APACHE OFFSHORE INVESTMENT PARTNERSHIP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2002

OR

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

For the Transition Period from to
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Commission File Number 0-13546

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APACHE OFFSHORE INVESTMENT PARTNERSHIP
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)

Delaware 41-1464066
------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)

Suite 100, One Post Oak Central 77056-4400
2000 Post Oak Boulevard, Houston, TX ----------
---------------------------------------- (Zip Code)
(Address of Principal Executive Offices)

Registrant's Telephone Number, Including Area Code: (713) 296-6000

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 [ ]

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

APACHE OFFSHORE INVESTMENT PARTNERSHIP
STATEMENT OF CONSOLIDATED INCOME
(UNAUDITED)

The accompanying notes to financial statements
are an integral part of this statement.

1

APACHE OFFSHORE INVESTMENT PARTNERSHIP
STATEMENT OF CONSOLIDATED CASH FLOWS
(UNAUDITED)

The accompanying notes to financial statements
are an integral part of this statement.

2

APACHE OFFSHORE INVESTMENT PARTNERSHIP
CONSOLIDATED BALANCE SHEET
(UNAUDITED)

The accompanying notes to financial statements
are an integral part of this statement.

3

APACHE OFFSHORE INVESTMENT PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The financial statements included herein have been prepared by the Apache
Offshore Investment Partnership (the Partnership), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission, and reflect
all adjustments which are, in the opinion of management, necessary for a fair
statement of the results for the interim periods, on a basis consistent with the
annual audited financial statements. All such adjustments are of a normal,
recurring nature. Certain information, accounting policies, and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to such
rules and regulations, although the Partnership believes that the disclosures
are adequate to make the information presented not misleading. These financial
statements should be read in conjunction with the financial statements and the
summary of significant accounting policies and notes thereto included in the
Partnership's latest annual report on Form 10-K.

1. RECEIVABLE FROM/PAYABLE TO APACHE CORPORATION

Payable to Apache Corporation, the Partnership's managing partner (Apache
or the Managing Partner), 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 month after the Partnership's
transactions are processed and the net results of operations are determined.

2. RIGHT OF PRESENTMENT

As provided in the Amended Partnership Agreement, a first right of
presentment offer for 2002 of $8,686 per Unit, plus interest to the date of
payment, was made to Investing Partners in April 2002, based on a valuation date
of December 31, 2001. As a result, the Partnership purchased 15.1 Units in June
2002 for a total of $134,477. A second right of presentment offer for 2002 of
$7,362 per Unit, plus interest to the date of payment, was made to the Investing
Partners on October 23, 2002, based on a valuation date of June 30, 2002. The
Investing Partners have until the close of business on November 22, 2002 to
present their Units for repurchase by the Partnership. The Partnership will
determine by December 20, 2002, whether or not to accept each Unit offered
during this election period.

The Partnership is not in a position to predict how many Units will be
presented for repurchase during the fourth quarter of 2002 and cannot, at this
time, determine if the Partnership will have sufficient funds available to
repurchase any Units. The Partnership has no obligation to purchase any Units
presented to the extent it determines that it has insufficient funds for such
purchases. The Amended Partnership Agreement contains limitations on the number
of Units that the Partnership can repurchase, including a limit of 10 percent of
the outstanding Units on an annual basis.

3. NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 143 "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This statement requires companies to record
the fair value of legal obligations associated with the retirement of tangible
long-lived assets in the period in which the obligation is incurred. The
liability is capitalized as part of the related long-lived asset's carrying
amount. Over time, accretion of the liability is recognized as an operating
expense and the capitalized cost is depreciated over the expected useful life of
the related asset. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002, with earlier adoption encouraged. The Partnership's asset
retirement obligations relate primarily to the dismantlement of offshore
platforms. The Partnership expects to adopt this new standard effective January
1, 2003. The Partnership is currently evaluating the impact of adopting this new
standard and accordingly has not quantified the impact on the consolidated
financial statements.

4

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

NET INCOME AND REVENUE

The Partnership reported net income in the third quarter of 2002 of $.8
million, down 42 percent from the prior year period due to lower oil and gas
production. Net income for the quarter per Investing Partner Unit decreased 46
percent, from $907 per Unit to $490 per Unit.

For the nine months of 2002, net income totaled $2.3 million, or $1,461 per
Investing Partner Unit, down 64 percent and 66 percent, respectively, from $6.4
million, or $4,324 per Unit, in the same period last year. The decrease in net
income was attributable to decreases in oil and gas production and prices in
2002.

Revenues for the quarter decreased 19 percent, falling from $2.1 million in
the third quarter of 2001 to $1.7 million in the third quarter of 2002. For the
first nine months of 2002, revenues decreased 46 percent to $4.8 million.
Natural gas sales accounted for 58 percent of the Partnership's total revenues
during the first nine months of 2002 compared to 74 percent during the first
nine months of 2001.

The Partnership's oil and gas production volume and price information is
summarized in the following table (gas volumes presented in thousand cubic feet
(Mcf) per day):

THIRD QUARTER 2002 COMPARED TO THIRD QUARTER 2001

Natural gas production revenues for the third quarter of 2002 totaled $.9
million, down 30 percent from the third quarter of 2001. Natural gas volumes for
the quarter declined 36 percent from a year ago due largely to declining
production on South Pass 83. North Padre Island 969 returned to production late
in third quarter after having been shut-in for a dispute with a pipeline company
on increased fees charged for the transportation of natural gas. In September
2002, the Federal Energy Regulatory Commission (FERC) issued a ruling which
established an unbundled gathering rate of approximately two cents per Mcf on
the North Padre Island system as opposed to the 12 cents per Mcf rate demanded
by the pipeline. Natural gas production was also down from a year ago due to
production interruptions from Hurricane Isidore during September 2002. Natural
gas prices increased 10 percent for the third quarter of 2002 compared to the
year-earlier period, offsetting approximately $.1 million of the decline in
sales resulting from lower production.

The Partnership's crude oil production revenues for the third quarter of
2002 totaled $741,000, a one percent decrease from the third quarter of 2001.
The decrease in oil sales was attributable to a five percent decline in the
Partnership's crude oil production, offset by a five percent increase in average
realized oil price. Production added through drilling at South Timbalier 295 was
offset by natural depletion and production interruptions attributable to
Hurricane Isidore.

YEAR-TO-DATE 2002 COMPARED TO YEAR-TO-DATE 2001

Gas sales for the nine months of 2002 of $2.8 million decreased $3.9
million, or 58 percent, when compared to the same period in 2001. The
Partnership's average realized gas prices decreased $2.01 per Mcf when compared
with the nine months of 2001, negatively impacting sales by $2.7 million. Daily
gas production for the first nine months of 2002 decreased 31 percent when
compared to the same period in 2001, negatively impacting revenues by $1.2
million.

5

The production decline from a year ago reflected natural depletion at South Pass
83 and shut-in production at North Padre Island 969.

For the nine months ended September 30, 2002, oil sales decreased 11
percent to $2.0 million when compared to the same period last year. The
Partnership's oil sales revenues were unfavorably impacted by a 10 percent
decrease in average realized oil price, and a one percent decrease in daily oil
production.

Declines in oil and gas production can be expected in future periods due to
natural depletion. Given the small number of producing wells owned by the
Partnership, and the fact that offshore wells tend to decline at a faster rate
than onshore wells, the Partnership's future production will be subject to more
volatility than those companies with greater reserves and longer-lived
properties. Fourth quarter 2002 production will also be impacted by production
interruptions from Hurricane Lili, a category 4 storm which blew through the
Gulf of Mexico in October.

OPERATING EXPENSES

The Partnership's depreciation, depletion and amortization (DD&A) rate,
expressed as a percentage of oil and gas production revenues, was approximately
35 percent during the third quarter of 2002 compared to 22 percent during the
same period in 2001. For the first nine months, the Partnership's DD&A rate
increased from 19 percent in 2001 to 33 percent in the current year.

Lease operating expense (LOE) in the third quarter 2002 was 14 percent
greater than the same quarter a year ago due to increases in repair and
maintenance costs. For the first nine months of 2002, LOE of $.5 million was up
14 percent from a year ago due to higher repair and maintenance cost during the
first nine months of 2002.

Oil and gas gathering and transportation costs paid directly by the
Partnership are reported as a separate expense on the statement of income.
Previously, these costs were netted against oil and gas revenues. The declines
in expense for the third quarter and first nine months compared to a year ago
reflected lower sales volumes in 2002.

CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES

CAPITAL RESOURCES AND LIQUIDITY

The Partnership's primary capital resource is net cash provided by
operating activities, which was $3.5 million for the first nine months of 2002.
Net cash provided by operating activities in 2002 was down 56 percent from a
year ago primarily due to lower prices and gas production. Future cash flows
will be influenced by fluctuations in product prices, production levels and
operating costs.

CAPITAL COMMITMENTS

The Partnership's primary needs for cash are for operating expenses,
drilling and recompletion expenditures, distributions to Investing Partners, and
the purchase of Units offered by Investing Partners under the right of
presentment.

During the first nine months of 2002, the Partnership's oil and gas
property additions totaled $2.7 million, which primarily related to drilling and
recompletion projects at South Timbalier 295. The Partnership participated in
drilling five wells (B-2 through B-6) at South Timbalier 295. The B-2 and B-3
wells were brought on production during the second quarter of 2002, and the B-4
and B-5 wells were brought on production during the third quarter. Drilling was
still in progress on the B-6 well as of September 30, 2002 and was delayed
subsequent to the end of the quarter by Hurricane Lili. The Partnership
anticipates capital expenditures of approximately $.1 million for the remainder
of 2002. Such estimates may change based on realized prices, drilling results or
changes by the operator to the development plan.

The Partnership made no cash distributions to Investing Partners during the
first nine months of 2002 due to low oil and gas price realizations during the
first quarter and the comparatively high level of capital cost from drilling
activities. The Partnership declared a distribution of $1,000 per Investing
Partner unit on September 12, 2002, payable to Unitholders on October 9, 2002.
The amount of future distributions will be dependent on actual and expected
production levels, realized and expected oil and gas prices, expected drilling
and recompletion

6

expenditures, and prudent cash reserves for future dismantlement and abandonment
costs that will be incurred after the Partnership's reserves are depleted.

As provided in the Amended Partnership Agreement, a first right of
presentment offer for 2002 of $8,686 per Unit, plus interest to the date of
payment, was made to Investing Partners in April 2002, based on a valuation date
of December 31, 2001. As a result, the Partnership purchased 15.1 Units in June
2002 for a total of $134,477. A second right of presentment offer for 2002 of
$7,362 per Unit, plus interest to the date of payment, was made to the Investing
Partners on October 23, 2002, based on a valuation date of June 30, 2002. The
Investing Partners have until the close of business on November 22, 2002 to
present their Units for repurchase by the Partnership. The Partnership will
determine by December 20, 2002, whether or not to accept each Unit offered
during this election period.

The Partnership is not in a position to predict how many Units will be
presented for repurchase during the fourth quarter of 2002 and cannot, at this
time, determine if the Partnership will have sufficient funds available to
repurchase any Units. The Partnership has no obligation to purchase any Units
presented to the extent it determines that it has insufficient funds for such
purchases. The Amended Partnership Agreement contains limitations on the number
of Units that the Partnership can repurchase, including a limit of 10 percent of
the outstanding Units on an annual basis.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Partnership's major market risk exposure is in the pricing applicable
to its oil and gas production. Realized pricing is primarily driven by the
prevailing worldwide price for crude oil and spot prices applicable to its
natural gas production. Historically, prices received for oil and gas production
have been volatile and unpredictable and price volatility is expected to
continue. Based on the Partnership's average daily production for the first nine
months of 2002, a $1.00 per barrel change in the weighted average price of oil
would have increased or decreased revenues for the nine month period by
approximately $82,000 and $.10 per Mcf change in the weighted average price of
natural gas would have increased or decreased revenues for the nine month period
by approximately $90,000. The Partnership has not used derivative financial
instruments or otherwise engaged in hedging activities during 2001 or the first
nine months of 2002.

ITEM 4 - CONTROLS AND PROCEDURES

The certifying officers of the general partner evaluated the effectiveness
of the Partnership's disclosure controls and procedures within the last 90 days
preceding the date of this report. Based on that review and as of the date of
that evaluation, these officers found the Partnership's disclosure controls to
be adequate, providing effective means to insure that the Partnership timely and
accurately disclose the information it is required to disclose under applicable
laws and regulations. We also made no significant changes in the Partnership's
internal controls or any other factors that could affect the Partnership's
internal controls since our most recent internal controls evaluation.

FORWARD-LOOKING STATEMENTS AND RISK

Certain statements in this report, including statements of the future
plans, objectives, and expected performance of the Partnership, are
forward-looking statements that are dependent on certain events, risks and
uncertainties that may be outside the Partnership's control, and which could
cause actual results to differ materially from those anticipated. Some of these
include, but are not limited to, the market prices of oil and gas, economic and
competitive conditions, inflation rates, legislative and regulatory changes,
financial market conditions, political and economic uncertainties of foreign
governments, future business decisions, and other uncertainties, all of which
are difficult to predict.

There are numerous uncertainties inherent in estimating quantities of
proved oil and gas reserves and in projecting future rates of production and
timing of development expenditures. The total amount or timing of actual future
production may vary significantly from reserves and production estimates. The
drilling of exploratory wells can involve significant risks, including those
related to timing, success rates and cost overruns. Lease and rig availability,
complex geology and other factors can affect these risks. Fluctuations in oil
and gas prices, or a prolonged period of low prices, may substantially adversely
affect the Partnership's financial position, results of operations and cash
flows.

7

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 2. CHANGES IN SECURITIES

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a. Exhibits

99.1 - Certification of Chief Executive Officer and
Chief Financial Officer

b. Reports on Form 8-K - None.

8

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

Dated: November 12, 2002 /s/ Roger B. Plank
---------------------------------------
Roger B. Plank
Executive Vice President and
Chief Financial Officer

Dated: November 12, 2002 /s/ Thomas L. Mitchell
---------------------------------------
Thomas L. Mitchell
Vice President and Controller
(Chief Accounting Officer)

CERTIFICATIONS

I, Roger B. Plank, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Apache Offshore
Investment Partnership;

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us by
others within those entities, particularly during the period in which
this quarterly report is being prepared;

(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

/s/ Roger B. Plank
- ----------------------------------------------------
Roger B. Plank
Executive Vice President and Chief Financial Officer
of Apache Corporation, General Partner

Date: November 12, 2002

CERTIFICATIONS

I, G. Steven Farris, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Apache Offshore
Investment Partnership;

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us by
others within those entities, particularly during the period in which
this quarterly report is being prepared;

(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

/s/ G. Steven Farris
- ----------------------------------------------
G. Steven Farris
President, Chief Executive Officer and
Chief Operating Officer of Apache Corporation,
General Partner

Date: November 12, 2002

EXHIBIT INDEX