made during 1996 to Investing
Partners totaled $5.4 million, or $4,500 per Unit. The Partnership made
cash distributions of $2,250 per Unit to the Investing Partners in 1995.
As discussed in Item 7 below, an amendment to the Partnership
Agreement in February 1994 created a right of presentment under which all
Investing Partners have a limited and voluntary right to offer their Units
to the Partnership twice each year to be purchased in cash.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the five years ended
December 31, 1996, should be read in conjunction with the Partnership's
financial statements and related notes included under Item 8 below.
At or For the Years Ended December 31,
-------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In thousands, except per Unit amounts)
Total assets $ 12,252 $ 13,486 $ 14,291 $ 19,521 $ 22,886
========= ========= ======== ==================
Long-term debt $ 1,998 $ 7,310 $ 9,435 $ 14,790 $ 23,545
========= ========= ========= ========= =========
Partners' capital (deficit) $ 8,498 $ 5,472 $ 4,175 $ 3,334 $ (1,940)
======== ======== ======= ========= =========
Oil and gas sales $ 17,511 $ 13,138 $ 16,926 $ 18,730 $ 12,853
======== ======= ========= ========= =========
Net income $ 11,127 $ 6,214 $ 10,116 $ 10,185 $ 3,115
======== ======== ======== ========= =========
Net income allocated to:
Managing Partner $ 2,652 $ 1,800 $ 2,519 $ 2,635 $ 1,406
Investing Partners 8,475 4,414 7,597 7,550 1,709
-------- -------- -------- --------- --------
$ 11,127 $ 6,214 $ 10,116 $ 10,185 $ 3,115
========= ======== ========= ======== =========
Net income per
Investing Partner Unit $ 7,032 $ 3,584 $ 5,974 $ 5,838 $ 1,321
========= ========= ========= ==================
Cash distributions per
Investing Partner Unit $ 4,500 $ 2,250 $ 4,500 $ 2,000 $ --
========= ========= ========= ==================
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In 1996, the Partnership realized record net income per Investing
Partner Unit and the highest cash flow provided by operating activities in
its history. Solid increases in both natural gas and crude oil prices were
the most significant contributors to the Partnership's improved results.
The average natural gas price for 1996 was the highest realized by the
Partnership since inception and the highest annual crude oil price realized
since 1991. As a result of the improved cash flow in 1996, the Partnership
reduced outstanding debt by $5.3 million to $2.0 million by year-end and,
in addition, made the largest single distribution in its history of $3,500
per Investing Partner Unit in October 1996. On January 31, 1997, the
Partnership elected to repay the outstanding debt balance and terminate its
revolving credit facility.
RESULTS OF OPERATIONS
Net Income and Revenue
The Partnership reported net income of $11.1 million for 1996 versus
$6.2 million in 1995. Net income per Investing Partner Unit increased 96
percent, to $7,032 from $3,584. Higher realized natural gas and crude oil
prices, lower financing costs and reduced lease operating expense led the
way to the Partnership's improved results.
Revenues increased 33 percent, from $13.1 million in 1995, to $17.5
million in 1996. Natural gas and crude oil sales contributed 81 percent and
19 percent, respectively, to the Partnership's total revenue in 1996 with
the remainder attributable to interest income. While oil and gas prices
are currently higher than amounts realized a year ago, the Partnership is
not in a position to predict future prices.
The Partnership's oil and gas production volume and price information
is summarized in the following table:
For the Year Ended December 31,
----------------------------------
Increase
1996 1995 (Decrease)
------- ------- ---------
Gas volumes - Mcf per day 15,441 16,581 (7) %
Average gas price - per Mcf $ 2.50 $ 1.58 58 %
Oil volume - Barrels per day 447 575 (22) %
Average oil price - per barrel $ 20.73 $ 16.97 22 %
As it is not anticipated that the Partnership will acquire any
additional exploratory leases, or that significant exploratory drilling
will take place on leases in which the Partnership currently holds
interests, continued declines in production due to natural depletion can be
expected.
1996 Compared to 1995
- ---------------------
Natural gas sales for 1996 totaled $14.1 million, 47 percent higher
than those recorded in 1995. The increase was driven by higher average
realized natural gas prices, which favorably impacted revenue by $5.2
million. Partially offsetting this increase was a 1,140 Mcfd decline in
natural gas production for 1996 when compared to 1995, reducing revenues by
$.6 million. The decline in production from 1995 was primarily driven by
natural declines at Roberto (-665 Mcfd) and High Island A-6 (-387 Mcfd).
Also contributing to the gas production decline was the make-up of
previously over-produced gas and natural decline at South Pass 83 (-423
Mcfd).
7
The Partnership's crude oil sales for the year totaled $3.4 million, a
five percent decrease from 1995. The average realized price for 1996
increased 22 percent when compared to 1995, favorably impacting revenues by
$.6 million. Offsetting the benefit of higher crude oil prices was a 128
bopd decline in production versus 1995, reducing sales by $.8 million. The
decrease in oil production resulted primarily from natural decline at South
Timbalier 295.
Given the small number of producing wells owned by the Partnership,
and the fact that offshore wells tend to decline on a steeper curve than
onshore wells, the Partnership's future production will be subject to more
volatility than those entities with greater reserves and longer-lived
properties.
In 1996, approximately $25,000 of interest income was earned on the
Partnership's investment account resulting from cash accumulated to fund
cash distributions to Investing Partners and for the purchase of Units
offered by Investing Partners under the right of presentment.
Operating Expenses
Depreciation, depletion and amortization (DD&A) expense for 1996
decreased two percent from last year, while the Partnership's DD&A rate,
expressed as a percentage of sales, was 25 percent during 1996, compared to
34 percent in 1995. The rate decrease reflects higher price realizations
and upward reserve revisions.
Lease operating expense (LOE) of $1.2 million decreased by $.2
million, or 11 percent, during 1996 when compared to 1995. The reduction in
LOE in 1996 was the result of lower workover activity.
Interest expense decreased 43 percent in 1996. The decrease was
primarily a result of a 73 percent reduction in debt from $7.3 million at
December 31, 1995, to $2.0 million at December 31, 1996. Also contributing
to the decrease was a slight decline in interest rates from 6.5 percent at
December 31, 1995, to 6.4 percent at December 31, 1996.
1995 Compared to 1994
- ---------------------
Revenue
Oil and gas sales of $13.1 million in 1995 decreased by $3.8 million,
or 22 percent, as compared to 1994. Lower gas prices accounted for $1.2
million of this decrease while lower oil and gas production accounted for
$2.6 million. The properties particularly affected by these declines were
Matagorda Island 681 ($3.0 million), South Pass 83 ($1.1 million), North
Padre Island 969 ($.5 million) and South Timbalier 295 ($.4 million).
The average oil and natural gas prices received during 1995 were
$16.97 per barrel and $1.58 per Mcf, respectively. This represented an eight
percent increase in oil prices and a 13 percent decrease in natural gas
prices when compared to 1994.
Average oil and natural gas production during 1995 totaled 575 bopd
and 16,581 Mcfd, respectively. This represented a 16 percent decrease in oil
production and a 15 percent decrease in gas production when compared to
1994. The decrease in oil production was due primarily to the plugging and
abandonment of the South Timbalier 295A #2 in 1994, which reduced oil
production by 109 bopd. The decrease in gas production was due to natural
declines and shut-ins for workovers or recompletions at Matagorda Island
681, South Pass 83, North Padre Island 969 and South Timbalier 295.
8
Operating Expenses
The DD&A rate increased during 1995 as compared to 1994, from 28
percent of sales to 34 percent. This increase resulted from lower gas
price realizations partially offset by upward reserve revisions.
Lease operating expense of $1.4 million in 1995 increased by $.6
million, or 69 percent, during 1995 as compared to 1994. This increase was
largely a result of workover costs to maintain production in the East
Cameron 60 field.
Administrative expense of $.5 million in 1995 decreased five percent
from 1994. Administrative expense in 1994 included legal expenses in
connection with the solicitation of consents from the Investing Partners as
required for amendment of the partnership agreement relating to the right
of presentment for Investing Partners.
Interest expense of $.6 million in 1995 decreased by $.1 million when
compared to 1994. The decrease was primarily a function of a 23 percent
reduction in debt, from $9.4 million at December 31, 1994, to $7.3 million
at December 31, 1995. Additionally, interest rates decreased from 6.9
percent at December 31, 1994, to 6.5 percent at December 31, 1995.
CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES
Capital Commitments
The Partnership's primary needs for cash are for operating expenses,
repayment of principal and interest on outstanding debt, drilling and
recompletion expenditures, distributions to Investing Partners and the
purchase of Units offered by Investing Partners under the right of
presentment. In 1996, the Partnership reduced net long-term debt by $5.3
million. The Partnership's cash payments for interest expense decreased to
$.3 million during 1996 from $.6 million during 1995 as a result of
reduction in outstanding debt balances and reduced interest rates. The
Partnership used cash from operating activities in 1995 and 1994 to reduce
debt by $2.1 million and $5.4 million, respectively. On January 31, 1997,
the Partnership repaid the remaining $2.0 million outstanding under its
revolving credit facility.
During 1996, the Partnership's oil and gas property additions totaled
$1.1 million. The 1996 additions include costs of drilling and completing
the #2 ST2 well at West Cameron 368 and the modification of the platform
for a drilling rig at South Timbalier 295. Additionally, a water injection
well for maintenance was in progress at the end of 1996.
Additions to oil and gas properties totaled $3.2 million and $.9
million in 1995 and 1994, respectively. The Partnership anticipates
capital expenditures will total approximately $2.1 million in 1997, based
on preliminary information provided by the operators of the properties in
which the Partnership has interests. The anticipated capital expenditures
relate primarily to the drilling of two developmental wells at South
Timbalier 295 and the installation of major gas compression facilities at
Ship Shoal 258/259. Additional capital expenditures may be proposed by the
operators in the future.
During 1996, the Partnership paid distributions to Investing Partners
totaling $5.4 million or $4,500 per Unit, compared to $2,250 per Unit in
1995. The Partnership also made a distribution of $1,000 per Unit on March
1, 1997. Apache, as the Managing Partner, will review the possibility of
an additional distribution in late 1997. Future distributions will be
dependent on actual and expected production levels, realized and expected
oil and gas prices and actual and anticipated capital expenditures.
9
In February 1994, an amendment to the Partnership Agreement created a
right of presentment under which all Investing Partners have a limited and
voluntary right to offer their Units to the Partnership twice each year to
be purchased for cash. In the initial presentment period, based upon a
valuation date of December 31, 1993, Investing Partners sold 46 Units to
the Partnership for a purchase price of $13,226 per Unit, plus interest to
the date of payment. During the second presentment period, based upon a
valuation date of June 30, 1994, Investing Partners sold nine Units to the
Partnership for a purchase price of $12,562 per Unit, plus interest to the
date of payment. As a result of the two 1994 presentment offerings, the
Partnership purchased approximately 55 Units for a total of $748,000 in
cash.
In 1995, the first right of presentment offer was made to the
Investing Partners for $10,391 per Unit, plus interest to the date of payment,
based on a December 31, 1994 valuation date. The second right of presentment
offer of $10,114 per Unit, plus interest to the date of payment, was made
to the Investing Partners based on a valuation date of June 30, 1995. As a
result of the two 1995 presentments, the Partnership purchased an
additional 25.99 Units for a total of $279,000 in cash.
During 1996, the Partnership purchased an additional 14.49 Units for a
total of $162,000 in cash. The first right of presentment offer for 1996
of $10,698 per Unit, plus interest to the date of payment, was made to the
Investing Partners using a valuation date of December 31, 1995. The second
right of presentment for 1996 of $10,572 per Unit, plus interest to the
date of payment, was made to the Investing Partners based on a valuation
date of June 30, 1996.
The Partnership is not in a position to predict how many Units will be
presented for repurchase and cannot, at this time, determine if the
Partnership will have sufficient funds available for repurchasing Units.
The Amended Partnership Agreement contains limitations on the number of
Units that the Partnership can repurchase, including an annual limit on
repurchases of 10 percent of outstanding Units. The Partnership has no
obligation to repurchase any Units presented to the extent that it
determines that it has insufficient funds for such repurchases.
Capital Resources and Liquidity
The Partnership's primary capital resource is net cash provided by
operating activities.
Net cash provided by operating activities for 1996 was $16.1 million,
an increase of 67 percent, reflecting higher realized gas and oil prices
during 1996 and lower financing costs, partially offset by gas and oil
production declines. Future cash flows will be influenced by gas and oil
prices and production and are not presently ascertainable.
The Partnership's future financial condition and results of operations
will largely depend upon prices received for its oil and natural gas
production and the costs of acquiring, finding, developing and producing
reserves. A substantial portion of the Partnership's production is sold
under market-sensitive contracts. Prices for oil and natural gas are
subject to fluctuations in response to changes in supply, market
uncertainty and a variety of factors beyond the Partnership's control.
These factors include worldwide political instability (especially in the
Middle East), the foreign supply of oil and natural gas, the price of
foreign imports, the level of consumer demand and the price and
availability of alternative fuels. With natural gas accounting for 85
percent of the Partnership's 1996 production and 72 percent of total
proved reserves, on an energy equivalent basis, the Partnership is affected
more by fluctuations in natural gas prices than in oil prices.
10
In July 1992, Apache obtained a $29,750,000 reducing revolving credit
facility with a group of banks on behalf of the Partnership. In order to
reduce fees, and based on its projection of future needs, the Partnership
requested and received a reduction in the available commitment in September
1996. At December 31, 1996, the available commitment was $5.1 million, of
which $2.0 million was outstanding. On January 31, 1997, the Partnership
repaid the outstanding debt balance and the credit facility was terminated.
It is expected that the net cash provided by operating activities and
cash available through Managing Partner contributions will be sufficient to
meet the Partnership's liquidity needs for routine operations over the next
two years. However, in the event that short-term operating cash
requirements are greater than the Partnership's financial resources, the
Partnership will seek future short-term, interest-bearing advances from the
Managing Partner.
Private Securities Litigation Reform Act Disclosure
Certain forward-looking information contained in this report is being
provided in reliance upon the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, as set forth in Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such information includes, without
limitation, discussions as to estimates, expectations, beliefs, plans and
objectives concerning the Partnership's future financial and operating
performance. Such forward-looking information is subject to assumptions and
beliefs based on current information known to the Partnership and factors
that could yield actual results differing materially from those
anticipated. Such factors include, without limitation, the prices received
for the Partnership's oil and natural gas production, the costs of
acquiring, finding, developing and producing reserves, the rates of
production of the Partnership's hydrocarbon reserves, the Partnership's
success in acquiring or finding additional reserves, unforeseen operational
hazards, significant changes in tax or regulatory environments, and the
political and economic uncertainties of foreign oil and gas supplies.
11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
APACHE OFFSHORE INVESTMENT PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND SUPPORTING SCHEDULES
Page
Number
------
Report of Independent Public Accountants 13
Balance Sheet as of December 31, 1996 and 1995 14
Statement of Income for each of the three years in the
period ended December 31, 1996 15
Statement of Cash Flows for each of the three years in the
period ended December 31, 1996 16
Statement of Changes in Partners' Capital for each of the
three years in the period ended December 31, 1996 17
Notes to Financial Statements 18
Supplemental Oil and Gas Disclosures 25
Schedules -
All financial statement schedules have been omitted because they are
either not required, not applicable or the information required to be
presented is included in the financial statements or related notes thereto.
12
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Apache Offshore Investment Partnership:
We have audited the accompanying balance sheet of Apache Offshore
Investment Partnership (a Delaware partnership) as of December 31, 1996 and
1995, and the related statements of income, cash flows and changes in
partners' capital for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Apache Offshore
Investment Partnership as of December 31, 1996 and 1995, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 24, 1997
13
APACHE OFFSHORE INVESTMENT PARTNERSHIP
BALANCE SHEET
December 31,
------------------------------
1996 1995
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,737,470 $ 104
Accrued revenues receivable 3,046,185 2,744,988
Drilling advances -- 8,570
---------- ------------
4,783,655 2,753,662
------------ ------------
OIL AND GAS PROPERTIES, on the basis
of full cost accounting:
Proved properties 162,877,903 161,821,838
Less-Accumulated depreciation,
depletion and amortization (155,409,894) (151,089,712)
------------ ------------
7,468,009 10,732,126
------------ ------------
$ 12,251,664 $ 13,485,788
============ ============
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accrued exploration and development $ 513,948 $ 426,930
Accrued operating expenses payable and other 398,898 207,422
Payable to Apache Corporation 843,084 69,824
------------ ------------
1,755,930 704,176
------------ ------------
LONG-TERM DEBT 1,997,500 7,310,000
------------ ------------
PARTNERS' CAPITAL:
Managing Partner 1,091,189 966,580
Investing Partners (1,197.9 and 1,212.3
Units outstanding, respectively) 7,407,045 4,505,032
------------ ------------
8,498,234 5,471,612
------------ ------------
$ 12,251,664 $ 13,485,788
============ ============
The accompanying notes to financial statements are
an integral part of this statement.
14
APACHE OFFSHORE INVESTMENT PARTNERSHIP
STATEMENT OF INCOME
For the Year Ended December 31,
---------------------------------------------
1996 1995 1994
------------ ------------ ------------
REVENUES:
Oil and gas sales $ 17,510,612 $ 13,138,358 $ 16,925,627
Interest income 24,699 -- 3,481
------------ ------------ -----------
17,535,311 13,138,358 16,929,108
------------ ------------ ------------
OPERATING EXPENSES:
Depreciation, depletion
and amortization 4,320,182 4,410,453 4,689,571
Lease operating 1,216,844 1,372,517 811,623
Administrative 532,325 529,832 557,849
Financing costs:
Interest expense 339,045 596,572 683,812
Amortization of deferred
financing costs -- 14,583 70,417
------------ ------------ ------------
6,408,396 6,923,957 6,813,272
------------ ------------ ------------
NET INCOME $ 11,126,915 $ 6,214,401 $ 10,115,836
============ ============ ============
Net income allocated to:
Managing Partner $ 2,651,779 $ 1,799,940 $ 2,518,929
Investing Partners 8,475,136 4,414,461 7,596,907
------------ ------------ ------------
$ 11,126,915 $ 6,214,401 $ 10,115,836
============ ============ ============
NET INCOME PER INVESTING PARTNER UNIT $ 7,032 $ 3,584 $ 5,974
============ ============ ============
WEIGHTED AVERAGE INVESTING PARTNER
UNITS OUTSTANDING 1,205.3 1,231.6 1,271.6
============ ============ ============
The accompanying notes to financial statements are
an integral part of this statement.
15
APACHE OFFSHORE INVESTMENT PARTNERSHIP
STATEMENT OF CASH FLOWS
For the Year Ended December 31,
--------------------------------------
1996 1995 1994
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,126,915 $ 6,214,401 $ 10,115,836
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation, depletion and amortization 4,320,182 4,410,453 4,689,571
Amortization of deferred financing costs -- 14,583 70,417
Changes in operating assets and liabilities:
(Increase) decrease in accrued revenues receivable (301,197) (715,704) 1,347,473
Increase (decrease) in accrued
operating expenses payable 191,476 2,340 (166,850)
Increase (decrease) in payable to Apache 773,260 (248,397) (693,937)
Other -- -- (50,921)
----------- ----------- -----------
Net cash provided by operating activities 16,110,636 9,677,676 15,311,589
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (1,073,490) (3,159,530) (902,841)
Proceeds from sales of oil and gas properties 17,425 264,072 --
Non-cash portion of oil and gas property additions 87,018 268,803 145,350
(Increase) decrease in drilling advances 8,570 (8,570) 76,434
----------- ----------- -----------
Net cash used in investing activities (960,477) (2,635,225) (681,057)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of Partnership Units (161,899) (279,064) (748,112)
Distributions to Investing Partners (5,411,224) (2,778,868) (5,750,224)
Distributions to Managing Partner, net (2,527,170) (1,859,519) (2,777,196)
Payments of long-term debt (5,312,500) (2,125,000) (5,355,000)
----------- ---------- - -----------
Net cash used in financing activities (13,412,793) (7,042,451) (14,630,532)
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,737,366 -- --
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 104 104 104
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,737,470 $ 104 $ 104
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 285,000 $ 597,000 $ 681,980
=========== ========== ===========
The accompanying notes to financial statements are
an integral part of this statement.
16
APACHE OFFSHORE INVESTMENT PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
Managing Investing
Partner Partners Total
------------ ------------ ------------
BALANCE, DECEMBER 31, 1993 $ 1,284,426 $ 2,049,932 $ 3,334,358
Distributions, net (2,777,196) (5,750,224) (8,527,420)
Repurchase of Partnership Units -- (748,112) (748,112)
Net income 2,518,929 7,596,907 10,115,836
------------ ------------ ------------
BALANCE, DECEMBER 31, 1994 1,026,159 3,148,503 4,174,662
Distributions, net (1,859,519) (2,778,868) (4,638,387)
Repurchase of Partnership Units -- (279,064) (279,064)
Net income 1,799,940 4,414,461 6,214,401
----------- - ------------ ------------
BALANCE, DECEMBER 31, 1995 966,580 4,505,032 5,471,612
Distributions, net (2,527,170) (5,411,224) (7,938,394)
Repurchase of Partnership Units -- (161,899) (161,899)
Net income 2,651,779 8,475,136 11,126,915
------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 $ 1,091,189 $ 7,407,045 $ 8,498,234
============ ============ ============
The accompanying notes to financial statements are
an integral part of this statement.
17
APACHE OFFSHORE INVESTMENT PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION:
Nature of Operations -
Apache Offshore Investment Partnership was formed as a Delaware
general partnership on October 31, 1983, consisting of Apache
Corporation (Apache) as Managing Partner and public investors as
Investing Partners. The Partnership invested its entire capital in
Apache Offshore Petroleum Limited Partnership, a Delaware limited
partnership formed to conduct oil and gas exploration, development and
production operations. The accompanying financial statements include
the accounts of both the limited and general partnerships. Apache is
the general partner of both Partnerships and holds approximately four
percent of the 1,197.9 Investing Partner Units outstanding at December
31, 1996. The term "Partnership," as used hereafter, refers to the
limited or the general partnership, as the case may be.
The Partnership purchased, at cost, an 85 percent interest in
offshore leasehold interests acquired by Apache as a co-venturer in a
series of oil and gas exploration, development and production
activities on 87 federal lease tracts (18 remain as of December 31,
1996) in the Gulf of Mexico, offshore Louisiana and Texas. The
remaining 15 percent interest was purchased by an affiliated
partnership or retained by Apache. The Partnership acquired an
increased revenue interest in Matagorda Island Blocks 681 and 682 in
November 1992, when the Partnership and Apache formed a joint venture
to acquire a 92.6 percent working interest in the blocks.
As of December 31, 1996, the Partnership had participated in 14
federal offshore lease sales in which 49 prospects were acquired
(through the same date 38 prospects have been surrendered/sold). The
Partnership's working interests in the 11 remaining Venture prospects
range from 4.92 percent to 7.08 percent.
The Partnership's future financial condition and results of
operations will depend largely upon prices received for its oil and
natural gas production and the costs of acquiring, finding, developing
and producing reserves. A substantial portion of the Partnership's
production is sold under market-sensitive contracts. Prices for oil and
natural gas are subject to fluctuations in response to changes in
supply, market uncertainty and a variety of factors beyond the
Partnership's control. These factors include worldwide political
instability (especially in the Middle East), the foreign supply of oil
and natural gas, the price of foreign imports, the level of consumer
demand, and the price and availability of alternative fuels. With
natural gas accounting for 85 percent of the Partnership's 1996
production and 72 percent of total proved reserves, on an energy
equivalent basis, the Partnership is affected more by fluctuations in
natural gas prices than in oil prices.
Under the terms of the Partnership Agreements, the Investing
Partners receive 80 percent and Apache receives 20 percent of revenue.
The Investing Partners generally pay for 90 percent and Apache
generally pays for 10 percent of exploration and development costs and
expenses incurred by the Partnership. However, intangible drilling
costs, interest costs and fees or expenses related to the loans incurred
by the Partnership are allocated 99 percent to the Investing Partners
and one percent to Apache until such time as the amount so allocated to
the Investing Partners' accounts equals 90 percent of the total amount
of such costs, including such costs incurred by Apache prior to the
formation of the Partnerships.
18
An amendment to the Partnership Agreement adopted in February 1994,
created a right of presentment under which all Investing Partners have
a limited and voluntary right to offer their Units to the Partnership
twice each year to be purchased for cash. In the initial presentment
period, based upon a valuation date of December 31, 1993, and the
second presentment period, based upon a valuation date of June 30,
1994, the Investing Partners sold a total of 55 Units to the
Partnership. For these presentment periods, the Partnership offered
purchase prices of $13,226 and $12,562 per Unit, respectively, plus
interest to the date of payment for a total of $748,000 in cash. The
right of presentment offers for 1995 of $10,391 per Unit and $10,114
per Unit, plus interest to the date of payment, were made to the
Investing Partners based on valuation dates of December 31, 1994 and
June 30, 1995, respectively. As a result of the two 1995 presentments,
the Partnership purchased an additional 25.99 Units for a total of
$279,000 in cash.
During 1996, the Investing Partners sold a total of 14.49 Units to
the Partnership for a total of $162,000 in cash. The first right of
presentment was based upon a valuation date of December 31, 1995 for a
purchase price of $10,698 per Unit, plus interest to the date of
payment. The second presentment offer was based on a valuation date of
June 30, 1996 for a purchase price of $10,572 per Unit, plus interest
to the payment date.
The Partnership is not in a position to predict how many Units will
be presented for repurchase during 1997, however, no more than 10
percent of the outstanding Units may be purchased under the right of
presentment in any year. The Partnership has no obligation to purchase
any Units presented to the extent that it determines that it has
insufficient funds for such purchases.
Repurchase Price -
The table below sets forth the total repurchase price and the
repurchase price per Unit for all outstanding Units at each presentment
period, based on the Right of Presentment valuation formula defined in
the Amendment to the Partnership Agreement. The right of presentment
offers, made twice annually, are based on a discounted Unit value
formula. The discounted Unit value will be not less than the Investing
Partner's share of: (a) the sum of (i) 70 percent of the discounted
estimated future net revenues from proved reserves, discounted at a
rate of 1.5 percent over prime or First National Bank of Chicago's base
rate in effect at the time the calculation is made, (ii) cash on hand,
(iii) prepaid expenses, (iv) accounts receivable less a reasonable
reserve for doubtful accounts, (v) oil and gas properties other than
proved reserves at cost less any amounts attributable to drilling and
completion costs incurred by the Partnership and included therein, and
(vi) the book value of all other assets of the Partnership, less the
debts, obligations and other liabilities of all kinds (including
accrued expenses) then allocable to such interest in the Partnership,
all determined as of the valuation date, divided by (b) the number of
Units, and fractions thereof, outstanding as of the valuation date.
The discounted Unit value does not purport to be, and may be
substantially different from, the fair market value of a Unit.
19
(Unaudited)
Total
Repurchase Repurchase Price
Right of Presentment Valuation Date Price Per Unit
------------------------------------ ------------ -----------------
December 31, 1993 $ 20,980,558 $ 13,226
June 30, 1994 17,540,491 12,562
December 31, 1994 14,725,170 10,391
June 30, 1995 13,345,913 10,114
December 31, 1995 14,181,413 10,698
June 30, 1996 16,881,655 10,572
Capital Contributions -
A total of $85,000 per Unit, or approximately 57 percent of investor
subscriptions, were called through December 31, 1996. The Partnership
determined the full $150,000 per Unit was not needed, and upon
completion of the last subscription call in November 1989, released the
Investing Partners from their remaining liability. As a result of
investors defaulting on cash calls and repurchases under the
presentment offer discussed above, the original 1,500 Units have been
reduced to 1,197.9 Units at December 31, 1996.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Statement Presentation -
The accounts of the Partnership are maintained on a tax basis method
of accounting in accordance with the Articles of Partnership and
methods of reporting allowed for federal income tax purposes.
Financial statements included in reports which the Partnership files
with the Securities and Exchange Commission (SEC) are required to be
prepared in conformity with generally accepted accounting principles.
Accordingly, the accompanying financial statements were prepared to
reflect memorandum entries to convert from tax basis to the accrual
basis method in conformity with generally accepted accounting
principles.
Statement of Cash Flows -
The Partnership considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents. These investments are carried at cost which approximates
market.
Oil and Gas Properties -
The Partnership uses the full cost method of accounting for
financial statement purposes. Under this method, the Partnership
capitalizes all acquisition, exploration and development costs incurred
for the purpose of finding oil and gas reserves. The amounts
capitalized under this method include dry hole costs, leasehold costs,
engineering, geological, exploration, development and other similar
costs. Costs associated with production and administrative functions
are expensed in the period incurred. Unless a significant portion of
the Partnership's reserve volumes are sold (greater than 25 percent),
proceeds from the sale of oil and gas properties are accounted for as
reductions to capitalized costs, and gains or losses are not
recognized.
20
Capitalized costs of oil and gas properties are amortized on the
future gross revenue method whereby the provision for depreciation,
depletion and amortization (DD&A) is computed quarterly by dividing the
net cost of evaluated oil and gas properties, including estimated
future development costs, by estimated future gross revenue from proved
oil and gas reserves and applying the resulting rate to oil and gas
sales for the period. The amortizable base includes estimated
dismantlement, restoration and abandonment costs, net of estimated
salvage values.
The Partnership limits the capitalized costs of oil and gas
properties, net of accumulated DD&A, to the estimated future net cash
flows from proved oil and gas reserves discounted at 10 percent, plus
the lower of cost or fair market value of unproved properties. If
capitalized costs exceed this limit, the excess is charged to DD&A
expense. The Partnership has not recorded any write-downs of
capitalized costs for the three years presented.
Per Unit Calculation -
The net income per Investing Partner Unit is calculated by dividing
the aggregate Investing Partners' net income for the period by the
number of weighted average Investing Partner Units outstanding for that
period.
Income Taxes -
The profit or loss of the Partnership for federal income tax
reporting purposes is included in the income tax returns of the
partners. Accordingly, no recognition has been given to income taxes
in the accompanying financial statements.
Deferred Financing Costs -
Amortization of deferred financing costs in 1995 and 1994 of $14,583
and $70,417, respectively, were related to the revolving credit
facility.
Use of Estimates -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates. Significant estimates with regard to these
financial statements include the estimate of proved oil and gas reserve
volumes and the related present value of estimated future net revenues
therefrom (see supplemental oil and gas disclosures).
Payable to Apache -
Payable to Apache represents the net result of the Investing
Partners' revenue and expenditure transactions in the current month.
Generally, cash in this amount will be transferred to Apache in the
following month after the Partnership's transactions are processed and
the net results from operations are determined.
Maintenance and Repairs -
Maintenance and repairs are charged to expense as incurred.
Recompletions and replacements which improve or extend the life of
existing properties are capitalized.
21
(3) COMPENSATION TO APACHE
Apache is entitled to the following types of compensation and
reimbursement for costs and expenses.
Total incurred by the Investing
Partners for the year ended
December 31,
---------------------------------
1996 1995 1994
------ ------ ------
(In thousands)
a. Apache is reimbursed for general,
administrative and overhead
expenses incurred in connection
with the management and operation
of the Partnership's business. $ 426 $ 424 $ 446
======= ======= =======
b. Apache is reimbursed for
exploration and development overhead
costs incurred in the Partnership's
operations, which costs are based on
exploration and development activities
and are capitalized to oil and gas
properties. $ 77 $ 142 $ 31
======= ======= =======
Apache operates certain Partnership properties. Billings are
made on the same basis as to unaffiliated third parties or at
prevailing industry rates.
(4) OIL AND GAS PROPERTIES
The following tables contain direct cost information and changes in
the Partnership's oil and gas properties for each of the years ended
December 31. All costs of oil and gas properties are currently being
amortized.
Oil and Gas Properties 1996 1995 1994
- ---------------------- -------- -------- --------
(In thousands)
Balance, beginning of year $ 161,822 $ 158,926 $ 158,024
Costs incurred during the year:
Leasehold additions (retirements) -
Investing Partners 23 (3) --
Managing Partner 3 -- --
Development -
Investing Partners 1,020 3,092 851
Managing Partner 27 71 51
Property sales proceeds(1) -
Investing Partners (13) (234) --
Managing Partner (4) (30) --
-------- --------- ---------
Balance, end of year $ 162,878 $ 161,822 $ 158,926
========= ========= =========
(1) The 1996 property sales proceeds are a result of the sale of the
No-See-Um (Vermillion 226/337) prospect. Partnership's interests
sold in 1995 related to non-producing, non-unitized leases.
22
Accumulated Depreciation, Managing Investing
Depletion and Amortization Partner Partners Total
-------------------------- -------- --------- ---------
(In thousands)
Balance, December 31, 1993 $ 18,148 $ 123,842 $ 141,990
Provisions 584 4,105 4,689
--------- --------- ---------
Balance, December 31, 1994 18,732 127,947 146,679
Provisions 441 3,970 4,411
--------- --------- ---------
Balance, December 31, 1995 19,173 131,917 151,090
Provisions 467 3,853 4,320
--------- --------- ---------
Balance, December 31, 1996 $ 19,640 $ 135,770 $ 155,410
========= ========= =========
The Partnership's aggregate DD&A expense was 25 percent, 34 percent
and 28 percent of oil and gas sales for 1996, 1995 and 1994,
respectively.
(5) MAJOR CUSTOMER INFORMATION
Revenues received from major third party customers exceeding ten
percent of oil and gas sales is discussed below. No other third party
customers individually accounted for more than ten percent of oil and
gas sales.
Purchases by Producers Energy Marketing LLC (ProEnergy), a 44
percent owned affiliate of Apache, accounted for 73 percent of the
Partnership's oil and gas sales in 1996. The prices the Partnership
receives for its gas production are, in the opinion of Apache, not
substantially different from prices that would be received from a non-
affiliated party. Beginning with April 1996 production, ProEnergy was
the principal purchaser of the Partnership's natural gas production.
Purchases of oil and condensate by Plains Petroleum Operating Co.
(Plains Petroleum) accounted for an additional 10 percent of the 1996
oil and gas sales.
Natural Gas Clearinghouse (NGC) was the principal purchaser of the
Partnership's spot market gas production from April 1990 through
September 30, 1995. Sales to NGC accounted for 49 percent and 77
percent of the Partnership's oil and gas sales in 1995 and 1994,
respectively. Plains Petroleum purchases accounted for 28 percent and
14 percent of the Partnership's oil and gas sales in 1995 and 1994,
respectively.
Effective November 1992, with Apache's and the Partnership's
acquisition of an additional revenue interest in Matagorda Island
Blocks 681 and 682, a wholly-owned subsidiary of Apache purchased from
Shell Oil Company (Shell) a 14.4 mile natural gas and condensate
pipeline connecting Matagorda Island Block 681 to onshore markets. The
Partnership paid an Apache subsidiary transportation fees totaling $.2
million in each of 1996 and 1995 and $.3 million in 1994 for
transportation of the Partnership's share of gas. The fees, which are
netted against oil and gas sales on the income statement, were at the
same rates and terms as previously paid to Shell.
The Partnership's revenues are derived principally from
uncollateralized sales to customers in the oil and gas industry;
therefore, customers may be similarly affected by changes in economic
and other conditions within the industry. The Partnership has not
experienced material credit losses on such sales.
23
(6) DEBT
In July 1992, through Apache, the Partnership obtained a line of
credit. Proceeds from this reducing revolving bank facility were used
to repay the limited recourse note which had previously been issued to
finance offshore leasehold in the Partnership. At December 31, 1996,
the Partnership had an available line of $5.1 million of which $2.0
million was outstanding. The $2.0 million of outstanding debt was due
in 1998; however, on January 31, 1997, the Partnership repaid the loan
in its entirety and terminated the facility.
At the Partnership's option, interest rates on the facility were
based on the London Interbank Offered Rate (LIBOR) plus .75 percent
(equal to 6.44 percent at December 31, 1996) or at First National Bank
of Chicago's base rate plus .5 percent (equal to 8.75 percent at
December 31, 1996).
It is expected that cash flows from operating activities and
Managing Partner contributions will be sufficient to meet the
Partnership's liquidity needs for routine operations over the next two
years. However, in the event short-term operating cash requirements are
greater than the Partnership's financial resources, the Partnership
will seek future short-term, interest-bearing advances from the
Managing Partner.
(7) FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accrued revenue
receivables and other financial instruments included in the
accompanying balance sheet approximated market value at December 31,
1996 and 1995. The Partnership did not engage in hedging activities
during the three year period ended December 31, 1996.
24
SUPPLEMENTAL OIL AND GAS DISCLOSURES
(UNAUDITED)
Oil and Gas Reserve Information -
Proved oil and gas reserve quantities are based on estimates
prepared by Ryder Scott Company Petroleum Engineers, independent
petroleum engineers, in accordance with guidelines established by the
SEC. These reserves are subject to revision due to the inherent
imprecision in estimating reserves, and are revised as additional
information becomes available. All of the Partnership's reserves are
located offshore Texas and Louisiana.
There are numerous uncertainties inherent in estimating quantities
of proved reserves and projecting future rates of production and timing
of development expenditures. The following reserve data represents
estimates only and should not be construed as being exact.
(Oil in Mbbls and gas in MMcf)
Proved Reserves 1996 1995 1994
Developed and ----------------- ------------------ ------------------
Undeveloped Oil Gas Oil Gas Oil Gas
- --------------- ------ ------ ------ ------ ------ ------
Beginning of year 1,169 20,848 1,237 25,122 1,373 29,305
Extensions, discoveries
and other additions -- 252 8 182 24 295
Revisions of
previous estimates 60 957 134 1,596 90 2,662
Production (164) (5,651) (210) (6,052) (250) (7,140)
Sales of reserves in-place -- (10) -- -- -- --
------ ------ ----- ------ ----- -------
End of year 1,065 16,396 1,169 20,848 1,237 25,122
====== ====== ===== ===== ====== =======
Proved Developed
- ----------------
Beginning of year 1,112 18,798 1,150 22,701 1,324 27,727
====== ======= ====== ======= ====== =======
End of year 917 14,223 1,112 18,798 1,150 22,701
====== ====== ===== ===== ====== =======
Future Net Cash Flows -
The following table sets forth unaudited information concerning
future net cash flows from oil and gas reserves. Future cash inflows
is based on year-end prices. Operating costs and future development
costs are based on current costs with no escalation. As the Registrant
is a general partnership, and therefore pays no income taxes, estimated
future income tax expenses are omitted. This information does not
purport to present the fair market value of the Partnership's oil and
gas assets, but does present a standardized disclosure concerning
possible future net cash flows that would result under the assumptions
used.
25
SUPPLEMENTAL OIL AND GAS DISCLOSURES - (CONTINUED)
(UNAUDITED)
Discounted Future Net Cash Flows
Relating to Proved Reserves At December 31,
-------------------------------------
1996 1995 1994
---------- ---------- ----------
(In thousands)
Future cash inflows $ 97,475 $ 75,770 $ 60,383
Future production and development costs (14,072) (10,615) (11,945)
---------- -------- ----------
Net cash flows 83,403 65,155 48,438
10 percent annual discount rate (21,325) (16,040) (13,206)
---------- --------- ---------
Discounted future net cash flows $ 62,078 $ 49,115 $ 35,232
========== ========= ==========
The following table sets forth the principal sources of change in
the discounted future net cash flows:
For the Years Ended December 31,
-------------------------------------
1996 1995 1994
---------- ---------- ----------
(In thousands)
Sales, net of production costs $ (16,294) $ (11,766) $ (16,114)
Net change in prices and production costs 22,269 15,808 (9,824)
Extensions, discoveries and other additions 862 566 735
Revisions of quantities 3,920 4,447 3,910
Accretion of discount 4,912 3,523 5,229
Changes in future development costs (607) 301 113
Sales of reserves in-place (18) -- --
Changes in production rates and other (2,081) 1,004 (1,104)
---------- ---------- ----------
$ 12,963 $ 13,883 $ (17,055)
========== ========== ==========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
All management functions are performed by Apache, the Managing Partner
of the Registrant. The Registrant itself has no officers or directors.
Information concerning the officers and directors of Apache set forth under
the captions "Information About Nominees for Election as Directors,"
"Information About Continuing Directors," "Executive Officers of the
Company," and "Voting Securities and Principal Holders" in the proxy
statement relating to the 1997 annual meeting of shareholders of Apache
(the "Apache Proxy") is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
See Note (3), "Compensation to Apache" of the Registrant's financial
statements, under Item 8 above, for information regarding compensation to
Apache as Managing Partner. The information concerning the compensation
paid by Apache to its officers and directors set forth under the captions
"Summary Compensation Table," "Option/SAR Grants Table," "Option/SAR
Exercises and Year-End Value Table," "Long-Term Incentive Plans - Awards in
Last Fiscal Year", "Employment Contracts and Termination of Employment and
Change-in-Control Arrangements," and "Director Compensation" in the Apache
Proxy is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Apache, as an Investing Partner and the General Partner, owns 53
Units, or approximately four percent of the outstanding Units of the
Registrant as of December 31, 1996. Directors and officers of Apache own
10.4 Units, approximately one percent of the Registrant's Units, as of
December 31, 1996. Apache owns a one-percent General Partner interest (15
equivalent Units). To the knowledge of the Registrant, no Investing
Partner owns, of record or beneficially, more than five percent of the
Registrant's outstanding Units.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective November 1992, with Apache's and the Partnership's
acquisition of an additional revenue interest in Matagorda Island Blocks
681 and 682, a wholly-owned subsidiary of Apache purchased from Shell a
14.4 mile-long natural gas and condensate pipeline connecting Matagorda
Island Block 681 to onshore markets. The Partnership paid the Apache
subsidiary transportation fees totaling $.2 million in each of 1996 and
1995 and $.3 million in 1994 for transportation of the Partnership's share
of gas. The fees, which are netted against oil and gas sales on the income
statement, were at the same rates and terms as previously paid to Shell.
Apache markets the Partnership's natural gas production through
ProEnergy, an affiliate of Apache. At December 31, 1996, Apache held a 44
percent interest in ProEnergy. The prices the Partnership receives for its
gas production are, in the opinion of Apache, not substantially different
from the prices that would be received from a non-affiliated party.
27
PART IV
ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. (1) Financial Statements - See accompanying index to financial
statements in Item 8 above.
(2) Financial Statement Schedules - See accompanying index to financial
statements in Item 8 above.
(3) Exhibits
3.1 Partnership Agreement of Apache Offshore Investment
Partnership (incorporated by reference to Exhibit (3)(i)
to Form 10 filed by Registrant with the Commission on
April 30, 1985, Commission File No. 0-13546).
3.2 Amendment No. 1, dated February 11, 1994, to the
Partnership Agreement of Apache Offshore Investment
Partnership (incorporated by reference to Exhibit 3.3 to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1993, Commission File No. 0-13546).
3.3 Limited Partnership Agreement of Apache Offshore
Petroleum Limited Partnership (incorporated by reference
to Exhibit (3)(ii) to Form 10 filed by Registrant with
the Commission on April 30, 1985, Commission File No. 0-
13546).
10.1 Credit Agreement dated July 24, 1992, between Apache,
the Lenders named therein and the First National Bank of
Chicago, as Agent (incorporated by reference to Exhibit
10.1 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1992, Commission File No. 0-
13546).
10.2 Second Amendment, dated as of July 29, 1994, to Credit
Agreement between Apache, the Lenders named therein and
the First National Bank of Chicago, as Agent
(incorporated by reference to Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1994, Commission File No. 1-
13546).
10.3 Third Amendment, dated as of March 31, 1995, to the
Credit Agreement between Apache, the Lenders named
therein and the First National Bank of Chicago, as Agent
(incorporated by reference to Exhibit 10.6 to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995, Commission File No. 0-13546).
10.4 Form of Assignment and Assumption Agreement between
Apache Corporation and Apache Offshore Petroleum Limited
Partnership (incorporated by reference to Exhibit 10.2 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1992, Commission File No. 0-
13546).
10.5 Joint Venture Agreement, dated as of November 23, 1992,
between Apache Corporation and Apache Offshore Petroleum
Limited Partnership (incorporated by reference to Exhibit
10.6 to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1992, Commission File No. 0-
13546).
28
10.6 Matagorda Island 681 Field Purchase and Sale Agreement
with Option to Exchange, dated November 24, 1992, between
Apache Corporation, Shell Offshore, Inc. and SOI
Royalties, Inc. (incorporated by reference to Exhibit
10.7 to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1992, Commission File No. 0-
13546).
*23.1 Consent of Ryder Scott Company Petroleum Engineers.
*27.1 Financial Data Schedule.
99.1 Consent statement of the Registrant, dated January 7,
1994 (incorporated by reference to Exhibit 99.1 to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1993, Commission File No. 0-13546).
99.2 Proxy statement dated March 28, 1997, relating to the
1997 annual meeting of shareholders of Apache Corporation
(incorporated by reference to the document filed by
Apache pursuant to Rule 14A, Commission File No. 1-4300,
dated March 28, 1997).
*Filed herewith.
b. Reports filed on Form 8-K.
No reports on Form 8-K were filed during the fiscal quarter
ended December 31, 1996.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
APACHE OFFSHORE INVESTMENT PARTNERSHIP
By: Apache Corporation, General Partner
Date: March 26, 1997 By: /s/ Raymond Plank
----------------------------------------
Raymond Plank,
Chairman and Chief Executive Officer
POWER OF ATTORNEY
The officers and directors of Apache Corporation, General Partner of
Apache Offshore Investment Partnership, whose signatures appear below,
hereby constitute and appoint Raymond Plank, G. Steven Farris, Z.S.
Kobiashvili and Mark A. Jackson, and each of them (with full power to each
of them to act alone), the true and lawful attorney-in-fact to sign and
execute, on behalf of the undersigned, any amendment(s) to this report and
each of the undersigned does hereby ratify and confirm all that said
attorneys shall do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Raymond Plank Chairman and Chief Executive March 26, 1997
- ----------------------- Officer (Principal Executive
Raymond Plank Officer)
/s/ Mark A. Jackson Vice President and Chief March 26, 1997
- ----------------------- Financial Officer (Principal
Mark A. Jackson Financial Officer)
/s/ Thomas L. Mitchell Controller and Chief March 26, 1997
- ----------------------- Accounting Officer (Principal
Thomas L. Mitchell Accounting Officer)
Signature Title Date
/s/ Frederick M. Bohen Director
- ------------------------------
Frederick M. Bohen March 26, 1997
/s/ Virgil B. Day Director
- ------------------------------
Virgil B. Day March 26, 1997
/s/ G. Steven Farris Director
- ------------------------------
G. Steven Farris March 26, 1997
/s/ Randolph M. Ferlic Director
- ------------------------------
Randolph M. Ferlic March 26, 1997
/s/ Eugene C. Fiedorek Director
- ------------------------------
Eugene C. Fiedorek March 26, 1997
/s/ W. Brooks Fields Director
- ------------------------------
W. Brooks Fields March 26, 1997
/s/ Robert V. Gisselbeck Director
- ------------------------------
Robert V. Gisselbeck March 26, 1997
/s/ Stanley K. Hathaway Director
- ------------------------------
Stanley K. Hathaway March 26, 1997
/s/ George D. Lawrence Jr. Director
- ------------------------------
George D. Lawrence Jr. March 26, 1997
/s/ Mary Ralph Lowe Director
- ------------------------------
Mary Ralph Lowe March 26, 1997
/s/ John A. Kocur Director
- ------------------------------
John A. Kocur March 26, 1997
/s/ Joseph A. Rice Director
- ------------------------------
Joseph A. Rice March 26, 1997