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 June 30, 2003

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

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 June 30, 2003..........................161,797,486

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.

On December 18, 2002, the Company declared a five percent stock dividend
payable on April 2, 2003, to shareholders of record on March 12, 2003. Quarterly
share and per share information for 2002 have been restated to reflect this
stock dividend.

Reclassifications

Certain prior period amounts have been reclassified to conform with current
year presentations.

1. ACQUISITIONS

On January 13, 2003, Apache announced that it had entered into agreements
to purchase producing properties in the North Sea and Gulf of Mexico from
subsidiaries of BP p.l.c. (referred to collectively as "BP") for $1.3 billion,
with $670 million allocated to the Gulf of Mexico properties and $630 million
allocated to properties in the North Sea. The properties included estimated
proved reserves of 233.2 million barrels of oil equivalent (MMboe), 147.6 MMboe
located in the North Sea with the balance in the Gulf of Mexico. Both purchase
agreements were effective as of January 1, 2003. As is customary, Apache assumed
BP's abandonment obligation for the properties, which was considered in
determining the purchase price. Both the Gulf of Mexico and North Sea assets
acquired from BP were funded with available cash on hand, the issuance of 9.9
million shares of Apache common stock and borrowings under the Company's lines
of credit and commercial paper program. The offering of Apache's common stock
provided net proceeds of approximately $554 million, with the proceeds from
additional debt approximating $604 million.

Apache and BP closed the above referenced acquisition of the Gulf of Mexico
properties on March 13, 2003, which included BP's interest in 56 producing
fields, and 104 blocks. At closing, the $670 million purchase price was adjusted
for normal closing items and preferential rights exercised by third parties. The
exercise of preferential rights by third parties reduced the purchase price by
$73 million and estimated reserves by 9.6 MMboe. The purchase price was further
adjusted for various normal closing items, including revenues and expenditures
related to the properties for the period between the effective and closing
dates. As a result, cash consideration of $509 million was paid by Apache upon
closing. In a separate transaction closed February 21, 2003, Apache purchased
BP's interest in several other Gulf of Mexico properties with estimated proved
reserves of 2.1 MMboe for an adjusted purchase price of $15 million. Including
$4 million of transaction costs, total cash consideration for the two
acquisitions of Gulf of Mexico properties from BP totaled $528 million.

The acquisition of the U.K. North Sea properties closed on April 2, 2003,
at which time Apache paid a purchase price, adjusted for normal closing and
working capital adjustments, of $630 million. The acquisition of the North Sea
properties includes a 96 percent interest in the Forties Field and establishes a
new core area for the Company. In conjunction with the Forties acquisition,
Apache may be required to issue a letter of credit to BP to cover the present
value of related asset retirement obligations if the rating of the Company's
senior unsecured debt is lowered by both Moody's and Standard and Poor's from
its current ratings of A3 and A-, respectively. Should this occur, the initial
letter of credit amount would be 175 million British pounds. Apache has agreed
to sell all of the North Sea production from those properties over the next two
years to BP at a combination of fixed and market sensitive prices pursuant to a
contract entered into in connection with the North Sea purchase agreement.

6

The BP purchase prices were allocated to the assets acquired and
liabilities assumed based upon their estimated fair values as of the date of
acquisition, as follows:

* Property balance includes $12 million of transaction costs (U.S. - $4
million; North Sea - $8 million).

The following unaudited pro forma information shows the effect on the
Company's consolidated results of operations as if the acquisitions from BP
occurred on January 1 of each period presented. The pro forma information is
based in part on data provided by BP and on numerous assumptions and is not
necessarily indicative of future results of operations.

(1) Pro forma shares assume the issuance of 9.9 million common shares as of the
beginning of each period presented.

On July 3, 2003, Apache announced that it had completed the acquisition of
producing properties on the Outer Continental Shelf of the Gulf of Mexico from
Shell Exploration and Production Company (Shell) for $200 million, subject to
normal post-closing adjustments, including preferential rights. Prior to the
transaction, Morgan Stanley Capital Group, Inc. (Morgan Stanley) paid Shell $300
million to acquire an overriding royalty interest in a portion of the reserves
to be produced over the next four years. Shell's sale of an overriding royalty
interest to Morgan Stanley is commonly known in the industry as a volumetric
production payment (VPP). Under the terms of the VPP, Morgan Stanley is to
receive a fixed volume of oil and gas production over the four-year term. The
VPP reserves and production will not be recorded by Apache.

Apache will record estimated proved reserves of 124.6 billion cubic feet
(Bcf) of natural gas and 6.6 million barrels of oil. In addition, a $60 million
liability for the future cost to produce and deliver volumes subject to the VPP
will be recorded by the Company because the overriding royalties are not
burdened by production costs. This liability will be amortized as the volumes
are produced and delivered to Morgan Stanley. The purchase agreement was
effective as of July 1, 2003. The acquisition included interests in 26 fields
covering 50 blocks (approximately 209,000 acres) and interests in two onshore
gas plants. Apache will operate 15 of the fields with 91 percent of the
production. The purchase price was funded by borrowings under the Company's
lines of credit and commercial paper program.

2. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Apache uses a variety of strategies to manage its exposure to fluctuations
in commodity prices. As established by the Company's hedging policy, Apache
primarily enters into cash flow hedges in connection with selected acquisitions
to protect against commodity price volatility. The success of these acquisitions
is significantly influenced by Apache's ability to achieve targeted production
at forecasted prices. These hedges effectively reduce price risk on a portion of
the production from the acquisitions.

7

During the first quarter of 2003, in conjunction with the acquisitions from
BP and during the fourth quarter of 2002, in conjunction with the South
Louisiana properties acquisition, Apache entered into, and designated as cash
flow hedges, natural gas and crude oil fixed-price swaps and natural gas option
collars. These positions were entered into in accordance with the Company's
hedging policy and involved several counterparties which are rated A+ or better.
As of June 30, 2003, the outstanding positions of our cash flow hedges were as
follows:

In addition to the fixed-price swaps and option collars, Apache entered
into a separate crude oil physical sales contract with BP. The sales contract is
a normal purchase and sale under Statement of Financial Accounting Standards
(SFAS) No. 133 and, therefore, the Company has designated and accounted for the
contract under the accrual method. As of June 30, 2003, the outstanding terms of
the contract were as follows:

A reconciliation of the components of accumulated other comprehensive
income (loss) in the statement of consolidated shareholders' equity related to
Apache's derivative activities is presented in the table below:

Based on current market prices, the Company recorded an unrealized loss in
other comprehensive income of $89.9 million ($56.1 million after tax). This loss
will be realized in future earnings contemporaneously with the related sales of
natural gas and crude oil production applicable to specific hedges. A loss of
$63.6 million ($46.2 million after tax) will be realized over the next 12
months. However, these amounts could vary materially as a result of changes in
market conditions. There was no material ineffectiveness associated with the
hedges during the period.

3. DEBT

On May 15, 2003, Apache Finance Canada Corporation (Apache Finance Canada)
issued $350 million of 4.375 percent, 12-year, senior unsecured notes in a
private placement. The notes are irrevocably and unconditionally guaranteed by
Apache. Interest is payable semi-annually on May 15 and November 15 of each year
commencing on November 15, 2003. The notes were sold pursuant to Rule 144A and
Regulation S, and may not be offered or sold

8

in the United States absent registration or an applicable exemption from the
registration requirements of the Securities Act of 1933, as amended.

If changes in relevant tax laws occur that would require Apache Finance
Canada to pay additional amounts under the terms of the indenture, Apache
Finance Canada has the right to redeem the notes prior to maturity. In addition,
the notes are redeemable, as a whole or in part, at Apache Finance Canada's
option, subject to a make-whole premium. The proceeds were used to reduce bank
debt and outstanding commercial paper and for general corporate purposes.

4. CAPITAL STOCK

On January 22, 2003, the Company completed a public offering of 9.9 million
shares of Apache common stock, adjusted for the five percent common stock
dividend, including underwriters' over-allotment option, for net proceeds of
approximately $554 million. The proceeds were used to purchase producing
properties in the North Sea and the Gulf of Mexico from BP.

5. FOREIGN CURRENCY TRANSLATION

The Company records foreign currency translation gains and losses related
to deferred taxes as a component of its provision for income taxes, while all
other foreign currency gains and losses are reflected in other revenues. For the
first six months of 2003, the Company recorded additional deferred tax expense
of $56 million as a result of the weaker U.S. dollar. Net gains and losses
reflected in other revenues totaled $.5 million for the six-month period.

6. 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:

9

7. STOCK-BASED COMPENSATION

On June 30, 2003, the Company had several stock-based employee compensation
plans. The Company accounts for those plans under the recognition and
measurement principles of Accounting Principals Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. Under
this method, the Company records no compensation expense for stock options
granted when the exercise price of those options is equal to or greater than the
market price of the Company's common stock on the date of grant, unless the
awards are subsequently modified. The following table illustrates the effect on
income attributable to common stock and earnings per share if the Company had
applied the fair value recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," as amended, to stock-based employee compensation for
the Company's option and performance plans.

The effects of applying SFAS No. 123, as amended, in this pro forma
disclosure should not be interpreted as being indicative of future effects. SFAS
No. 123, as amended, does not apply to awards prior to 1995, and the extent and
timing of additional future awards cannot be predicted.

During the second quarter of 2003, the Company issued a total of 901,105
stock appreciation rights (SARs) to non-executive employees in lieu of stock
options. The Company issued 60,500 shares of restricted common stock to
executives in May of 2003. The SARs will be settled in cash upon exercise, if
the price on the date of exercise is equal to or greater than the closing price
of the Company's stock on the date of grant. The vesting period is over four
years and the Company will record compensation expense on the vested SARs
outstanding as the price of the Company's common stock fluctuates. The related
second-quarter expense was $.3 million after tax.

8. SUPPLEMENTAL CASH FLOW INFORMATION

The following table provides supplemental disclosure of cash flow
information:

10

9. 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, asset retirement obligation
accretion, international impairments, lease operating costs, gathering and
transportation costs, and severance and other taxes.

10. LITIGATION

In June 2003, Apache and Cinergy Marketing and Trading, LLC (Cinergy)
agreed to terminate their agreement concerning marketing of Apache's U.S.
natural gas production and to dismiss the arbitration between them. The parties
reached an amicable settlement, the amounts of which were immaterial to Apache's
financial position and results of operations. Consequently, the Company began
marketing its U.S. natural gas production previously marketed by Cinergy
beginning with July 2003 production.

11. NEW ACCOUNTING PRONOUNCEMENTS

Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting
for Asset Retirement Obligations," which resulted in an increase to net oil and
gas properties of $410 million and additional liabilities related to asset
retirement obligations of $369 million. These entries reflect the asset
retirement obligation of Apache had the provisions of SFAS No. 143 been applied
since inception and resulted in a non-cash cumulative-effect increase to
earnings of $27 million ($41 million pretax). Prior to adoption of SFAS No. 143,
abandonment obligations were accrued over the productive lives of the assets
through depreciation, depletion and amortization of oil and gas properties
without recording a separate liability for such amounts.

11

The following table describes all changes to the Company's asset retirement
obligation liability since adoption (in thousands):

Asset retirement obligation upon adoption on January 1, 2003 ....... $ 368,537
Liabilities incurred ............................................... 331,692
Liabilities settled ................................................ (4,583)
Accretion expense .................................................. 15,758
---------
Asset retirement obligation at June 30, 2003 ....................... $ 711,404
=========

Liabilities incurred during the period primarily relate to obligations
assumed in connection with the Gulf of Mexico and North Sea properties acquired
from BP. Liabilities settled during the period relate to individual properties
plugged and abandoned or sold during the period. The pro forma asset retirement
obligation would have been approximately $334 million at January 1, 2002 had the
Company adopted SFAS No. 143 on January 1, 2002. For the three and six month
periods ended June 30, 2002, the pro forma effect on Income Attributable to
Common Stock and Net Income per Common Share would not have been materially
different than reported amounts had SFAS No. 143 been adopted by the Company on
January 1, 2002.

In January 2003, the FASB issued Interpretation No., 46, "Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51." Interpretation No. 46 requires a company to consolidate a variable
interest entity (VIE) if the company has a variable interest (or combination of
variable interests) that is exposed to a majority of the entity's expected
losses if they occur, receive a majority of the entity's expected residual
returns if they occur, or both. In addition, more extensive disclosure
requirements apply to the primary and other significant variable interest owners
of the VIE. This interpretation applies immediately to VIEs created after
January 31, 2003, and to VIEs in which an enterprise obtains an interest after
that date. It is also effective for the first fiscal year or interim period
beginning after June 15, 2003, to VIEs in which a company holds a variable
interest that is acquired before February 1, 2003. The guidance regarding this
interpretation is extremely complex and, although we do not believe we have an
interest in a VIE, the Company continues to assess the impact, if any, this
interpretation will have on the Company's consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards on how companies classify and measure certain financial
instruments with characteristics of both liabilities and equity. The statement
requires that the Company classify as liabilities the fair value of all
mandatorily redeemable financial instruments that had previously been recorded
as equity or elsewhere in the consolidated financial statements. This statement
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise effective for all existing financial instruments beginning
in the third quarter of 2003. Apache is continuing to assess the impact of
adopting this statement, which may require a significant portion, if not all, of
its Preferred Interests of Subsidiaries to be reclassified as a component of
debt. In any event, the Company has in the past provided pro forma information
about how viewing the Company's Preferred Interests of Subsidiaries as debt
would impact its debt-as-a-percentage-of-capitalization calculation (see page 2
of Annual Report on Form 10-K for the year ended December 31, 2002). Preferred
Interests related to any portion reclassified would prospectively be reflected
as interest expense instead of Preferred Interests of Subsidiaries in the
Consolidated Statement of Operations.

12. SUPPLEMENTAL GUARANTOR INFORMATION

Apache Finance Pty Ltd. (Apache Finance Australia) and 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's consolidated financial
statements. As such, the condensed consolidating financial statements should be
read in conjunction with the financial statements of Apache and subsidiaries and
notes thereto of which this note is an integral part.

12

APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED JUNE 30, 2003

13

APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED JUNE 30, 2002

14

APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2003

15

APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2002

16

APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003

17

APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002

18

APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2003

19

APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2002

20

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

OVERVIEW

Apache reported earnings totaling $580 million for the first half of 2003,
establishing a new record for a six-month period and representing a 165 percent
increase over the prior-year period. Cash provided by operating activities
totaled $1.2 billion and nearly doubled the comparable 2002 period, establishing
a six-month period record. Results for the second quarter of 2003, while down
from our record first quarter, were nonetheless strong.

Several milestones were achieved during the second quarter, as we
assimilated the assets acquired from BP p.l.c. (BP) into our operations:

o Apache achieved record production of approximately 429,000 barrels of
oil equivalent (boe) per day, an increase of 26 percent from the
prior-year period. Oil production increased 40 percent to 211,701
barrels per day, while daily gas production rose 15 percent to 1.25
billion cubic feet (Bcf).

o Second-quarter oil and gas production revenues crossed the billion
dollar threshold, another quarterly-first for Apache.

o Fifty-four percent of our equivalent production came from outside the
U.S., as we commenced operations in the U.K. North Sea, continuing the
multi-year trend to establish a diversified base of production and
reserves.

o Single-day gross oil production records were set in Egypt and from the
Legendre field offshore Western Australia.

We had numerous drilling successes during the quarter, the most significant
of which was the Legendre North 4H, which flowed up to 25,000 gross barrels per
day and helped establish the daily production record in Australia mentioned
above. We also announced several significant discoveries in July which are
discussed below.

During the quarter, the Company issued $350 million of 12-year unsecured
notes at a 4.375-percent coupon rate; and filed a shelf registration with the
Securities and Exchange Commission that, when effective, will allow Apache to
sell up to $1.5 billion in stock and debt securities. Proceeds from the 12-year
unsecured notes were used to reduce bank debt and outstanding commercial paper,
and for general corporate purposes.

We had a very active first-half, and at mid-year we are encouraged by the
outlook for the remainder of 2003. Current NYMEX futures markets show oil and
natural gas prices remaining above historical trends for the balance of the
year, at a time in which Apache is establishing new production records. While we
are very pleased with our first-half results, our July 2003 acquisition and
several other important events (discussed below) are not reflected in our
reported results. Based on the expected impact of these events and our existing
production profile, we believe we are well positioned for the second half of
2003.

Below are several important events that will play a pivotal role in
defining not only the second half of the year but Apache's future for years to
come:

o Consistent with our policy of continued expansion through selective
acquisitions, Apache consummated an agreement effective July 1, 2003
with Shell Exploration and Production Company (Shell) to acquire
interests in 26 oil and gas fields on the outer Continental Shelf of
the Gulf of Mexico and two onshore gas plants for $200 million. Prior
to the transaction, Morgan Stanley Capital Group, Inc. (Morgan
Stanley) paid Shell $300 million to acquire an overriding royalty
interest in a portion of the reserves to be produced over the next
four years. Shell's sale of an overriding royalty interest to Morgan
Stanley is commonly known in the industry as a volumetric production
payment (VPP). Under the terms of the VPP, Morgan Stanley is to
receive a fixed volume of oil and gas production over the four-year
term. The VPP reserves and production will not be recorded by Apache.
In addition, a $60 million liability for the future cost to produce
and deliver volumes subject to the VPP will be recorded by the Company
because the overriding royalties are not burdened by production costs.
This liability will be amortized as the volumes are produced and
delivered to Morgan Stanley. Subject to preferential rights, this
acquisition will add approximately 124.6 Bcf of natural gas and 6.6
million barrels of oil to Apache's reserves. We estimate it

21

will add an average of 70 million cubic feet (MMcf) of natural gas and
4,600 barrels of oil to our daily production in the second half of
2003.

o Apache also began to market its U.S. natural gas effective with July
2003 production. With our North American daily natural gas production
exceeding one Bcf, we felt it was prudent to bring this responsibility
back in-house.

o Production was initiated on the Zhao Dong block in the Bohai Bay,
offshore China in mid-July. Gross production is projected to peak at
22,000 barrels a day during the first quarter of 2004.

o In July 2003, we announced two important exploration wells in Egypt,
the Qasr-1X on the Khalda Concession and the Alexandrite-1X on the
Matruh Concession. The Qasr-1X well tested at a combined rate of 51.8
MMcf of natural gas and 2,688 barrels of condensate per day from two
zones. One interval on the Alexandrite-1X tested at a combined rate of
20 MMcf and 1,683 barrels of condensate per day.

o In July 2003, we announced that our Ravensworth-1 well discovered oil
in the Exmouth Sub-Basin offshore Western Australia. This well creates
a new play for Apache in an oil-prone area south of existing
operations in the Carnarvon Basin and adds a new dimension to our
exploration program offshore Western Australia.

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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.

23

Natural Gas Revenues

The Company's second-quarter 2003 natural gas production increased 159
million cubic feet per day (MMcf/d), compared to the same period last year,
which increased natural gas revenues by $67 million. Production in the U.S.
climbed 187 MMcf/d, concentrated in the Gulf Coast region. Production in the
Gulf Coast region includes production from the Gulf of Mexico properties
acquired from BP in the first quarter of 2003 and production from the South
Louisiana properties acquired in the fourth quarter of 2002. These increases
offset natural declines in mature fields and production declines associated with
well performance and facility downtime. A successful workover and recompletion
program, particularly offshore, helped to stem the natural declines in the U.S.
In Australia, a gas contract expired in October 2002, resulting in a net
decrease in production of 20 MMcf/d compared to the second quarter of 2002.
Higher natural gas prices contributed $159 million to second-quarter worldwide
natural gas revenues.

Apache uses a variety of strategies to manage its exposure to fluctuations
in natural gas prices, including fixed-price physical contracts and derivatives.
Approximately eight percent of our second quarter 2003 U.S. natural gas
production was subject to long-term fixed-price physical contracts, down from 11
percent in the second quarter of 2002. We continue to amortize the unrealized
gains and losses of derivative positions closed in October and November 2001,
which were negligible in the second quarter of 2003. The following table shows
the impact on average prices of each of these items:

Year-to-date natural gas production increased seven percent compared to the
same period last year, increasing our natural gas revenues by $70 million.
Production rates in the U.S. were higher and production rates in Australia were
lower as discussed above. Canada saw a marginal decline in production, while
Egypt's production was flat. Natural gas prices increased 86 percent increasing
natural gas revenues by $450 million.

Approximately 10 percent of our first six month 2003 domestic natural gas
production was subject to long-term fixed-price physical contracts, down from 11
percent in the 2002 period.

Crude Oil Revenues

The Company's second-quarter 2003 oil production increased 60,221 barrels
per day (b/d), increasing second-quarter crude oil revenues by $144 million.
Production growth was concentrated in the Gulf Coast region and the North Sea,
which benefited by the acquisitions discussed above. Australia and Egypt also
contributed to the production growth as new production from drilling and
workovers offset natural declines. A six percent increase in oil price
contributed $19 million to crude oil revenues.

Apache also manages its exposure to fluctuations in crude oil prices using
derivatives. We continue to amortize the unrealized gains and losses over the
original production life of derivative positions closed in October and November
2001. The following table shows the impact on prices of each of these items:

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Year-to-date oil production increased 19 percent for the reasons discussed
above, contributing $153 million to oil sales. Realized oil prices rose 24
percent, increasing oil sales by $153 million.

Operating Expenses

The table below presents a detail of our expenses:

Depreciation, Depletion and Amortization

Apache's 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
development and abandonment costs. On an equivalent barrel basis, full-cost DD&A
expense increased $.23 from $6.30 per boe in the second quarter of 2002 to $6.53
per boe in 2003. The increase in the worldwide rate was driven by rate increases
in Egypt and Australia, and the addition of the North Sea properties. Egypt's
rate was impacted by volume variances related to the dynamics of the Production
Sharing Agreement and increases in estimated future development cost. In
Australia, costs incurred for several long-lead development projects coupled
with recent reserve additions at higher than historical costs caused the rate
increase. The North Sea properties carry a higher DD&A rate than our historical
worldwide rate.

Lease Operating Costs

LOE increased $74 million compared to last year's second quarter. Eighty
percent of the increase ($59 million) in absolute costs was related to the
acquisition of Gulf of Mexico and North Sea properties from BP and of South
Louisiana properties in the fourth quarter of 2003. Canada saw an increase of
$13 million primarily related to acquisitions completed in the second half of
2002, higher electricity rates, and the impact of a weaker U.S. dollar. The
Company also had a higher level of workover activity compared to the prior year.

LOE increased 44 percent, or $97 million in the first half of 2003 compared
to the first half of 2002. As indicated above, 63 percent of the increase in
absolute costs was related to the BP and South Louisiana acquisitions. The
remaining balance was primarily related to the increase in Canada and increased
workover activity.

Gathering and Transportation Costs

Gathering and transportation costs include amounts paid by Apache to third
parties to transport oil and gas to a purchaser-specified delivery point. Such
costs vary based on the volume and distance shipped, and the fee charged by the
transporter, which may be price sensitive. During the second quarter of 2003,
the Company incurred $4 million more costs than in the comparable 2002 quarter,
$3 million of which related to the North Sea. During the first half of 2003,
gathering and transportation costs were $8 million more than in the first half
of 2002. The higher year-over-year costs were from the North Sea ($3 million),
Canada ($4 million) and the U.S. ($1 million).

25

Severance and Other Taxes

Severance and other taxes, which generally are based on a percentage of oil
and gas production revenues, increased $15 million in the second quarter of 2003
compared to the same quarter last year. Severance taxes increased $7 million as
a result of increased revenues. Other taxes were $8 million higher than the 2002
quarter. Six million dollars of the increase was related to the petroleum
revenue tax (PRT) on the North Sea properties acquired from BP. The remaining $2
million increase was attributable to higher Saskatchewan production tax expense
and foreign currency losses related to the weaker U.S. dollar.

Severance and other taxes were $25 million higher in the first half of 2003
than in the first half of 2002. Severance tax increased $17 million as a result
of higher revenues. Other taxes include an increase of $2 million in Canadian
tax and $6 million in North Sea PRT tax as discussed above.

General and Administrative Expense

Even though the Company acquired over a billion dollars in assets from BP,
our second-quarter 2003 G&A costs were only $3 million higher than the year-ago
quarter. The additional $3 million resulted from transition costs incurred on
the Gulf of Mexico properties acquired from BP and incremental G&A related to
North Sea operations. On a boe basis, our G&A costs were $.12 per boe lower than
the year-ago quarter, driven by the 26 percent increase in production, discussed
earlier.

On a year-to-date basis, G&A costs were $5 million higher than the
comparable period in 2002. Forty-two percent of the increase was associated with
G&A costs related to the acquisitions from BP discussed above. Eighteen percent
was related to the increase in the size of our gas marketing department
necessary to support the decision to market our U.S. natural gas beginning in
July 2003. The balance was spread among several departments, consistent with our
growth.

Financing Costs, Net

Net financing costs for the second quarter of 2003 decreased $2 million
(five percent) compared to the prior-year quarter, driven by an increase in
capitalized interest resulting from a higher unproved property balance. Had
financing costs included preferred interests of subsidiaries, they would have
decreased $3 million compared to the second quarter of 2002.

For the first half of 2003, net financing costs decreased $2 million (three
percent) compared to the same period in 2002. Higher unproved property balances
drove a $3 million increase in capitalized interest which was slightly offset by
an increase in gross interest of $1 million. The increase in gross interest
resulted from a slightly higher average interest rate offset by lower average
outstanding debt. Had financing costs included preferred interests of
subsidiaries, they would have decreased $4 million when compared to the same
period in 2002.

Provision for Income Taxes

Second-quarter 2003 income tax expense increased $135 million or 142
percent over the comparable prior-year quarter. The increase is related to both
a higher net income before taxes in the 2003 quarter and additional deferred tax
expense recognized on certain foreign operations as a result of the weaker U.S.
dollar. Our effective tax rate in the second quarter of 2003 increased to 48.51
percent from 39.39 percent in the 2002 quarter. For the first half of 2003,
income tax expense increased $300 million or 219 percent compared to the first
half of 2002 for the reasons discussed above. Our effective tax rate was 43.99
percent for the first half of 2003 compared to 37.66 percent in 2002. The
additional deferred tax expense related to changes in foreign currency exchange
rates totaled $51 million for the second quarter of 2003 and $56 million for the
first half of 2003.

26

OIL AND GAS CAPITAL EXPENDITURES

CAPITAL RESOURCES

Apache's primary cash needs are for exploration, development and
acquisition of oil and gas properties, operating expenses, repayment of
principal and interest on outstanding debt, and payment of dividends. The
Company funds its exploration and development activities primarily through
internally generated cash flows. Apache budgets capital expenditures based upon
projected cash flows and routinely adjusts its capital expenditures in response
to changes in oil and natural gas prices and corresponding changes in cash flow.
The Company cannot accurately predict future oil and gas prices.

Net Cash Provided by Operating Activities

Apache's net cash provided by operating activities during the first half of
2003 totaled $1.2 billion, an increase of 96 percent from $624 million in the
first half of 2002. This increase generally reflects the impact of higher prices
on oil and gas production revenues and higher production levels relative to the
prior-year period.

LIQUIDITY

The Company had $41 million in cash and cash equivalents on hand at June
30, 2003, down from $52 million at December 31, 2002. Apache's ratio of current
assets to current liabilities at June 30, 2003 was 1.28 compared to 1.44 at
December 31, 2002.

On January 22, 2003, the Company completed a public offering of 9.9 million
shares of Apache common stock, adjusted for the five percent common stock
dividend, including underwriters' over-allotment option, for net proceeds of
approximately $554 million. The proceeds were used toward Apache's acquisition
from BP of producing properties in the North Sea and the Gulf of Mexico.

Apache believes that cash on hand, net cash generated from operations,
short-term investments, and unused committed borrowing capacity under its $1.5
billion global credit facility will be adequate to satisfy future financial
obligations and liquidity needs. The $750 million 364-day U.S. credit facility,
which was scheduled to mature on June 1, 2003, was extended on the same terms
for an additional one-year period and is currently scheduled to mature on May
28, 2004. As of June 30, 2003, Apache's available borrowing capacity under its
global credit facility was $1.4 billion.

27

Occasionally, the Company accesses capital markets to fund acquisitions,
repay debt, and enhance liquidity. On May 15, 2003, Apache Finance Canada
Corporation (Apache Finance Canada) issued $350 million of 4.375 percent,
12-year, senior unsecured notes in a private placement. The notes are
irrevocably and unconditionally guaranteed by Apache. Interest is payable
semi-annually on May 15 and November 15 of each year commencing on November 15,
2003. The notes were sold pursuant to Rule 144A and Regulation S, and may not be
offered or sold in the United States absent registration or an applicable
exemption from the registration requirements of the Securities Act of 1933, as
amended. If changes in relevant tax laws occur that would require Apache Finance
Canada to pay additional amounts under the terms of the indenture, Apache
Finance Canada has the right to redeem the notes prior to maturity. In addition,
the notes are redeemable, as a whole or in part, at Apache Finance Canada's
option, subject to a make-whole premium. The proceeds were used to reduce bank
debt and outstanding commercial paper and for general corporate purposes.

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 actively 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, including the properties recently acquired from BP and Shell, we
have an abundant inventory of exploitation opportunities.

Acquiring Properties to Which We Can Add Value

We seek to purchase reserves at appropriate prices by generally avoiding
auction processes, where we are competing against other buyers. 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.

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.

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.

28

Apache sells all of its Egyptian crude oil and natural gas production 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.

U.S. and Canadian energy markets continue to evolve into a single energy
market. In light of this ongoing 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, 2002, is incorporated herein by reference. Information
about market risks for the quarter ended June 30, 2003 does not differ
materially from the disclosure in our 2002 Form 10-K, except as noted below.

The Company considers its interest rate risk exposure to be minimal as a
result of fixing interest rates on approximately 93 percent of the Company's
debt. At June 30, 2003, total debt included $158 million of floating-rate debt.
As a result, Apache's annual interest costs in 2003 will fluctuate based on
short-term interest rates on approximately seven percent of its total debt
outstanding at June 30, 2003. Additionally, our preferred interests of
subsidiaries of $438 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 of subsidiaries, would be
approximately $1.5 million.

On June 30, 2003, the Company had open natural gas derivative positions
with a fair value of $(65.5) million. A 10 percent increase in natural gas
prices would change the fair value by $(57.8) million. A 10 percent decrease in
prices would change the fair value by $56.9 million. The Company also had open
oil price swap positions with a fair value of $(22.7) million. A 10 percent
increase in oil prices would change the fair value by $(32.8) million. A 10
percent decrease in oil prices would change the fair value by $32.8 million.
Notional volumes associated with the Company's derivative contracts are shown in
Note 2 to the Company's consolidated financial statements.

ITEM 4 - CONTROLS AND PROCEDURES

G. Steven Farris, the Company's President, Chief Executive Officer and
Chief Operating Officer, and Roger B. Plank, the Company's Executive Vice
President and Chief Financial Officer, 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, the
Company's disclosure controls were found 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. Also, we made no
significant changes in internal controls or any other factors that could affect
our 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 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 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.

29

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, 2002 (filed with the Securities and
Exchange Commission on March 25, 2003) 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

The Company's annual meeting of stockholders was held in Houston,
Texas at 10:00 a.m. local time, on Thursday, May 1, 2003. Proxies for
the meeting were solicited pursuant to Regulation 14 under the
Securities Exchange Act of 1934, as amended. There was no
solicitation in opposition to the nominees for election as directors
as listed in the proxy statement, and all nominees were elected.

Out of a total of 153,867,875 shares of the Company's common stock
outstanding and entitled to vote, 138,682,470 shares were present at
the meeting in person or by proxy, representing 90.1 percent. Matters
voted upon at the meeting were as follows:

Election of five directors to serve on the Company's board of
directors. Mr. Bohen, Mr. Lawrence, Mr. Patton, Mr. Pitman, and
Mr. Precourt were elected to serve until the annual meeting in
2006. The vote tabulation with respect to each nominee was as
follows:

ITEM 5. OTHER INFORMATION

None

30

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

10.1 - Apache Corporation Non-Employee Directors'
Compensation Plan, as amended and restated May 1,
2003, effective July 1, 2003.

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

31.1 - Certification of Chief Executive Officer.

31.2 - Certification of Chief Financial Officer.

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

(b) Reports filed on Form 8-K

The following current reports on Form 8-K were filed by Apache
during the fiscal quarter ended June 30, 2003:

Item 2 - Acquisition or Disposition of Assets - dated March
18, 2003, filed April 17, 2003

On March 18, 2003 and April 2, 2003, Apache announced the
closings of acquisitions from subsidiaries of BP p.l.c. of
interests in 61 producing fields, including 113 blocks located
in the Gulf of Mexico and two producing fields in the North
Sea. Upon closing, Apache paid a purchase price, adjusted for
normal closing and working capital adjustments and
preferential purchase rights, of $509 million for the Gulf of
Mexico properties and $630 million for the North Sea assets.

Amendment No. 1 on Form 8-K/A to Form 8-K dated March 18, 2003

On June 16, 2003, under Item 7 - Financial Statements, Pro
Forma Financial Information and Exhibits, Apache filed the
required financial statement and pro forma financial
information in connection with Apache's acquisition of
interests in producing fields located in the Gulf of Mexico
and in the North Sea.

Item 5 - Other Events - dated May 15, 2003, filed May 16, 2003

Apache announced the closing of a private offering of $350
million principal amount of 4.375% Notes due 2015, to be
issued by Apache Finance Canada Corporation, an Apache
subsidiary. The notes will be irrevocably and unconditionally
guaranteed by Apache and will be sold under Rule 144A and
offshore under Regulation S.

Item 5 - Other Events - dated June 24, 2003, filed July 14,
2003

On June 24, 2003, Apache announced (i) that it will begin
directly marketing its U.S. natural gas production, beginning
with July 2003 production and (ii) the termination of
marketing arrangements with Cinergy Marketing and Trading, LLC
and dismissal of arbitration pending between Apache and
Cinergy. On July 3, 2003, Apache announced that it had
acquired producing properties located in the Gulf of Mexico
from Shell Exploration and Production Company for $200
million, subject to normal post-closing adjustments, including
the exercise of preferential purchase rights. The properties
were subject to a volumetric production payment, which was
sold by Shell to Morgan Stanley Capital Group, Inc. for $300
million.

31

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: August 13, 2003 /s/ Roger B. Plank
--------------------------------------
Roger B. Plank
Executive Vice President and
Chief Financial Officer

Dated: August 13, 2003 /s/ Thomas L. Mitchell
--------------------------------------
Thomas L. Mitchell
Vice President and Controller
(Chief Accounting Officer)

INDEX TO EXHIBITS