APACHE CORP - 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 _____________________

Commission File Number 1-4300

APACHE CORPORATION
-----------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)

Delaware 41-0747868
------------------------------- ----------------------
(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
----- ----

Number of shares of Registrant's common stock, outstanding as of
September 30, 2002.................................................143,966,713

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
(UNAUDITED)

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

1

APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(UNAUDITED)

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

2

APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)

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

3

APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)

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

4

APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
(UNAUDITED)

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

5

APACHE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

These financial statements have been prepared by Apache Corporation (Apache
or the Company) 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 accounting principles generally
accepted in the United States have been omitted pursuant to such rules and
regulations, although the Company 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 Company's most
recent annual report on Form 10-K.

In September 2001, the Company declared a 10 percent stock dividend to
shareholders of record on December 31, 2001. Quarterly share and per share
information for 2001 have been restated to reflect the stock dividend.

As a result of the consensus on Emerging Issues Task Force Issue 00-10,
"Accounting for Shipping and Handling Fees and Costs", third party gathering and
transportation costs have been reported as an operating cost instead of a
reduction of revenues as previously reported. Reclassifications have been made
to reflect this change in prior period statements of consolidated operations.

1. ACQUISITIONS

In March 2001, the Company completed two significant acquisitions. Apache
acquired substantially all of Repsol YPF's (Repsol) oil and gas concession
interests in Egypt for approximately $447 million in cash, and acquired
subsidiaries of Fletcher Challenge Energy (Fletcher) for approximately $465
million in cash and 1.8 million restricted shares of Apache common stock issued
to Shell Overseas Holdings (valued at $55.49 per share).

The following unaudited pro forma information shows the effect on the
Company's consolidated results of operations as if the Fletcher and Repsol
acquisitions occurred on January 1, 2001. The pro forma information is based on
numerous assumptions and is not necessarily indicative of future results of
operations.

2. DEBT

In April 2002, the Company issued $400 million principal amount, $397
million net of discount, of senior unsecured 6.25-percent notes maturing on
April 15, 2012. The notes are redeemable, as a whole or in part, at Apache's
option, subject to a make-whole premium. The proceeds were used to repay a
portion of the Company's outstanding commercial paper and for general corporate
purposes.

6

On June 3, 2002, Apache entered into a new $1.5 billion global credit
facility to replace its existing global and 364-day credit facilities. The new
global credit facility consists of four separate bank facilities: a $750 million
364-day facility in the United States; a $450 million five-year facility in the
United States; a $150 million five-year facility in Australia; and a $150
million five-year facility in Canada. The financial covenants of the global
credit facility require the Company to: (i) maintain a consolidated tangible net
worth, plus the aggregate amount of any non-cash write-downs, of at least $2.2
billion as of September 30, 2002, adjusted for subsequent earnings, (ii)
maintain an aggregate book value for assets of Apache and certain subsidiaries,
as defined, on an unconsolidated basis of at least $2 billion as of September
30, 2002, and (iii) maintain a ratio of debt to capitalization of not greater
than 60 percent at the end of any fiscal quarter. The Company was in compliance
with all financial covenants at September 30, 2002.

The five-year facilities are scheduled to mature on June 3, 2007 and the
364-day facility is scheduled to mature on June 1, 2003. The 364-day facility
allows the Company to convert outstanding revolving loans at maturity into
one-year term loans. The Company may request extensions of the maturity dates
subject to approval of the lenders. At the Company's option, the interest rate
is based on (i) the greater of (a) The JPMorgan Chase Bank prime rate or (b) the
federal funds rate plus one-half of one percent, (ii) the London Interbank
Offered Rate (LIBOR) plus a margin determined by the Company's senior long-term
debt rating, or (iii) in the case of the U.S. $450 million five-year facility, a
margin that is determined by competitive bids from participating banks. At
September 30, 2002, the margin over LIBOR for committed loans was .30 percent on
the five-year facilities and .32 percent on the 364-day facility. If the total
amount of the loans borrowed under all of the facilities equals or exceeds 33
percent of the total facility commitments, then an additional .125 percent will
be added to the margins over LIBOR. The Company also pays a quarterly facility
fee of .10 percent on the total amount of each of the five-year facilities and
..08 percent on the total amount of the 364-day facility. The facility fees vary
based upon the Company's senior long-term debt rating.

The $450 million U.S. five-year facility and the $750 million U.S. 364-day
credit facility are used to support Apache's commercial paper program. The
available borrowing capacity under the global credit facility at September 30,
2002 was $1.2 billion.

3. DERIVATIVE INSTRUMENTS AND FIXED-PRICE PHYSICAL CONTRACTS

Due to the uncertainty of how the collapse of Enron Corp. might impact the
derivative markets, Apache closed out all of its derivative positions and
certain fixed-price physical contracts during October and November 2001 (the
"unwind"). The unwind of Apache's hedged positions and acquired derivative
contracts resulted in a net gain recorded to accumulated other comprehensive
income. This deferred gain will be reclassified into earnings over the remaining
periods of the original hedge contracts (approximately 15 months). The remaining
deferred gain related to these contracts was $1 million and $20 million at
September 30, 2002 and December 31, 2001, respectively.

As part of the unwind, Apache also terminated the gas price swap associated
with its advances from gas purchasers, receiving proceeds of $78 million. These
proceeds will be realized into earnings over the original life of the contracts
and effectively increase the original contract's fixed prices by approximately
51 percent. As of September 30, 2002 and December 31, 2001, the Company had an
unamortized gain of $72 million and $78 million, respectively, related to the
unwind of the contracts.

7

4. NET INCOME PER COMMON SHARE

A reconciliation of the components of basic and diluted net income per
common share is presented in the table below:

(1) The Series C preferred stock converted to Apache common stock on May
15, 2002.

5. SUPPLEMENTAL CASH FLOW INFORMATION

The following table provides supplemental disclosure of cash flow
information:

6. SHORT-TERM INVESTMENTS

At December 31, 2001, Apache had $103 million of U.S. Government Agency
Notes, $17 million of which were designated as "available for sale" securities.
In January 2002, the Company sold all of the "available for sale" securities for
approximately $17 million. The balance was designated as "held to maturity" and
was carried at amortized cost. These notes paid interest at rates from 6.25
percent to 6.375 percent and matured on October 15, 2002.

8

7. IMPAIRMENTS

During the first quarter of 2002, the Company recorded a $5 million
impairment ($3 million after tax) of unproved property costs in Poland. No
impairment was recorded in the second or third quarter. At September 30, 2002,
Apache had $28 million in unproved property costs remaining in Poland. The
Company will continue to evaluate its operations, which may result in additional
impairments.

8. BUSINESS SEGMENT INFORMATION

Apache has five reportable segments which are primarily in the business of
natural gas and crude oil exploration and production. The Company evaluates
segment performance based on results from oil and gas sales and lease level
expenses. Apache's reportable segments are managed separately because of their
geographic locations. Financial information by operating segment is presented
below:

(1) Operating income (loss) consists of oil and gas production revenues less
depreciation, depletion and amortization, international impairments, lease
operating costs, gathering and transportation costs, and severance and
other taxes.

(2) During the second quarter of 2001, the Company recorded a $65 million
impairment ($41 million after-tax) of unproved property costs in Poland
and China. During the first quarter of 2002, the Company recorded an
additional $5 million impairment ($3 million after-tax) of unproved
property costs in Poland.

9

9. NEW ACCOUNTING PRONOUCEMENTS

The Company adopted Statement of Financial Accounting Standards (SFAS) No.
142 "Goodwill and Other Intangible Assets" effective January 1, 2002. SFAS No.
142 addresses financial accounting and reporting for acquired goodwill and other
intangible assets and supersedes Accounting Principles Board (APB) Opinion No.
17 "Intangible Assets". As a result of this pronouncement, goodwill is no longer
subject to amortization. Rather, goodwill is subject to at least an annual
assessment for impairment by applying a fair-value-based test. Apache had
goodwill of $189 million at September 30, 2002, representing the excess of the
purchase price over the estimated fair value of the assets acquired and
liabilities assumed in the Fletcher and Repsol acquisitions, adjusted for
currency fluctuations. Apache has recognized no impairment of goodwill as of
September 30, 2002. Had the principles of SFAS No. 142 been applied to prior
years, goodwill amortization of $2 million ($1 million after tax) and $5 million
($3 million after tax) expensed during the third quarter and first nine months
of 2001, respectively, would not have been incurred. Net income for the
comparative interim period adjusted to exclude the effect of goodwill
amortization would have increased diluted earnings per share by $.01 and $.02
for the three months and nine months ended September 30, 2001, respectively.

In June 2001, the Financial Accounting Standards Board (FASB) issued 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 present value of
obligations associated with the retirement of tangible long-lived assets in the
period in which it 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. The Company's asset
retirement obligations relate primarily to the dismantlement of oil and gas
properties. The Company expects to adopt this new standard effective January 1,
2003. The Company is currently evaluating the impact of adopting this new
standard and accordingly has not quantified the impact on the consolidated
financial statements.

10. SUPPLEMENTAL GUARANTOR INFORMATION

Apache Finance Pty Ltd. (Apache Finance Australia) and Apache Finance
Canada Corporation (Apache Finance Canada) are subsidiaries of Apache, that have
issuances of publicly traded securities and require the following condensed
consolidating financial statements be provided as an alternative to filing
separate financial statements.

Each of the companies presented in the condensed consolidating financial
statements has been fully consolidated in Apache Corporation's consolidated
financial statements. As such, the condensed consolidating financial statements
should be read in conjunction with the financial statements of Apache
Corporation and subsidiaries and notes thereto of which this note is an integral
part.

10

APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
(IN THOUSANDS)

11

APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
(IN THOUSANDS)

12

APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(IN THOUSANDS)

13

APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(IN THOUSANDS)

14

APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(IN THOUSANDS)

15

APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(IN THOUSANDS)

16

APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2002
(IN THOUSANDS)

17

APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2001
(IN THOUSANDS)

18

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

OVERVIEW

For the third quarter Apache recorded income attributable to common stock
of $145 million ($1.00 per diluted common share) which was slightly higher than
second-quarter and four percent lower than the prior-year quarter. Cash from
operating activities of $385 million decreased eight percent from the same
quarter last year due to lower gas production and prices as well as higher
foreign currency losses, partially offset by higher oil prices.

For the first nine months of 2002, our income attributable to common stock
of $364 million ($2.55 per diluted share) and cash from operating activities of
$1.0 billion were 42 percent and 35 percent, respectively, below the 2001
period, a period which saw higher oil and gas price realizations.

Our goal at the outset of 2002 was to increase financial flexibility and
preserve our "A-credit ratings" by curtailing capital spending from prior year
levels in favor of reducing debt. This decision was predicated on volatile
natural gas prices, high drilling costs, inflated acquisition prices and the
impact of the September 11th attacks on an already faltering economy. As the
year progressed, improving prices and declining drilling costs allowed us to
continue to build financial flexibility and ramp-up capital spending.
Accordingly, we have increased drilling activity in all of our regions and
currently project to spend approximately $1 billion on exploration, development
and acquisition activities this year, up from our initial projection of
approximately $600 million. Even with increased capital spending this quarter,
we reduced debt by $42 million and debt (including preferred interest of
subsidiaries, net of cash and marketable securities) as a percentage of
capitalization fell to 33.5 percent, well ahead of our initial goal for the year
and our lowest quarter-end level in nearly 20 years.

Third quarter production was down slightly from the second quarter as the
impact from increased drilling activity in the third-quarter was hampered by the
impact of Hurricane Isidore. Hurricane Isidore forced us to shut-in all of our
Gulf of Mexico production for five days in September and reduced third quarter
average daily production by 4,000 barrels of oil equivalent (boe) per day.

Year-to-date oil and gas production, on a boe basis, was slightly higher
this year than last year. The increase was driven by the Repsol and Fletcher
Challenge acquisitions in late March 2001, in Egypt and Canada respectively,
coupled with successful drilling results at Ladyfern field in Canada. These
increases more than offset the impact of decreased capital spending in 2002.
Daily oil and gas production, on a boe basis, was seven percent lower this
quarter from the same quarter last year as a result of the impact of restricted
capital spending in 2002, Isidore and property sales in late 2001, which were
partially offset by successful results at Ladyfern and new discoveries in Egypt
and Australia.

Early in the fourth quarter, we were forced again to shut-in all of our
Gulf of Mexico production when Hurricane Lili, a Category 4 storm, blew through
the central Gulf. Our current production continues to be hampered by the damage
wrought by Hurricane Lili and we are estimating a fourth-quarter impact of
approximately 10,000 boe/d. We carry insurance, subject to normal deductibles,
that covers both the physical damage and loss of production income, which will
partially mitigate the financial impact of this hurricane.

We are continuing our successful exploration program in the deepwater
segment of our West Mediterranean Concession in Egypt. During the quarter, we
announced our third consecutive deepwater natural gas discovery and are drilling
a fourth well and planning a fifth before year-end. We also announced a new
fault-block discovery on our Khalda Concession in Egypt.

In early October 2002, we reported our fourteenth international discovery
for the year, the South Simpson-1 in Australia. In China, our Zhao Dong project
is proceeding on schedule. The newly constructed drilling platform was set in
October in Bohai Bay. We expect to commence drilling by year-end, with initial
production expected by mid-2003.

19

RESULTS OF OPERATIONS

Revenues

The table below presents oil and gas production revenues, production and
average prices received from sales of natural gas, oil and natural gas liquids.

20

Natural Gas Revenues

Third quarter natural gas production decreased 11 percent, compared to the
same period last year, reducing our natural gas revenues by $32 million. The
decline was driven primarily by our strategic decision to curtail capital
spending during 2002. The U.S. production was also impacted by property sales in
late 2001 and Isidore, which forced us to shut-in all of our Gulf of Mexico
production for 5 days. Partially offsetting the impact of lower 2002 drilling
activity were production increases in Canada at Ladyfern and in Egypt due to an
active drilling program at Khalda and Khalda Offset, an aggressive workover
campaign at South Umbarka and additional production at Ras Kanayes. Natural gas
prices declined four percent reducing natural gas revenues an additional $13
million.

Approximately 11 percent of our third-quarter 2002 and 10 percent of our
third-quarter 2001 domestic natural gas production was subject to long-term
fixed-price physical contracts. These contracts reduced our 2002 and increased
our 2001 worldwide realized price by $.02 and $.03 per Mcf, respectively. As
discussed in Note 3 of the Notes to Consolidated Financial Statements, we closed
all of our derivative positions during October and November 2001. Amortization
from the unwind of these derivative positions increased reported gas prices by
$.06 per Mcf during the third quarter of 2002. During the third quarter of 2001,
the net result of derivative instruments increased the Company's realized gas
price by $.19 per Mcf.

Year-to-date natural gas production decreased three percent, compared to
the same period last year, reducing our natural gas revenues by $24 million.
Production rates in the U.S. were lower for the reasons discussed above.
Production increased in Canada and Egypt as a result of acquisitions and
subsequent drilling activity on properties acquired in late March 2001 and
successful drilling results at the Ladyfern field in Canada. Natural gas prices
declined 35 percent reducing natural gas revenues by an additional $440 million.

Approximately 11 percent of our first nine month's 2002 and 2001 domestic
natural gas production was subject to long-term fixed-price physical contracts.
These contracts reduced our 2002 and 2001 worldwide realized price by $.01 and
$.16 per Mcf, respectively. During the first nine months of 2002 and 2001, the
net result of derivative instruments increased worldwide gas prices by $.07 and
$.05 per Mcf, respectively.

Crude Oil Revenues

Oil production decreased one percent in the third quarter 2002 compared to
the same period last year, reducing our oil revenues by $6 million. As discussed
previously, production was impacted by our strategic decision to curtail capital
spending in 2002. North America's production was also reduced by the disposition
of heavy oil properties in Canada and downtime associated with Isidore in the
U.S., as discussed above. Partially offsetting the decrease was increased
production in Australia where we realized a full quarter of production from the
Simpson field and first production from the Gibson and South Plato wells.
Realized oil prices increased $2.93 per barrel contributing $41 million to our
oil revenues.

As mentioned above, we closed all of our derivative positions during
October and November 2001. Amortization from the unwind of our derivative
positions increased reported prices by $.22 per barrel during the third quarter
of 2002. During the third quarter of 2001, realized losses from hedging
positions negatively impacted the Company's realized oil price by $.47 per
barrel.

Year-to-date oil production increased seven percent over the same period
last year, contributing $70 million to oil sales. Production in Australia
increased as a result of initial production from Simpson, Gibson and South
Plato. Egypt's production increased due to the acquisition and subsequent
drilling activity on properties we acquired late in the first quarter of 2001.
These increases more than offset the impact of the curtailed capital spending in
2002, the disposition of heavy oil properties in Canada in late 2001, and
downtime associated with Isidore in the U.S. Realized oil prices decreased $.94
per barrel, reducing oil sales by $37 million.

Amortization from the unwind of our derivative positions increased oil
prices by $.12 per barrel during the first nine months of 2002. During the first
nine months of 2001, realized losses from hedging positions negatively impacted
our realized oil price by $.57 per barrel.

21

Operating Expenses

The table below details our expenses.

Depreciation, Depletion and Amortization

Full-cost DD&A expense is driven by many factors including certain costs
incurred in the exploration, development, and acquisition of producing reserves,
production levels, estimates of proved reserve quantities and future
developmental costs. On an equivalent barrel basis, full-cost DD&A expense
increased $.21 per barrel of oil equivalent (boe), from $6.05 per boe in the
third quarter of 2001 to $6.26 per boe in 2002. This increase was primarily due
to higher average service costs over the last twelve months, that contributed to
higher drilling and finding costs in the U.S., plus transfers of unevaluated
costs to the full-cost pool since the third quarter 2001. The DD&A rate for the
U.S. increased $.27 per boe from $6.74 per boe, to $7.01 per boe. U.S. DD&A
accounts for almost half of our full-cost DD&A expense. For the first nine
months, our full-cost DD&A expense increased $.26 per boe to $6.27 per boe,
compared to the same period last year, for the reasons discussed above.

Impairments

During the second quarter of 2001, we recorded a $65 million impairment
($41 million after-tax) of unproved property costs in Poland and China.

During the first quarter of 2002, we recorded a $5 million impairment ($3
million after tax) of unproved property costs in Poland. No impairment was
recorded in the second and third quarter of 2002. At September 30, 2002, Apache
had $28 million in unproved property costs remaining in Poland. We will continue
to evaluate our operations, which may result in additional impairments.

Lease Operating Costs

LOE costs increased 14 percent when compared to the third quarter of 2001.
Increased repairs and maintenance on offshore platforms and facilities in the
Gulf Coast Region combined with increased workover activity in Canada and Egypt
led to the increase in costs. On an equivalent barrel basis, LOE increased $.69
per boe to $3.79. Sixty-eight percent of the increase on a boe basis is
attributable to the increase in costs while the remaining increase is the result
of lower production.

LOE costs increased 17 percent in the first nine months of 2002, compared
to the same period last year, for the reasons discussed above in addition to
increased workover activity in the Gulf Coast Region and the additional costs
related to Canadian and Egyptian properties acquired late in the first quarter
2001. On an equivalent barrel basis, LOE increased 15 percent to $3.67. The
increase in the LOE rate related to higher costs was slightly offset by
increased production.

22

Gathering and Transportation Costs

As a result of the consensus on Emerging Issues Task Force Issue 00-10,
"Accounting for Shipping and Handling Fees and Costs", third party gathering and
transportation costs have been reported as an operating cost instead of a
reduction of revenues as previously reported. This change increases revenues and
expenses by the same amount with no impact on income attributable to common
stock.

Severance and Other Taxes

Severance and other taxes decreased $2 million in the third quarter of 2002
when compared to the prior-year quarter, due primarily to a decline in property
and other taxes in Canada. The third quarter of 2001 included $2 million in
Saskatchewan resource surtax due to Canadian acquisitions. In addition, a
decline in U.S. severance taxes, attributable to lower U.S. oil and gas
production and associated revenues was largely offset by an increase in
Australian severance taxes associated with higher production and prices.
Severance and other taxes decreased $13 million in the first nine months of 2002
compared to the same period last year due to lower U.S. oil and gas production
revenues and for the reasons discussed above.

General and Administrative Expenses

Third quarter G&A expense was $3 million, or $.13 per boe, higher than the
comparable 2001 quarter. The higher 2002 boe rate is related to both higher
expenses and lower relative production. Unexpected expenses relating to employee
separation, litigation and amendments to our stock option plans coupled with
higher overall insurance costs accounted for 62 percent of the increase in rate,
with the balance production driven. Similarly, the 2002 year-to-date rate of
$.84 per boe was $.12 higher than the equivalent 2001 period.

Financing Costs, Net

Net financing costs for the third quarter of 2002 were flat compared to the
prior-year quarter. Gross interest expense decreased $5 million due primarily to
a lower average outstanding debt. This decrease was offset by a $5 million
decrease in capitalized interest driven by a decrease in the unproved property
balance. Had financing costs included preferred interests of subsidiaries, they
would have increased $1 million from the third quarter of 2001.

For the first nine months of 2002, net financing costs decreased eight
percent compared to the same period last year. Gross interest decreased $21
million due to lower average outstanding debt coupled with a lower average
effective rate. The impact of this decrease on net financing cost was partially
offset by a $14 million decrease in capitalized interest due to a lower unproved
property balance. Had financing costs included preferred interests of
subsidiaries, they would have increased $2 million from the comparable 2001
period.

23

OIL AND GAS CAPITAL EXPENDITURES

* Includes reimbursement from the Chinese government in 2001 for
previously paid costs.

In March 2001, we completed the acquisition of substantially all of Repsol
YPF's (Repsol) oil and gas concession interests in Egypt for approximately $447
million in cash, subject to normal post closing adjustments. The properties
include interests in seven Western Desert concessions and had estimated proved
reserves of 66 million barrels of oil equivalent (MMboe) as of the acquisition
date. We previously held interests in five of the seven concessions.

In March 2001, we also completed the acquisition of certain subsidiaries of
Fletcher Challenge Energy (Fletcher) for approximately $465 million in cash and
1.8 million restricted shares of Apache common stock issued to Shell Overseas
Holdings (valued at $55.49 per share), subject to normal post closing
adjustments. The transaction included properties located primarily in Canada's
Western Sedimentary Basin. Estimated proved reserves totaled 120.8 MMboe as of
the acquisition date. Apache assumed a liability of $103 million representing
the fair value of derivative instruments and fixed-price commodity contracts
entered into by Fletcher.

CAPITAL RESOURCES

Our primary cash needs are for exploration, development and acquisition of
oil and gas properties, repayment of principal and interest on outstanding debt
and payment of dividends. We fund our exploration and development activities
primarily through internally generated cash flows. We budget capital
expenditures based upon projected cash flows and we routinely adjust our capital
expenditures in response to changes in oil and natural gas prices and
corresponding changes in cash flow. We cannot accurately predict future oil and
gas prices.

Net Cash Provided by Operating Activities

Our net cash provided by operating activities during the first nine months
of 2002 totaled $1.0 billion, a decrease of 35 percent from $1.5 billion in the
first nine months of 2001. This decrease was due to lower oil and gas revenues
as a result of lower realized oil and gas prices as compared to last year, and
to a lesser extent, the impact of increases in LOE.

24

Preferred Interests of Subsidiaries

During 2001, several of our subsidiaries issued a total of $443 million
($441 million, net of issuance costs) of preferred stock and limited partner
interests to unrelated institutional investors. These funds were used to pay
down debt which increased Apache's available borrowing capacity. We pay a
weighted average return to the investors of 123 basis points above the
prevailing LIBOR interest rate. These subsidiaries are consolidated in the
accompanying financial statements. For the nine months of 2002, the subsidiaries
paid $10 million to investors, which is reflected as Preferred Interests of
Subsidiaries on the Statement of Consolidated Operations.

Debt

In April 2002, we issued $400 million principal amount, $397 million net of
discount, of senior unsecured 6.25-percent notes maturing on April 15, 2012. The
notes are redeemable, as a whole or in part, at our option, subject to a
make-whole premium. The proceeds were used to repay a portion of our outstanding
commercial paper and for general corporate purposes.

On June 3, 2002, we entered into a new $1.5 billion global credit facility
to replace our existing global and 364-day credit facilities. The new global
credit facility consists of four separate bank facilities: a $750 million
364-day facility in the United States; a $450 million five-year facility in the
United States; a $150 million five-year facility in Australia; and a $150
million five-year facility in Canada. The financial covenants of the global
credit facility require us to: (i) maintain a consolidated tangible net worth,
plus the aggregate amount of any non-cash write-downs, of at least $2.2 billion
as of September 30, 2002, adjusted for subsequent earnings, (ii) maintain an
aggregate book value for assets of Apache and certain subsidiaries, as defined,
on an unconsolidated basis of at least $2 billion as of September 30, 2002, and
(iii) maintain a ratio of debt to capitalization of not greater than 60 percent
at the end of any fiscal quarter. We were in compliance with all financial
covenants at September 30, 2002.

The five-year facilities are scheduled to mature on June 3, 2007 and the
364-day facility is scheduled to mature on June 1, 2003. The 364-day facility
allows us to convert outstanding revolving loans at maturity into one-year term
loans. We may request extensions of the maturity dates subject to approval of
the lenders. At our option, the interest rate is based on (i) the greater of (a)
The JPMorgan Chase Bank prime rate or (b) the federal funds rate plus one-half
of one percent, (ii) the London Interbank Offered Rate (LIBOR) plus a margin
determined by our senior long-term debt rating, or (iii) in the case of the U.S.
$450 million five-year facility, a margin that is determined by competitive bids
from participating banks. At September 30, 2002, the margin over LIBOR for
committed loans was .30 percent on the five-year facilities and .32 percent on
the 364-day facility. If the total amount of the loans borrowed under all of the
facilities equals or exceeds 33 percent of the total facility commitments, then
an additional .125 percent will be added to the margins over LIBOR. We also pay
a quarterly facility fee of .10 percent on the total amount of each of the
five-year facilities and .08 percent on the total amount of the 364-day
facility. The facility fees vary based upon our senior long-term debt rating.

The $450 million U.S. five-year facility and the $750 million U.S. 364-day
credit facility are used to support our commercial paper program.

Series C Preferred Stock

On May 15, 2002, we completed the mandatory conversion of our Series C
Preferred stock into approximately 6.2 million common shares.

LIQUIDITY

We had $167 million in cash and cash equivalents on hand at September 30,
2002, an increase of $132 million from December 31, 2001. Our ratio of current
assets to current liabilities at September 30, 2002 was 1.69 compared to 1.34 at
December 31, 2001.

We had $85 million in short-term securities (U.S. Government Agency Notes)
at September 30, 2002, which matured on October 15 and were used to reduce debt.

We believe that cash on hand, net cash generated from operations,
short-term investments and unused committed borrowing capacity under the global
credit facility will be adequate to satisfy our financial obligations

25

and liquidity needs. As of September 30, 2002, our available borrowing capacity
under the global credit facility was $1.2 billion.

CHINA

Apache China Corporation LDC was sued in an arbitration by Texaco China,
B.V. in September 2001. Texaco China later added Apache Bohai Corporation LDC to
the arbitration. The arbitration covers Texaco's claims for damages arising out
of Apache Bohai's alleged failure to drill three wells, prior to re-assignment
of the interest to Texaco. Apache China and Apache Bohai deny any liability.
Apache Bohai filed suit in federal district court, contending there is no right
to arbitration. The district court denied Apache's claim. Apache has filed with
the federal court of appeals to have the trial court's opinion reviewed and
reversed. That matter is currently pending, as is the arbitration.

FUTURE TRENDS

Our objective is to build a company of lasting value by pursuing profitable
growth through a combination of drilling and acquisitions. Our investment
decisions are subjected to strict rate of return criteria and generally fall in
the categories identified below, depending on which phase of the price and cost
cycle we may be in. Those categories include:

- exploiting our existing property base;

- acquiring properties to which we can add value; and

- drilling high-potential exploration prospects.

Exploiting Existing Asset Base

We seek to maximize the value of our existing asset base by increasing
production and reserves while reducing operating costs per unit. In order to
achieve these objectives, we rigorously pursue production enhancement
opportunities such as workovers, recompletions and moderate risk drilling, while
divesting marginal and non-strategic properties and identifying other activities
to reduce costs. Given the significant acquisitions and discoveries over the
last few years, we have an abundant inventory of exploitation opportunities.

Acquiring Properties to Which We Can Add Incremental Value

We seek to purchase reserves at appropriate prices by generally avoiding
auction processes, where we are competing against other buyers, and timing our
acquisitions to avoid the peak of the price cycle. Our aim is to follow each
acquisition with a cycle of reserve enhancement, property consolidation and cash
flow acceleration, facilitating asset growth and debt reduction. Inflated
acquisition prices since early 2001 caused us to sideline any significant
acquisition activities.

Investing in High-Potential Exploration Prospects

We seek to concentrate our exploratory investments in a select number of
international areas and to become one of the dominant operators in those
regions. We believe that these investments, although higher-risk, offer
potential for attractive investment returns and significant reserve additions.
Our international investments and exploration activities are a significant
component of our long-term growth strategy. They complement our domestic
operations, which are more development oriented.

As we entered 2002, natural gas prices were extremely volatile and the
impact of the September 11th attacks on an already faltering economy had created
uncertainty over demand for oil and gas. In order to maximize our financial
flexibility and preserve our "A-credit ratings", we curtailed our capital
expenditure plans by over half from prior year levels in favor of reducing debt.
A combination of debt reduction and strong earnings reduced our debt, including
preferred interests of subsidiaries and net of cash and marketable securities,
as a percentage of capitalization from 36.9 percent at year end 2001 to 33.5
percent at September 30, 2002. Strong commodity prices along with lower oilfield
service costs enabled us to increase drilling activity while continuing to build
financial flexibility in the third quarter. Accordingly, we have increased
drilling activity in all of our regions and currently

26

project to spend approximately $1 billion on exploration, development and
acquisition activities this year, up from our initial projection of
approximately $600 million.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Major market risk exposure continues to be the pricing applicable to our
oil and gas production. Realized pricing is primarily driven by the prevailing
worldwide price for crude oil and spot prices applicable to our United States
and Canadian natural gas production. Historically, prices received for oil and
gas production have been volatile and unpredictable.

Apache sells all of its Egyptian crude oil and natural gas to the Egyptian
General Petroleum Corporation (EGPC) for U.S. dollars. Weak economic conditions
in Egypt continue to impact the timeliness of receipts from EGPC; however, the
situation has not deteriorated since year-end and Apache continues to receive
payments.

The U.S. and Canadian energy markets continue to evolve into a single
energy market. In light of this continuing transformation, we adopted the U.S.
dollar as our functional currency in Canada, effective October 1, 2002. The U.S.
dollar is now the functional currency for all of our foreign operations.

The information set forth under "Commodity Risk", "Interest Rate Risk" and
"Foreign Currency Risk" in Item 7A of our annual report on Form 10-K for the
year ended December 31, 2001, is incorporated herein by reference. Information
about market risks for the nine months ended September 30, 2002 does not differ
materially except for "Interest Rate Risk".

The Company considers its interest rate risk exposure to be minimal as a
result of fixing interest rates on approximately 85 percent of the Company's
debt. At September 30, 2002, total debt included $300 million of floating-rate
debt. As a result, Apache's annual interest costs in 2002 will fluctuate based
on short-term interest rates on approximately 15 percent of its total debt
outstanding at September 30, 2002. Additionally, our preferred interests of
subsidiaries of $436 million is subject to fluctuations in short-term interest
rates. The impact on annual cash flow of a 10 percent change in the floating
interest rate, including our preferred interests in subsidiaries, (approximately
20 basis points) would be approximately $1.5 million.

ITEM 4 - CONTROLS AND PROCEDURES

Apache's certifying officers evaluated the effectiveness of our 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 company's disclosure controls to be adequate, providing
effective means to insure that we timely and accurately disclose the information
we are required to disclose under applicable laws and regulations. We also made
no significant changes in internal controls or any other factors that could
affect our internal controls since our most recent internal controls evaluation.

ITEM 5 - OTHER INFORMATION

During the quarterly period covered by this filing, the company's Audit
Committee approved the engagement of Ernst & Young for the following new or
continuing non-audit services: tax services, services in connection with
registration statements, consultation relating to new or changing rules,
acquisition and divestiture assistance, incentive compensation plan
consultation, litigation support, and computer systems security review.

FORWARD-LOOKING STATEMENTS AND RISK

Certain statements in this report, including statements of the future
plans, objectives, and expected performance of the Company, are forward-looking
statements that are dependent upon certain events, risks and uncertainties that
may be outside the Company'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

27

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 the
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. Although Apache may
make use of futures contracts, swaps, options and fixed-price physical contracts
to mitigate risk, fluctuations in oil and gas prices, or a prolonged
continuation of low prices, may adversely affect the Company's financial
position, results of operations and cash flows.

28

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information set forth in Note 11 to the Consolidated Financial
Statements contained in the Company's annual report on Form 10-K for
the year ended December 31, 2001 (filed with the SEC on March 22,
2002) is incorporated herein by reference.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

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

10.1 - Apache Corporation 401(k) Savings Plan, effective
August 1, 2002.

10.2 - Apache Corporation Money Purchase Retirement Plan,
dated August 1, 2002.

12.1 - Statement of computation of ratio of earnings to
fixed charges and combined fixed charges and
preferred stock dividends.

99.1 - Certification of Chief Executive Officer and Chief
Financial Officer.

(b) Reports filed on Form 8-K

There were no current reports on Form 8-K filed by Apache
during the fiscal quarter ended September 30, 2002.

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 CORPORATION

Dated: November 13, 2002 /s/ Roger B. Plank
--------------------------------------
Roger B. Plank
Executive Vice President and Chief
Financial Officer

Dated: November 13, 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 Corporation;

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, including its
consolidated subsidiaries, 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

Date: November 13, 2002

CERTIFICATIONS

I, G. Steven Farris, certify that:

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

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, including its
consolidated subsidiaries, 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

Date: November 13, 2002

EXHIBIT INDEX