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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, 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
Number of shares of Registrant's common stock, outstanding as of October 31,
2003 162,037,932
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
APACHE CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
(UNAUDITED)
FOR THE QUARTER FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
(In thousands, except per common share data)
REVENUES AND OTHER:
Oil and gas production revenues..................... $ 1,110,015 $ 655,917 $ 3,129,507 $ 1,837,570
Other............................................... (5,474) (10,728) (4,001) (8,070)
------------ ------------ ------------ ------------
1,104,541 645,189 3,125,506 1,829,500
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Depreciation, depletion and amortization............ 292,885 208,788 779,590 630,617
Asset retirement obligation accretion............... 11,342 - 27,100 -
International impairments........................... - - - 4,600
Lease operating costs............................... 194,574 116,314 514,995 339,544
Gathering and transportation costs.................. 16,948 9,869 43,940 29,214
Severance and other taxes........................... 41,587 16,064 98,883 48,769
General and administrative.......................... 34,692 25,463 93,097 78,830
Financing costs:
Interest expense................................. 48,784 38,787 127,908 117,120
Amortization of deferred loan costs.............. 557 530 1,624 1,330
Capitalized interest............................. (14,222) (10,029) (38,072) (30,493)
Interest income.................................. (1,247) (1,215) (2,749) (3,427)
------------ ------------ ------------ ------------
625,900 404,571 1,646,316 1,216,104
------------ ------------ ------------ ------------
PREFERRED INTERESTS OF SUBSIDIARIES..................... 1,976 3,922 8,668 12,584
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES.............................. 476,665 236,696 1,470,522 600,812
Provision for income taxes.......................... 199,704 90,168 636,883 227,302
------------ ------------ ------------ ------------
INCOME BEFORE CHANGE IN ACCOUNTING
PRINCIPLE............................................. 276,961 146,528 833,639 373,510
Cumulative effect of change in accounting principle,
net of income tax................................ - - 26,632 -
------------ ------------ ------------ ------------
NET INCOME.............................................. 276,961 146,528 860,271 373,510
Preferred stock dividends........................... 1,420 1,406 4,260 9,395
------------ ------------ ------------ ------------
INCOME ATTRIBUTABLE TO COMMON STOCK..................... $ 275,541 $ 145,122 $ 856,011 $ 364,115
============ ============ ============ ============
BASIC NET INCOME PER COMMON SHARE:
Before change in accounting principle............... $ 1.70 $ 0.96 $ 5.15 $ 2.46
Cumulative effect of change in accounting principle. - - 0.17 -
------------ ------------ ------------ ------------
$ 1.70 $ 0.96 $ 5.32 $ 2.46
============ ============ ============ ============
DILUTED NET INCOME PER COMMON SHARE:
Before change in accounting principle............... $ 1.69 $ 0.95 $ 5.11 $ 2.42
Cumulative effect of change in accounting principle. - - 0.16 -
------------ ------------ ------------ ------------
$ 1.69 $ 0.95 $ 5.27 $ 2.42
============ ============ ============ ============
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)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2003 2002
------------- -------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... $ 860,271 $ 373,510
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization................................ 779,590 630,617
Asset retirement obligation accretion................................... 27,100 -
Provision for deferred income taxes..................................... 352,479 83,271
International impairments............................................... - 4,600
Cumulative effect of change in accounting principle..................... (26,632) -
Other................................................................... 19,686 (11,936)
Changes in operating assets and liabilities:
(Increase) decrease in receivables...................................... (75,366) (72,939)
(Increase) decrease in inventories...................................... (3,680) (526)
(Increase) decrease in drilling advances and other...................... (937) (18,383)
(Increase) decrease in deferred charges and other....................... (22,046) 961
Increase (decrease) in accounts payable................................. 61,612 61,459
Increase (decrease) in accrued expenses................................. 142,089 (9,981)
Increase (decrease) in advances from gas purchasers..................... (11,667) (10,437)
Increase (decrease) in deferred credits and noncurrent liabilities...... (23,390) (20,947)
------------- -------------
Net cash provided by operating activities........................... 2,079,109 1,009,269
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment........................................... (1,115,349) (747,216)
Acquisition of BP properties.................................................. (1,154,962) -
Acquisition of Shell properties............................................... (201,813) -
Acquisition of Occidental properties.......................................... (22,000) (11,000)
Proceeds from sales of oil and gas properties................................. 16,202 -
Proceeds from sale of short-term investments.................................. - 17,006
Other, net.................................................................... (44,302) (24,506)
------------- -------------
Net cash used in investing activities............................... (2,522,224) (765,716)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings.......................................................... 1,769,658 1,246,296
Payments on long-term debt.................................................... (1,414,929) (1,327,471)
Dividends paid................................................................ (51,967) (53,059)
Common stock activity......................................................... 574,349 27,407
Treasury stock activity, net.................................................. 4,275 1,861
Cost of debt and equity transactions.......................................... (4,520) (6,741)
Repurchase of preferred interests of subsidiaries............................. (443,000) -
------------- -------------
Net cash provided by (used in) financing activities................. 433,866 (111,707)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................. (9,249) 131,846
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................................... 51,886 35,625
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD....................................... $ 42,637 $ 167,471
============= =============
The accompanying notes to consolidated financial statements
are an integral part of this statement.
2
APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2003 2002
--------------- ---------------
(In thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 42,637 $ 51,886
Receivables, net of allowance........................................ 619,508 527,687
Inventories.......................................................... 126,180 109,204
Drilling advances.................................................... 31,509 45,298
Prepaid assets and other............................................. 49,505 32,706
--------------- ---------------
869,339 766,781
--------------- ---------------
PROPERTY AND EQUIPMENT:
Oil and gas, on the basis of full cost accounting:
Proved properties................................................. 15,702,029 12,827,459
Unproved properties and properties under
development, not being amortized............................... 1,033,869 656,272
Gas gathering, transmission and processing facilities................ 804,194 784,271
Other................................................................ 230,007 194,685
--------------- ---------------
17,770,099 14,462,687
Less: Accumulated depreciation, depletion and amortization.......... (6,646,795) (5,997,102)
--------------- ---------------
11,123,304 8,465,585
--------------- ---------------
OTHER ASSETS:
Goodwill, net........................................................ 189,252 189,252
Deferred charges and other........................................... 58,150 38,233
--------------- ---------------
$ 12,240,045 $ 9,459,851
=============== ===============
The accompanying notes to consolidated financial statements
are an integral part of this statement.
3
APACHE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2003 2002
--------------- ---------------
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................................... $ 284,941 $ 214,288
Accrued operating expense............................................ 83,133 47,382
Accrued exploration and development.................................. 181,140 146,871
Accrued compensation and benefits.................................... 41,432 32,680
Accrued interest..................................................... 45,736 30,880
Accrued income taxes................................................. 105,000 44,256
Oil and gas derivative instruments................................... 22,078 -
Other................................................................ 65,844 15,878
--------------- ---------------
829,304 532,235
--------------- ---------------
LONG-TERM DEBT.......................................................... 2,514,118 2,158,815
--------------- ---------------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES:
Income taxes......................................................... 1,520,586 1,120,609
Advances from gas purchasers......................................... 113,786 125,453
Asset retirement obligation.......................................... 778,673 -
Oil and gas derivative instruments................................... 12,068 3,507
Other................................................................ 174,425 158,326
--------------- ---------------
2,599,538 1,407,895
--------------- ---------------
PREFERRED INTERESTS OF SUBSIDIARIES..................................... - 436,626
--------------- ---------------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 5,000,000 shares authorized - Series B, 5.68%
Cumulative Preferred Stock,
100,000 shares issued and outstanding.......................... 98,387 98,387
Common stock, $1.25 par, 215,000,000 shares authorized,
165,989,808 and 155,464,540 shares issued, respectively........... 207,487 194,331
Paid-in capital...................................................... 4,023,754 3,427,450
Retained earnings.................................................... 2,204,487 1,427,607
Treasury stock, at cost, 4,059,266 and 4,211,328 shares,
respectively...................................................... (106,564) (110,559)
Accumulated other comprehensive loss................................. (130,466) (112,936)
--------------- ---------------
6,297,085 4,924,280
--------------- ---------------
$ 12,240,045 $ 9,459,851
=============== ===============
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)
SERIES B SERIES C
COMPREHENSIVE PREFERRED PREFERRED COMMON PAID-IN RETAINED
(In thousands) INCOME STOCK STOCK STOCK CAPITAL EARNINGS
---------- ------------- ---------- ---------- ---------- -----------
BALANCE AT DECEMBER 31, 2001.............. $ 98,387 $ 208,207 $ 185,288 $2,803,825 $ 1,336,478
Comprehensive income (loss):
Net income........................... $ 373,510 - - - - 373,510
Currency translation adjustments..... 5,328 - - - - -
Commodity hedges, net of income tax
benefit of $8,105.................. (11,300) - - - - -
Marketable securities, net of income
tax benefit of $67................. (125) - - - - -
----------
Comprehensive income................... $ 367,413
==========
Dividends:
Preferred............................ - - - - (9,395)
Common ($.29 per share).............. - - - - (42,512)
Common shares issued................... - - 742 24,525 -
Conversion of Series C Preferred Stock. - (208,207) 8,193 200,014 -
Treasury shares issued, net............ - - - 37 -
Other.................................. - - - 598 -
---------- ---------- ---------- ---------- -----------
BALANCE AT SEPTEMBER 30, 2002............. $ 98,387 $ - $ 194,223 $3,028,999 $ 1,658,081
========== ========== ========== ========== ===========
BALANCE AT DECEMBER 31, 2002.............. $ 98,387 $ - $ 194,331 $3,427,450 $ 1,427,607
Comprehensive income (loss):
Net income........................... $ 860,271 - - - - 860,271
Commodity hedges, net of income tax
benefit of $10,157................. (17,530) - - - - -
----------
Comprehensive income................... $ 842,741
==========
Dividends:
Preferred............................ - - - - (4,260)
Common ($.32 per share).............. - - - - (53,217)
Five percent common stock dividend..... - - 581 25,333 (25,914)
Common shares issued................... - - 12,575 567,945 -
Treasury shares issued, net............ - - - 2,904 -
Other.................................. - - - 122 -
---------- ---------- ---------- ---------- ----------
BALANCE AT SEPTEMBER 30, 2003............. $ 98,387 $ - $ 207,487 $4,023,754 $2,204,487
========== ========== ========== ========== ==========
ACCUMULATED
OTHER TOTAL
TREASURY COMPREHENSIVE SHAREHOLDERS'
(In thousands) STOCK INCOME (LOSS) EQUITY
---------- ------------- -------------
BALANCE AT DECEMBER 31, 2001.............. $ (111,885) $(101,817) $4,418,483
Comprehensive income (loss):
Net income........................... - - 373,510
Currency translation adjustments..... - 5,328 5,328
Commodity hedges, net of income tax
benefit of $8,105.................. - (11,300) (11,300)
Marketable securities, net of income
tax benefit of $67................. - (125) (125)
Comprehensive income...................
Dividends:
Preferred............................ - - (9,395)
Common ($.29 per share).............. - - (42,512)
Common shares issued................... - - 25,267
Conversion of Series C Preferred Stock. - - -
Treasury shares issued, net............ 1,269 - 1,306
Other.................................. - - 598
---------- --------- ----------
BALANCE AT SEPTEMBER 30, 2002............. $ (110,616) $ (107,914) $4,761,160
========== ========== ==========
BALANCE AT DECEMBER 31, 2002.............. $ (110,559) $ (112,936) $4,924,280
Comprehensive income (loss):
Net income........................... - - 860,271
Commodity hedges, net of income tax
benefit of $10,157................. - (17,530) (17,530)
Comprehensive income...................
Dividends:
Preferred............................ - - (4,260)
Common ($.32 per share).............. - - (53,217)
Five percent common stock dividend..... - - -
Common shares issued................... - - 580,520
Treasury shares issued, net............ 3,995 - 6,899
Other.................................. - - 122
---------- ---------- ----------
BALANCE AT SEPTEMBER 30, 2003............. $ (106,564) $ (130,466) $6,297,085
========== ========== ==========
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 net proceeds of approximately $554 million
from the issuance of 9.9 million shares of common stock in January 2003, and
proceeds from additional debt of approximately $604 million borrowed under
existing lines of credit and commercial paper.
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:
U.S. - U.K. -
GULF OF MEXICO NORTH SEA TOTAL*
---------------- ---------------- ----------------
(In thousands)
Proved property $ 539,110 $ 854,835 $ 1,393,945
Unproved property 57,500 65,000 122,500
Working capital acquired, net - 10,957 10,957
Asset retirement obligation (69,000) (250,887) (319,887)
Deferred income tax liability - (50,381) (50,381)
---------------- ---------------- ----------------
Cash consideration $ 527,610 $ 629,524 $ 1,157,134
================ ================ ================
* 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.
FOR THE NINE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2003 ENDED SEPTEMBER 30, 2002
--------------------------------- ------------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------- ------------- ------------- -------------
(In thousands, except per common share data)
Revenues and other.......................... $ 3,125,506 $ 3,363,468 $ 1,829,500 $ 2,520,630
Net income.................................. 860,271 933,468 373,510 455,565
Preferred stock dividends................... 4,260 4,260 9,395 9,395
Income attributable to common stock......... 856,011 929,208 364,115 446,170
Net income per common share:
Basic................................... $ 5.32 $ 5.75 $ 2.46 $ 2.83
Diluted................................. 5.27 5.70 2.42 2.78
Average common shares outstanding (1)....... 160,954 161,680 147,716 157,617
(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 approximately four years
beginning in August 2003 for gas and November 2003 for oil. 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
7
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.
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 September 30, 2003, the outstanding positions of our cash flow hedges were
as follows:
PRODUCTION TOTAL VOLUMES WEIGHTED AVERAGE FAIR VALUE ASSET/
PERIOD INSTRUMENT TYPE (MMBTU/BBL) FLOOR/CEILING (LIABILITY)
- -------------------- ------------------------ --------------- --------------------- -------------------
(In thousands)
10/2003 - 12/2003 Gas Collars 4,600,000 $ 3.50 / 6.09 $ (320)
Gas Fixed-Price Swap 18,400,000 5.17 7,053
Oil Fixed-Price Swap 4,600,000 26.59 (9,919)
2004 Gas Collars 18,300,000 3.25 / 5.81 (5,893)
Gas Fixed-Price Swap 51,240,000 4.52 (18,561)
Oil Fixed-Price Swap 1,550,000 26.59 (2,070)
2005 Gas Collars 9,050,000 3.25 / 5.20 (4,436)
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 September 30, 2003, the outstanding
terms of the contract were as follows:
CRUDE OIL FIXED-PRICE PHYSICAL SALES CONTRACT (BRENT)
-------------------------------------------------------
PRODUCTION TOTAL VOLUMES AVERAGE
PERIOD (BARRELS) FIXED PRICE
----------------- ------------- -----------
10/2003 - 12/2003 2,300,000 $ 25.32
2004 14,175,000 22.24
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:
GROSS AFTER TAX
------------- --------------
(In thousands)
Unrealized loss on derivatives at December 31, 2002.................. $ (7,141) $ (4,186)
Net losses realized into earnings.................................... 69,379 43,135
Net change in derivative fair value.................................. (97,066) (60,665)
------------ ------------
Unrealized loss on derivatives at September 30, 2003................. $ (34,828) $ (21,716)
============ ============
Based on current market prices, the Company recorded an unrealized loss in
other comprehensive income of $34.8 million ($21.7 million after tax). Any loss
will be realized in future earnings contemporaneously with the related sales of
natural gas and crude oil production applicable to specific hedges. Were current
prices to hold, a loss of $22.8 million ($14.2 million after tax) would be
realized over the next 12 months. However, these amounts could vary materially
as a result of changes in market conditions. The contracts designated as hedges
qualified and continue to qualify for hedge accounting in accordance with SFAS
No. 133, as amended.
8
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 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. PREFERRED INTERESTS OF SUBSIDIARIES
On September 26, 2003, Apache repurchased and retired preferred interests
issued by three of its subsidiaries for approximately $443 million, plus an
additional $1 million for accrued dividends and distributions. The transactions
involved the purchase of preferred stock issued by two of the Company's
subsidiaries for approximately $82 million and the retirement of a limited
partnership interest in a partnership controlled by a subsidiary of the Company
for approximately $361 million. Apache funded the transactions with available
cash on hand and by issuing commercial paper under its existing commercial paper
facility.
5. 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.
On September 12, 2003, the Company announced that its Board of Directors
voted to increase the quarterly cash dividend on its common stock to 12 cents
per share from 10 cents per share, effective with the November 2003 payment, and
to split its common stock two-for-one early in 2004, subject to shareholder
approval of an increase in the authorized number of common shares.
6. FOREIGN CURRENCY TRANSLATION
The Company accounts for foreign currency gains and losses in accordance
with SFAS No. 52 "Foreign Currency Translation." Foreign currency translation
gains and losses related to deferred taxes are recorded as a component of its
provision for income taxes, while all other foreign currency gains and losses
are reflected in Revenues and Other. For the first nine months of 2003, the
Company recorded additional deferred tax expense of $77 million as a result of
the weaker U.S. dollar. Net foreign currency gains and losses reflected in
Revenues and Other totaled $(1) million for the nine-month period.
9
7. 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:
FOR THE QUARTER ENDED SEPTEMBER 30,
--------------------------------------------------------------------------
2003 2002
------------------------------------ -----------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
---------- ---------- ---------- ----------- ---------- ----------
(In thousands, except per share amounts)
BASIC:
Income attributable to common stock. $ 275,541 161,875 $ 1.70 $ 145,122 151,097 $ 0.96
========== ==========
EFFECT OF DILUTIVE SECURITIES:
Stock options and other............. - 1,425 - 1,238
---------- --------- ----------- ----------
DILUTED:
Income attributable to common stock,
including assumed conversions...... $ 275,541 163,300 $ 1.69 $ 145,122 152,335 $ 0.95
========== ========== ========== =========== ========== ==========
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------
2003 2002
------------------------------------ ------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
---------- ---------- ----------- ---------- ---------- ----------
(In thousands, except per share amounts)
BASIC:
Income attributable to common stock. $ 856,011 160,954 $ 5.32 $ 364,115 147,716 $ 2.46
========== ==========
EFFECT OF DILUTIVE SECURITIES:
Stock options and other............. - 1,371 - 1,354
Series C Preferred Stock ........... - - 5,149 3,217
---------- --------- ----------- ----------
DILUTED:
Income attributable to common stock,
including assumed conversions...... $ 856,011 162,325 $ 5.27 $ 369,264 152,287 $ 2.42
========== ========= ========== =========== ========== ==========
10
8. STOCK-BASED COMPENSATION
On September 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.
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- --------------------------
2003 2002 2003 2002
-----------------------------------------------------------
(In thousands, except for per common share amounts)
Income attributable to common stock, as reported. $ 275,541 $ 145,122 $ 856,011 $ 364,115
Add: Stock-based employee compensation expense
included in reported net income, net of related
tax effects................................... - 275 391 751
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (5,567) (5,240) (16,433) (15,312)
---------- ---------- ---------- ----------
Pro forma income attributable to common stock.... $ 269,974 $ 140,157 $ 839,969 $ 349,554
========== ========== ========== ==========
Net Income per Common Share:
Basic:
As reported................................. $ 1.70 $ 0.96 $ 5.32 $ 2.46
Pro forma................................... 1.67 0.93 5.22 2.37
Diluted:
As reported................................. $ 1.69 $ 0.95 $ 5.27 $ 2.42
Pro forma................................... 1.63 0.91 5.12 2.31
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 SARs will be settled in cash upon exercise. 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 after tax expense was $.7 million and $1.0 million for the third quarter
and year-to-date, respectively. The Company issued a 2003 award of 60,500 shares
of restricted common stock to executives in May of 2003.
9. SUPPLEMENTAL CASH FLOW INFORMATION
The following table provides supplemental disclosure of cash flow
information:
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
2003 2002
-------------- ---------------
(In thousands)
Cash paid during the period for:
Interest (net of amounts capitalized)...................................... $ 58,821 $ 57,649
Income taxes (net of refunds).............................................. 225,667 115,363
11
10. GEOGRAPHIC AREA INFORMATION
Apache's exploration and production operations are a single line of
business conducted in five core geographic regions. Each of those regions
confronts the same operational concerns and has similar types of customers and
demands for our products. Where appropriate to an understanding of our business,
we will discuss the results of operations or risks and uncertainties in an
individual geographic area. Additional information regarding our geographic
locations is provided in Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations of this Form 10-Q, and in both
Item 7A - Quantitative and Qualitative Disclosures About Market Risk and Item 15
- - Notes to the Consolidated Financial Statements of our 2002 Form 10-K.
UNITED OTHER
STATES CANADA EGYPT AUSTRALIA NORTH SEA INTERNATIONAL TOTAL
---------------------------------------------------------------------------------
(IN THOUSANDS)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2003
Oil and Gas Production Revenues..... $1,527,389 $ 627,861 $ 482,222 $ 297,787 $ 181,389 $ 12,859 $ 3,129,507
=================================================================================
Operating Income (1)................ $ 849,027 $ 350,924 $ 287,353 $ 150,687 $ 22,536 $ 4,472 $ 1,664,999
====================================================================
Other Income (Expense):
Other............................ (4,001)
General and administrative....... (93,097)
Preferred interests of (8,668)
subsidiaries...................
Financing costs, net............. (88,711)
-----------
Income Before Income Taxes.......... $ 1,470,522
===========
Total Assets........................ $5,574,670 $2,829,605 $1,714,001 $ 955,209 $ 981,240 $ 185,320 $12,240,045
=================================================================================
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002
Oil and Gas Production Revenues..... $ 799,716 $ 385,424 $ 402,236 $ 245,300 $ - $ 4,894 $ 1,837,570
=================================================================================
Operating Income (Loss) (1)........ $ 285,896 $ 149,584 $ 231,665 $ 120,529 $ - $ (2,848) $ 784,826
====================================================================
Other Income (Expense):
Other............................ (8,070)
General and administrative....... (78,830)
Preferred interests of (12,584)
subsidiaries...................
Financing costs, net............. (84,530)
-----------
Income Before Income Taxes.......... $ 600,812
===========
Total Assets........................ $4,111,676 $2,303,297 $1,668,826 $ 998,643 $ - $ 166,267 $ 9,248,709
=================================================================================
(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.
11. 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.
12. 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-
12
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.
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................................................. 389,480
Liabilities settled.................................................. (6,444)
Accretion expense.................................................... 27,100
---------------
Asset retirement obligation at September 30, 2003.................... $ 778,673
===============
Liabilities incurred during the period primarily relate to asset retirement
obligations assumed in connection with the BP Gulf of Mexico, BP North Sea and
Shell property acquisitions. 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 nine-month periods ended September 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 December 31, 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. As stated in Note 4, the Company paid off the
Preferred Interests of Subsidiaries in September 2003; therefore, this statement
did not have a material impact on the Company's financial statements.
13. 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.
13
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
----------- ------------- ----------- -----------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues............... $ 452,358 $ - $ - $ -
Equity in net income (loss) of affiliates..... 171,661 6,614 9,591 30,809
Other......................................... (331) - - -
----------- ---------- ----------- -----------
623,688 6,614 9,591 30,809
----------- ---------- ----------- -----------
OPERATING EXPENSES:
Depreciation, depletion and amortization...... 104,743 - - -
Asset retirement obligation accretion......... 4,674 - - -
Lease operating costs......................... 80,068 - - -
Gathering and transportation costs............ 5,522 - - -
Severance and other taxes..................... 11,233 - - -
General and administrative.................... 26,499 - - -
Financing costs, net.......................... 27,042 - 4,509 9,945
----------- ---------- ----------- -----------
259,781 - 4,509 9,945
----------- ---------- ----------- -----------
PREFERRED INTERESTS OF SUBSIDIARIES.............. (25) - - -
----------- ---------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES................ 363,932 6,614 5,082 20,864
Provision (benefit) for income taxes.......... 86,971 - (1,532) (3,619)
----------- ---------- ----------- -----------
INCOME (LOSS) BEFORE CHANGE IN
ACCOUNTING PRINCIPLE........................... 276,961 6,614 6,614 24,483
Cumulative effect of change in accounting
principle, net of income tax................ - - - -
----------- ---------- ----------- -----------
NET INCOME....................................... 276,961 6,614 6,614 24,483
Preferred stock dividends..................... 1,420 - - -
----------- ---------- ----------- -----------
INCOME ATTRIBUTABLE TO COMMON STOCK.............. $ 275,541 $ 6,614 $ 6,614 $ 24,483
=========== =========== =========== ===========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------ --------------- -------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues............... $ 704,664 $ (47,007) $ 1,110,015
Equity in net income (loss) of affiliates..... (9,303) (209,372) -
Other......................................... (5,143) - (5,474)
------------ ------------- ------------
690,218 (256,379) 1,104,541
------------ ------------- ------------
OPERATING EXPENSES:
Depreciation, depletion and amortization...... 188,142 - 292,885
Asset retirement obligation accretion......... 6,668 - 11,342
Lease operating costs......................... 161,513 (47,007) 194,574
Gathering and transportation costs............ 11,426 - 16,948
Severance and other taxes..................... 30,354 - 41,587
General and administrative.................... 8,193 - 34,692
Financing costs, net.......................... (7,624) - 33,872
------------ ------------- ------------
398,672 (47,007) 625,900
------------ ------------- ------------
PREFERRED INTERESTS OF SUBSIDIARIES.............. 2,001 - 1,976
------------ ------------- ------------
INCOME (LOSS) BEFORE INCOME TAXES................ 289,545 (209,372) 476,665
Provision (benefit) for income taxes.......... 117,884 - 199,704
------------ ------------- ------------
INCOME (LOSS) BEFORE CHANGE IN
ACCOUNTING PRINCIPLE........................... 171,661 (209,372) 276,961
Cumulative effect of change in accounting
principle, net of income tax................ - - -
------------ ------------- ------------
NET INCOME....................................... 171,661 (209,372) 276,961
Preferred stock dividends..................... - - 1,420
------------ ------------- ------------
INCOME ATTRIBUTABLE TO COMMON STOCK.............. $ 171,661 $ (209,372) $ 275,541
============ ============= ============
14
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
------------- ------------- ------------- -------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues............... $ 206,029 $ - $ - $ -
Equity in net income (loss) of affiliates..... 105,002 6,534 9,512 15,714
Other......................................... (497) - - -
----------- ----------- ----------- -----------
310,534 6,534 9,512 15,714
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Depreciation, depletion and amortization...... 46,851 - - -
Lease operating costs......................... 52,289 - - -
Gathering and transportation costs............ 4,250 - - -
Severance and other taxes..................... 8,695 - - 90
General and administrative.................... 21,496 - - -
Financing costs, net.......................... 18,470 - 4,512 10,268
----------- ----------- ----------- -----------
152,051 - 4,512 10,358
----------- ----------- ----------- -----------
PREFERRED INTERESTS OF SUBSIDIARIES.............. - - - -
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES................ 158,483 6,534 5,000 5,356
Provision (benefit) for income taxes.......... 11,955 - (1,534) (4,948)
----------- ----------- ----------- -----------
NET INCOME....................................... 146,528 6,534 6,534 10,304
Preferred stock dividends..................... 1,406 - - -
----------- ----------- ----------- -----------
INCOME ATTRIBUTABLE TO COMMON STOCK.............. $ 145,122 $ 6,534 $ 6,534 $ 10,304
=========== =========== =========== ===========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------ --------------- -------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues............... $ 485,979 $ (36,091) $ 655,917
Equity in net income (loss) of affiliates..... (8,388) (128,374) -
Other......................................... (10,231) - (10,728)
----------- ------------ -----------
467,360 (164,465) 645,189
----------- ------------ -----------
OPERATING EXPENSES:
Depreciation, depletion and amortization...... 161,937 - 208,788
Lease operating costs......................... 100,116 (36,091) 116,314
Gathering and transportation costs............ 5,619 - 9,869
Severance and other taxes..................... 7,279 - 16,064
General and administrative.................... 3,967 - 25,463
Financing costs, net.......................... (5,177) - 28,073
----------- ------------ -----------
273,741 (36,091) 404,571
----------- ------------ -----------
PREFERRED INTERESTS OF SUBSIDIARIES.............. 3,922 - 3,922
----------- ------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES................ 189,697 (128,374) 236,696
Provision (benefit) for income taxes.......... 84,695 - 90,168
----------- ------------ -----------
NET INCOME....................................... 105,002 (128,374) 146,528
Preferred stock dividends..................... - - 1,406
----------- ------------ -----------
INCOME ATTRIBUTABLE TO COMMON STOCK.............. $ 105,002 $ (128,374) $ 145,122
=========== ============ ===========
15
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
------------- ------------- ------------- -------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues............... $ 1,267,321 $ - $ - $ -
Equity in net income (loss) of affiliates..... 427,821 23,343 32,276 65,411
Other......................................... (6,588) - - -
----------- ----------- ----------- -----------
1,688,554 23,343 32,276 65,411
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Depreciation, depletion and amortization...... 265,954 - - -
Asset retirement obligation accretion......... 11,216 - - -
Lease operating costs......................... 204,842 - - -
Gathering and transportation costs............ 14,419 - - -
Severance and other taxes..................... 38,632 - - 53
General and administrative.................... 75,340 - - -
Financing costs, net.......................... 75,486 - 13,534 30,124
----------- ----------- ----------- -----------
685,889 - 13,534 30,177
----------- ----------- ----------- -----------
PREFERRED INTERESTS OF SUBSIDIARIES.............. (25) - - -
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES................ 1,002,690 23,343 18,742 35,234
Provision (benefit) for income taxes.......... 162,176 - (4,601) (11,049)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE CHANGE IN
ACCOUNTING PRINCIPLE........................... 840,514 23,343 23,343 46,283
Cumulative effect of change in accounting
principle, net of income tax................ 19,757 - - -
----------- ----------- ----------- -----------
NET INCOME....................................... 860,271 23,343 23,343 46,283
Preferred stock dividends..................... 4,260 - - -
----------- ----------- ----------- -----------
INCOME ATTRIBUTABLE TO COMMON STOCK.............. $ 856,011 $ 23,343 $ 23,343 $ 46,283
=========== =========== =========== ===========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------ --------------- -------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues............... $ 2,007,790 $ (145,604) $ 3,129,507
Equity in net income (loss) of affiliates..... (28,061) (520,790) -
Other......................................... 2,587 - (4,001)
------------- ------------ -----------
1,982,316 (666,394) 3,125,506
------------- ------------ -----------
OPERATING EXPENSES:
Depreciation, depletion and amortization...... 513,636 - 779,590
Asset retirement obligation accretion......... 15,884 - 27,100
Lease operating costs......................... 455,757 (145,604) 514,995
Gathering and transportation costs............ 29,521 - 43,940
Severance and other taxes..................... 60,198 - 98,883
General and administrative.................... 17,757 - 93,097
Financing costs, net.......................... (30,433) - 88,711
------------- ------------ -----------
1,062,320 (145,604) 1,646,316
------------- ------------ -----------
PREFERRED INTERESTS OF SUBSIDIARIES.............. 8,693 - 8,668
------------- ------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES................ 911,303 (520,790) 1,470,522
Provision (benefit) for income taxes.......... 490,357 - 636,883
------------- ------------ -----------
INCOME (LOSS) BEFORE CHANGE IN
ACCOUNTING PRINCIPLE........................... 420,946 (520,790) 833,639
Cumulative effect of change in accounting
principle, net of income tax................ 6,875 - 26,632
------------- ------------ -----------
NET INCOME....................................... 427,821 (520,790) 860,271
Preferred stock dividends..................... - - 4,260
------------- ------------ -----------
INCOME ATTRIBUTABLE TO COMMON STOCK.............. $ 427,821 $ (520,790) $ 856,011
============= ============ ===========
16
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
------------- ------------- ------------- -------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues............... $ 582,789 $ - $ - $ -
Equity in net income (loss) of affiliates..... 277,729 15,618 24,552 52,817
Other......................................... (402) - - -
----------- ----------- ----------- -----------
860,116 15,618 24,552 52,817
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Depreciation, depletion and amortization...... 161,698 - - -
International impairments..................... - - - -
Lease operating costs......................... 152,615 - - -
Gathering and transportation costs............ 12,259 - - -
Severance and other taxes..................... 23,828 - - 116
General and administrative.................... 66,882 - - -
Financing costs, net.......................... 54,512 - 13,537 30,715
----------- ----------- ----------- -----------
471,794 - 13,537 30,831
----------- ----------- ----------- -----------
PREFERRED INTERESTS OF SUBSIDIARIES.............. - - - -
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES................ 388,322 15,618 11,015 21,986
Provision (benefit) for income taxes.......... 14,812 - (4,603) (13,874)
----------- ----------- ----------- -----------
NET INCOME....................................... 373,510 15,618 15,618 35,860
Preferred stock dividends..................... 9,395 - - -
----------- ----------- ----------- -----------
INCOME ATTRIBUTABLE TO COMMON STOCK.............. $ 364,115 $ 15,618 $ 15,618 $ 35,860
============= =========== =========== ===========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------ --------------- -------------
(IN THOUSANDS)
REVENUES AND OTHER:
Oil and gas production revenues............... $ 1,378,151 $ (123,370) $ 1,837,570
Equity in net income (loss) of affiliates..... (25,891) (344,825) -
Other......................................... (7,668) - (8,070)
----------- ------------- -----------
1,344,592 (468,195) 1,829,500
----------- ------------- -----------
OPERATING EXPENSES:
Depreciation, depletion and amortization...... 468,919 - 630,617
International impairments..................... 4,600 - 4,600
Lease operating costs......................... 310,299 (123,370) 339,544
Gathering and transportation costs............ 16,955 - 29,214
Severance and other taxes..................... 24,825 - 48,769
General and administrative.................... 11,948 - 78,830
Financing costs, net.......................... (14,234) - 84,530
----------- ------------- -----------
823,312 (123,370) 1,216,104
----------- ------------- -----------
PREFERRED INTERESTS OF SUBSIDIARIES.............. 12,584 - 12,584
----------- ------------- -----------
INCOME (LOSS) BEFORE INCOME TAXES................ 508,696 (344,825) 600,812
Provision (benefit) for income taxes.......... 230,967 - 227,302
----------- ------------- -----------
NET INCOME....................................... 277,729 (344,825) 373,510
Preferred stock dividends..................... - - 9,395
----------- ------------- -----------
INCOME ATTRIBUTABLE TO COMMON STOCK.............. $ 277,729 $ (344,825) $ 364,115
=========== ============ ===========
17
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
------------- ------------- ------------- -------------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES....................................... $ 883,634 $ - $ (13,791) $ (22,893)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment.............. (325,918) - - -
Acquisitions..................................... (739,072) - - -
Proceeds from sales of oil and gas properties.... 4,192 - - -
Investment in subsidiaries, net.................. (542,452) (12,525) - -
Other, net....................................... (23,531) - - -
----------- ----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES.............. (1,626,781) (12,525) - -
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings............................. 1,531,596 - 1,266 2,103
Payments on long-term debt....................... (1,227,288) - - -
Dividends paid................................... (51,967) - - -
Common stock activity............................ 574,349 12,525 12,525 20,663
Treasury stock activity, net..................... 4,275 - - -
Cost of debt and equity transactions............. (4,520) - - -
Repurchase of preferred interests of subsidiaries (82,000) - - -
----------- ----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES.......... 744,445 12,525 13,791 22,766
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................................. 1,298 - - (127)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR................................ 224 - 2 127
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD.................................... $ 1,522 $ - $ 2 $ -
=========== =========== =========== ===========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------ --------------- -------------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES....................................... $ 1,232,159 $ - $ 2,079,109
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment.............. (789,431) - (1,115,349)
Acquisitions..................................... (639,703) - (1,378,775)
Proceeds from sales of oil and gas properties.... 12,010 - 16,202
Investment in subsidiaries, net.................. (617) 555,594 -
Other, net....................................... (20,771) - (44,302)
----------- ------------ -----------
NET CASH USED IN INVESTING ACTIVITIES.............. (1,438,512) 555,594 (2,522,224)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings............................. (385,108) 619,801 1,769,658
Payments on long-term debt....................... (187,641) - (1,414,929)
Dividends paid................................... - - (51,967)
Common stock activity............................ 1,129,682 (1,175,395) 574,349
Treasury stock activity, net..................... - - 4,275
Cost of debt and equity transactions............. - - (4,520)
Repurchase of preferred interests of subsidiaries (361,000) - (443,000)
----------- ------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES.......... 195,933 (555,594) 433,866
----------- ------------ -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................................. (10,420) - (9,249)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR................................ 51,533 - 51,886
----------- ------------ -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD.................................... $ 41,113 $ - $ 42,637
=========== ============ ===========
18
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
------------- ------------- ------------- -------------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES....................................... $ 379,276 $ - $ (12,525) $ (28,581)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment.............. (182,908) - - -
Acquisitions..................................... (11,000) - - -
Proceeds from sales of oil and gas properties.... - - - -
Proceeds from sale of U.S. Government Agency Notes - - - -
Investment in subsidiaries, net.................. (270,250) (12,525) - -
Other, net....................................... (10,757) - - -
----------- ----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES.............. (474,915) (12,525) - -
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings............................. 1,259,436 - - 3,449
Payments on long-term debt....................... (1,136,800) - - -
Dividends paid................................... (53,059) - - -
Common stock activity............................ 27,407 12,525 12,525 25,132
Treasury stock activity, net..................... 1,861 - - -
Cost of debt and equity transactions............. (6,741) - - -
----------- ----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES.......... 92,104 12,525 12,525 28,581
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................................. (3,535) - - -
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR................................ 6,383 - 2 -
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD.................................... $ 2,848 $ - $ 2 $ -
=========== =========== =========== ===========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------ --------------- -------------
(IN THOUSANDS)
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES....................................... $ 671,099 $ - $ 1,009,269
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment.............. (564,308) - (747,216)
Acquisitions..................................... - - (11,000)
Proceeds from sales of oil and gas properties.... - - -
Proceeds from sale of U.S. Government Agency Notes 17,006 - 17,006
Investment in subsidiaries, net.................. (238,450) 521,225 -
Other, net....................................... (13,749) - (24,506)
----------- ------------ -----------
NET CASH USED IN INVESTING ACTIVITIES.............. (799,501) 521,225 (765,716)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings............................. 358,522 (375,111) 1,246,296
Payments on long-term debt....................... (190,671) - (1,327,471)
Dividends paid................................... - - (53,059)
Common stock activity, net....................... 95,932 (146,114) 27,407
Treasury stock activity, net..................... - - 1,861
Cost of debt and equity transactions............. - - (6,741)
----------- ------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES.......... 263,783 (521,225) (111,707)
----------- ------------ -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................................. 135,381 - 131,846
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR................................ 29,240 - 35,625
----------- ------------ -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD.................................... $ 164,621 $ - $ 167,471
=========== ============ ===========
19
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2003
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
------------- ------------- ------------- -------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................... $ 1,522 $ - $ 2 $ -
Receivables, net of allowance.................. 202,341 - - -
Inventories.................................... 17,851 - - -
Drilling advances and other.................... 29,663 - - -
----------- ----------- ----------- -----------
251,377 - 2 -
----------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT, NET...................... 4,587,732 - - -
----------- ----------- ----------- -----------
OTHER ASSETS:
Intercompany receivable, net................... 262,764 - (1,785) 93,753
Goodwill, net.................................. - - - -
Equity in affiliates........................... 4,658,877 178,018 434,743 1,040,841
Deferred charges and other..................... 35,155 - - 4,833
----------- ----------- ----------- -----------
$ 9,795,905 $ 178,018 $ 432,960 $ 1,139,427
============= =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................... $ 180,489 $ - $ - $ -
Other accrued expenses......................... 224,518 - (1,944) 11,483
----------- ----------- ----------- -----------
405,007 - (1,944) 11,483
----------- ----------- ----------- -----------
LONG-TERM DEBT................................... 1,593,098 - 268,938 646,726
----------- ----------- ----------- -----------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes................................... 858,436 - (12,052) (1,105)
Advances from gas purchasers................... 113,786 - - -
Asset retirement obligation.................... 326,905 - - -
Oil and gas derivative instruments............. 34,146 - - -
Other.......................................... 167,442 - - -
----------- ----------- ----------- -----------
1,500,715 - (12,052) (1,105)
----------- ----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY............................. 6,297,085 178,018 178,018 482,323
----------- ----------- ----------- -----------
$ 9,795,905 $ 178,018 $ 432,960 $ 1,139,427
=========== =========== =========== ===========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------ --------------- -------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................... $ 41,113 $ - $ 42,637
Receivables, net of allowance.................. 417,167 - 619,508
Inventories.................................... 108,329 - 126,180
Drilling advances and other.................... 51,351 - 81,014
----------- ------------ -----------
617,960 - 869,339
----------- ------------ -----------
PROPERTY AND EQUIPMENT, NET...................... 6,535,572 - 11,123,304
----------- ------------ -----------
OTHER ASSETS:
Intercompany receivable, net................... (354,732) - -
Goodwill, net.................................. 189,252 - 189,252
Equity in affiliates........................... (815,243) (5,497,236) -
Deferred charges and other..................... 18,162 - 58,150
----------- ------------ -----------
$ 6,190,971 $ (5,497,236) $12,240,045
=========== ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................... $ 104,452 $ - $ 284,941
Other accrued expenses......................... 310,306 - 544,363
----------- ------------ -----------
414,758 - 829,304
----------- ------------ -----------
LONG-TERM DEBT................................... 5,356 - 2,514,118
----------- ------------ -----------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes................................... 675,307 - 1,520,586
Advances from gas purchasers................... - - 113,786
Asset retirement obligation.................... 451,768 - 778,673
Oil and gas derivative instruments............. (22,078) - 12,068
Other.......................................... 6,983 - 174,425
----------- ------------ -----------
1,111,980 - 2,599,538
----------- ------------ -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY............................. 4,658,877 (5,497,236) 6,297,085
----------- ------------ -----------
$ 6,190,971 $ (5,497,236) $12,240,045
=========== ============ ===========
20
APACHE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2002
APACHE APACHE
APACHE APACHE FINANCE FINANCE
CORPORATION NORTH AMERICA AUSTRALIA CANADA
------------- ------------- ------------- -----------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... $ 224 $ - $ 2 $ 127
Receivables, net of allowance................... 121,410 - - -
Inventories..................................... 15,509 - - -
Drilling advances and other..................... 19,468 - - -
----------- ----------- ----------- -----------
156,611 - 2 127
----------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT, NET....................... 3,403,716 - - -
----------- ----------- ----------- -----------
OTHER ASSETS:
Intercompany receivable, net.................... 1,146,086 - (662) (253,851)
Goodwill, net................................... - - - -
Equity in affiliates............................ 2,994,954 142,422 402,596 958,382
Deferred charges and other...................... 31,804 - - 2,472
----------- ----------- ----------- -----------
$ 7,733,171 $ 142,422 $ 401,936 $ 707,130
=========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................ $ 124,152 $ - $ - $ -
Other accrued expenses.......................... 134,191 - 2,229 1,263
----------- ----------- ----------- -----------
258,343 - 2,229 1,263
----------- ----------- ----------- -----------
LONG-TERM DEBT.................................... 1,550,645 - 268,795 297,019
----------- ----------- ----------- -----------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes.................................... 736,661 - (11,510) (1,205)
Advances from gas purchasers.................... 125,453 - - -
Oil and gas derivative instruments.............. 3,507 - - -
Other........................................... 134,282 - - -
----------- ----------- ----------- -----------
999,903 - (11,510) (1,205)
----------- ----------- ----------- -----------
PREFERRED INTERESTS OF SUBSIDIARIES............... - - - -
----------- ----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY.............................. 4,924,280 142,422 142,422 410,053
----------- ----------- ----------- -----------
$ 7,733,171 $ 142,422 $ 401,936 $ 707,130
=========== =========== =========== ===========
ALL OTHER
SUBSIDIARIES
OF APACHE RECLASSIFICATIONS
CORPORATION & ELIMINATIONS CONSOLIDATED
------------ --------------- -------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... $ 51,533 $ - $ 51,886
Receivables, net of allowance................... 406,277 - 527,687
Inventories..................................... 93,695 - 109,204
Drilling advances and other..................... 58,536 - 78,004
----------- ------------ -----------
610,041 - 766,781
----------- ------------ -----------
PROPERTY AND EQUIPMENT, NET....................... 5,061,869 - 8,465,585
----------- ------------ -----------
OTHER ASSETS:
Intercompany receivable, net.................... (891,573) - -
Goodwill, net................................... 189,252 - 189,252
Equity in affiliates............................ (808,503) (3,689,851) -
Deferred charges and other...................... 3,957 - 38,233
----------- ------------ -----------
$ 4,165,043 $ (3,689,851) $ 9,459,851
=========== ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................ $ 90,136 $ - $ 214,288
Other accrued expenses.......................... 180,264 - 317,947
----------- ------------ -----------
270,400 - 532,235
----------- ------------ -----------
LONG-TERM DEBT.................................... 42,356 - 2,158,815
----------- ------------ -----------
DEFERRED CREDITS AND OTHER
NONCURRENT LIABILITIES:
Income taxes.................................... 396,663 - 1,120,609
Advances from gas purchasers.................... - - 125,453
Oil and gas derivative instruments.............. - - 3,507
Other........................................... 24,044 - 158,326
----------- ------------ -----------
420,707 - 1,407,895
----------- ------------ -----------
PREFERRED INTERESTS OF SUBSIDIARIES............... 436,626 - 436,626
----------- ------------ -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY.............................. 2,994,954 (3,689,851) 4,924,280
----------- ------------ -----------
$ 4,165,043 $ (3,689,851) $ 9,459,851
=========== ============ ===========
21
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Apache reported third-quarter earnings of $276 million, 90 percent above
the $145 million reported in the prior-year quarter. Third-quarter cash from
operating activities of $855 million set a new quarterly record and compared to
$385 million in the 2002 period. The quarter-over-quarter gains were primarily
fueled by:
o Record oil production of 228,698 Bopd, 51 percent above the prior-year
period.
o Record gas production of 1.26 Bcf/d, 19 percent above the comparable
2002 quarter.
o A 62 percent rise in natural gas price realizations.
Other notable operational highlights include:
o Production was initiated on the Zhao Dong block in the Bohai Bay,
offshore China in late July, further diversifying our production base.
o We completed the acquisition of fields in the Gulf of Mexico from Shell
Exploration and Production Company (Shell).
o We announced two significant exploration successes in Egypt during the
second quarter of 2003, the Qasr-1X well in the Khalda Concession, and
the Alexandrite-1X well in the Matruh Concession. The Qasr-1X tested at
a combined rate of 51.8 million cubic feet per day (MMcf/d) and 2,688
barrels of condensate per day from two zones. The Alexandrite-1X well
flowed at a daily rate of 20 MMcf/d and 1,683 barrels of condensate per
day from one interval. Initial production is anticipated in the fourth
quarter of 2003. Apache operates with a 100 percent contractor interest
in both concessions. On November 5, 2003, we completed drilling of the
Qasr-2X appraisal well, which confirmed the Qasr-1X discovery announced
in July. The Qasr-2X well has a 707-foot gross hydrocarbon column and
logs indicate net Jurassic pay at 669 feet. We expect additional
exploratory drilling and 3-D seismic acquisition in the near future.
o We announced two oil discoveries in Western Australia's offshore
Exmouth Sub-Basin, the Ravensworth-1 discovered in July, 2003 and the
Crosby-1 discovered in early October 2003. The Crosby-1 discovery
provides additional assurance that we have opened a new oil-play south
of our existing Carnarvon Basin operations. Appraisal of both fields
along with additional exploration drilling will be undertaken in early
2004.
For the nine-month period ending September 30, 2003, we reported record
earnings of $856 million, 135 percent above the comparable prior-year period.
Cash from operating activities, which totaled a record $2.1 billion, more than
doubled the 2002 nine-month period.
The outlook for the fourth quarter remains strong. Current NYMEX futures
markets are showing oil and natural gas prices remaining above historical trends
through the end of the year. Coupled with our current production profile, we
expect solid results in the fourth quarter.
On September 12, 2003, Apache's Board of Directors voted to increase the
quarterly cash dividend on our common stock 20 percent to 12 cents per share
from 10 cents. The Board also voted to split the stock two-for-one early in
2004, subject to shareholder approval of an increase in the authorized number of
common shares.
To take advantage of historically low interest rates on commercial paper
and better position ourselves to pay down debt, if we so elect, the Company, on
September 26, 2003, repurchased and retired preferred interests issued by three
of its subsidiaries for approximately $443 million, plus an additional $1
million for accrued dividends and distributions.
22
CRITICAL ACCOUNTING POLICY
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations," which requires the purchase method of
accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. In July 2001, the FASB also issued
SFAS No. 142, "Goodwill and Other Intangible Assets," which discontinues the
practice of amortizing goodwill and indefinite lived intangible assets and
initiates an annual review for impairment. Intangible assets with a determinable
useful life will continue to be amortized over that period. SFAS No. 141 and 142
clarify that more assets should be distinguished and classified between tangible
and intangible. The Company did not change or reclassify contractual mineral
rights included in oil and gas properties on the balance sheet upon adoption of
SFAS No. 141 and 142. The Company believes the treatment of such mineral rights
as property continues to be appropriate under the full cost method of accounting
for crude oil and natural gas properties. An issue has arisen regarding whether
contractual mineral rights should be classified as intangible assets rather than
properties for oil and gas companies. The amount that could be potentially
reclassified cannot be quantified until resolution regarding classification of
use rights for oil and gas companies, including full cost companies, is reached.
Our current practice, as described above, may change based upon a change in the
guidance over these costs.
23
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.
FOR THE QUARTER ENDED SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------- ----------------------------------------
INCREASE INCREASE
2003 2002 (DECREASE) 2003 2002 (DECREASE)
------------- ------------- ---------- ------------ ------------ ------------
Revenues (in thousands):
Natural gas...................... $ 517,891 $ 267,768 93% $ 1,561,729 $ 791,906 97%
Oil.............................. 575,201 377,437 52% 1,518,012 1,013,717 50%
Natural gas liquids.............. 16,923 10,712 58% 49,766 31,947 56%
----------- ----------- ----------- -----------
Total........................ $ 1,110,015 $ 655,917 69% $ 3,129,507 $ 1,837,570 70%
=========== =========== =========== ===========
Natural Gas Volume - Mcf per day:
United States.................... 717,988 492,165 46% 658,231 515,603 28%
Canada........................... 319,522 316,307 1% 315,307 317,542 (1%)
Egypt............................ 100,965 117,781 (14%) 112,534 117,803 (4%)
Australia........................ 114,248 122,922 (7%) 107,415 123,421 (13%)
North Sea........................ 3,321 - - 1,820 - -
China............................ - - - - - -
Argentina........................ 7,858 11,250 (30%) 7,466 7,931 (6%)
----------- ----------- ----------- -----------
Total........................ 1,263,902 1,060,425 19% 1,202,773 1,082,300 11%
=========== =========== =========== ===========
Average Natural Gas price - Per Mcf:
United States.................... $ 5.00 $ 3.13 60% $ 5.40 $ 2.93 84%
Canada........................... 4.47 2.29 95% 4.87 2.53 92%
Egypt............................ 4.31 4.06 6% 4.20 3.58 17%
Australia........................ 1.47 1.34 10% 1.39 1.29 8%
North Sea........................ 1.88 - - 1.95 - -
China............................ - - - - - -
Argentina........................ 0.50 .40 25% 0.48 .43 12%
Total........................ 4.45 2.74 62% 4.76 2.68 78%
Oil Volume - Barrels per day:
United States.................... 75,593 52,510 44% 68,535 54,255 26%
Canada........................... 25,790 25,231 2% 25,143 25,178 -
Egypt............................ 48,788 42,319 15% 47,406 43,540 9%
Australia........................ 32,711 30,462 7% 31,949 30,297 5%
North Sea........................ 42,111 - - 25,320 - -
China............................ 3,131 - - 1,055 - -
Argentina........................ 574 621 (8%) 586 627 (7%)
----------- ----------- ----------- -----------
Total........................ 228,698 151,143 51% 199,994 153,897 30%
=========== =========== =========== ===========
Average Oil price - Per barrel:
United States.................... $ 27.03 $ 27.81 (3%) $ 27.52 $ 24.59 12%
Canada........................... 27.90 25.98 7% 29.23 22.80 28%
Egypt............................ 27.16 26.72 2% 27.30 24.14 13%
Australia........................ 29.04 27.55 5% 29.45 24.39 21%
North Sea........................ 26.58 - - 26.10 - -
China............................ 25.10 - - 25.10 - -
Argentina........................ 28.42 26.67 7% 29.14 23.15 26%
Total........................ 27.34 27.14 1% 27.80 24.13 15%
Natural Gas Liquids (NGL)
Volume - Barrels per day:
United States.................. 8,241 6,745 22% 7,265 6,836 6%
Canada......................... 1,445 1,336 8% 1,582 1,436 10%
----------- ----------- ----------- -----------
Total........................ 9,686 8,081 20% 8,847 8,272 7%
=========== =========== =========== ===========
Average NGL Price - Per barrel:
United States.................. $ 19.23 $ 14.33 34% $ 20.99 $ 14.48 45%
Canada......................... 17.62 14.82 19% 18.85 12.58 50%
Total........................ 18.99 14.41 32% 20.60 14.15 46%
24
Natural Gas Revenues
The Company's third-quarter 2003 natural gas production increased 203
MMcf/d, compared to the same period last year, which increased natural gas
revenues by $83 million. Production in the U.S. climbed 226 MMcf/d, concentrated
in the Gulf Coast region. Production in the Gulf Coast region includes
production from Gulf of Mexico properties acquired from Shell in July 2003, BP
p.l.c. (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, facility downtime and a hurricane. The Gulf Coast region,
which contributed 71 percent of Apache's U.S. 2003 production, is characterized
by reservoirs which demonstrate high initial rates followed by steep declines
when compared to other U.S. producing regions. A successful workover and
recompletion program, particularly offshore, helped to stem the natural declines
in the U.S. Natural decline drove down production in our U.S. Central region.
Egypt's lower production is related to scheduled facility downtime on the Khalda
Salam gas plant for maintenance and unrelated operational problems experienced
during start-up, following maintenance. The impact on production from the gas
plant events was partially offset by new wells on the Ras El Hekma and Matruh
concessions. In Australia, a gas contract expired in October 2002, reflecting
lower customer demand and resulting in 9 MMcf/d of lower sales in the third
quarter of 2003 versus the same period last year. Higher natural gas prices
contributed $167 million to third-quarter 2003 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 third-quarter 2003 U.S. natural gas
production was subject to long-term fixed-price physical contracts, down from 11
percent in the third 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 third quarter of 2003. The following table shows
the impact on average prices of each of these items:
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -------------------------------
2003 2002 2003 2002
------------ ------------ --------------- ------------
(Per Mcf)
Fixed-price physical................ $ (0.05) $ 0.01 $ (0.04) $ 0.01
Derivatives......................... 0.02 (0.05)
- -
Amortization........................ (0.01) 0.04 (0.01) 0.05
Year-to-date natural gas production increased 11 percent compared to the
same period last year, increasing our natural gas revenues by $156 million.
Higher production rates in the U.S. Gulf Coast region, primarily for the reasons
discussed above, were partially offset by lower demand in Australia. Canada saw
a marginal decline in production, while Egypt's production was down four percent
year-over-year for the reasons discussed above. Natural gas prices increased 78
percent, increasing natural gas revenues by $613 million.
Approximately nine percent of our first nine-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 third-quarter 2003 oil production increased 77,555 barrels
per day (b/d), compared to the same period last year, increasing third-quarter
crude oil revenues by $195 million. Production growth occurred in all regions,
primarily concentrated in the U.S. Gulf Coast and North Sea, which benefited by
the acquisitions discussed above. Egypt's production rose 15 percent as several
new wells on the East Bahariya, South Umbarka, Umbarka and Ras El Hekma
concessions were brought online, more than offsetting lower production from the
Qarun concession related to increasing water cuts. Other contributors were
China, where production commenced in late July 2003, and Australia, where
several new wells were brought online, offsetting natural decline on other
wells. A one percent increase in oil price contributed $3 million to crude oil
revenues.
25
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:
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -------------------------------
2003 2002 2003 2002
------------ ------------ --------------- ------------
(Per bbl)
Derivatives......................... $ (0.79) $ - $ (0.92) $ -
Amortization........................ 0.02 0.22 0.03 0.12
Year-to-date oil production increased 30 percent for the reasons discussed
above, contributing $350 million to oil sales. Realized oil prices rose 15
percent, increasing oil sales by $154 million.
Operating Expenses
The table below presents a detail of our expenses:
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ------------------------------
2003 2002 2003 2002
------------ -------------- ------------ -------------
(In millions)
Depreciation, depletion and amortization (DD&A):
Oil and gas property and equipment........ $ 275 $ 194 $ 728 $ 586
Other assets.............................. 18 15 52 45
Asset retirement obligation accretion....... 11 - 27 -
International impairments................... - - - 5
Lease operating costs (LOE)................. 195 116 515 339
Gathering and transportation costs.......... 17 10 44 29
Severance and other taxes................... 41 16 98 49
General and administrative expense (G&A).... 35 26 93 79
Financing costs, net........................ 34 28 89 84
---------- ----------- ---------- -----------
Total................................ $ 626 $ 405 $ 1,646 $ 1,216
========== =========== =========== ===========
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 $.39 from $6.26 per boe in the third quarter of 2002 to $6.65
per boe in 2003. The increase in the worldwide rate was driven by rate increases
in the U.S., reflecting the impact of our recent acquisitions, the addition of
the North Sea properties, first production in China and higher estimates of
future costs to extract reserves. The China and North Sea properties carry a
higher DD&A rate than our historical worldwide rate.
Lease Operating Costs
LOE increased $78 million compared to last year's third quarter.
Seventy-three percent of the increase ($57 million) in absolute costs was
related to the acquisition of Gulf of Mexico and North Sea properties in 2003
and South Louisiana properties in the fourth quarter of 2002. Canada saw an
increase of $12 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 52 percent, or $175 million in the first nine months of 2003
compared to the same period in 2002. As indicated above, 69 percent of the
increase in absolute costs was related to the BP, Shell and South Louisiana
acquisitions. The remaining increase occurred in all regions, primarily in
Canada as noted above.
26
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 third quarter of 2003, the
Company incurred $7 million more costs than in the comparable 2002 quarter, $4
million of which related to the North Sea. During the first nine months of 2003,
gathering and transportation costs were $15 million more than in the first nine
months of 2002. The higher year-over-year costs were from the North Sea ($7
million), Canada ($5 million) and the U.S. ($3 million).
Severance and Other Taxes
Severance and other taxes, which generally are based on a percentage of oil
and gas production revenues were $25 million higher in the third quarter of 2003
compared to the same quarter last year. Severance taxes increased $4 million as
a result of increased revenues. Other taxes were $21 million higher than the
2002 quarter, $17 million of which was related to the petroleum revenue tax
(PRT) on the North Sea properties acquired from BP. The balance of the change
was primarily attributable to higher Canadian tax expense, a result of higher
prices, a weakened U.S. dollar and the fact that the 2002-period benefited from
a tax refund.
Severance and other taxes were 103 percent higher in the first nine months
of 2003 compared to the same period in 2002. Severance taxes were $22 million
higher, a result of higher revenues, while other taxes were $28 million higher.
For the reasons above, the North Sea PRT tax and Canadian taxes were $23 million
and $7 million higher, respectively, than the prior year.
General and Administrative Expense
Third-quarter 2003 G&A costs were $9 million higher than the year-ago
quarter. The additional $9 million is related to one-time transition costs
incurred on the Gulf of Mexico properties acquired from Shell, incremental G&A
related to North Sea operations and our new gas marketing operations. On a boe
basis, our G&A costs were $.02 per boe higher than the year-ago quarter.
On a year-to-date basis, G&A costs were $14 million higher than the
comparable period in 2002. Forty-eight percent of the increase was associated
with G&A costs related to the acquisitions from BP and Shell discussed above.
Fifteen 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,
which began in July 2003. The remaining 37 percent was spread among several
departments including higher insurance costs on our larger asset base,
consistent with our growth.
Financing Costs, Net
Net financing costs for the third quarter of 2003 increased $6 million
compared to the prior-year quarter. Interest expense increased $10 million with
$5 million related to the write-off of unamortized fees triggered by the
retirement of preferred interests of subsidiaries noted below. Capitalized
interest increased $4 million driven by a higher unproved property balance. If
net financing costs included distributions from Preferred Interests of
Subsidiaries, net financing costs would have increased by approximately $4
million.
For the first nine months of 2003, net financing costs increased $4 million
compared to the same period in 2002 driven by an $11 million increase in
interest expense for the reasons discussed above. Higher unproved property
balances increased capitalized interest by $8 million. If net financing costs
included distributions from Preferred Interests of Subsidiaries, net financing
costs would have increased by less than $1 million.
Preferred Interests of Subsidiaries
On September 26, 2003, Apache repurchased and retired preferred interests
issued by three of its subsidiaries for approximately $443 million, plus an
additional $1 million for accrued dividends and distributions. The transactions
involved the purchase of preferred stock issued by two of the Company's
subsidiaries for approximately $82 million and the retirement of a limited
partnership interest in a partnership controlled by a subsidiary of the Company
for approximately $361 million. Apache funded the transactions with available
cash on hand and by issuing commercial paper under its existing commercial paper
facility.
27
Provision for Income Taxes
Third-quarter 2003 income tax expense was $110 million or 121 percent
higher than the comparable prior-year quarter. The higher taxes related to both
a higher net income in the 2003 quarter and $21 million of deferred tax expense
recognized on Canadian operations related to the weakening of the U.S. dollar
relative to the Canadian dollar. Our effective tax rate in the third quarter of
2003 of 41.90 percent compared to 38.09 percent in the 2002 quarter was a
consequence of the $21 million additional deferred tax expenses discussed above.
For the nine-month period of 2003, income tax expense was $410 million or 180
percent higher than the comparable 2002-period as discussed above. Similarly,
our effective tax rate of 43.31 percent for the nine-month period of 2003
compared to 37.83 percent in 2002. The additional deferred tax expense related
to changes in foreign currency exchange rates totaled $77 million for the
nine-month period of 2003.
OIL AND GAS CAPITAL EXPENDITURES
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------
2003 2002
------------ ------------
(In thousands)
Exploration and development:
United States.......................................... $ 318,490 $ 232,372
Canada................................................. 419,636 192,216
Egypt.................................................. 188,098 114,335
Australia.............................................. 87,544 64,559
North Sea.............................................. 23,189 -
Other International.................................... 27,998 21,448
----------- -----------
$ 1,064,955 $ 624,930
=========== ===========
Capitalized Interest....................................... $ 38,072 $ 30,493
=========== ===========
Gas gathering, transmission and processing facilities...... $ 14,439 $ 23,905
=========== ===========
Acquisitions:
Oil and gas properties................................. $ 1,501,312 $ 29,855
Gas gathering, transmission and processing facilities.. 5,484 -
----------- -----------
$ 1,506,796 $ 29,855
=========== ===========
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 forecasts, for internal use by
management, an annual cash flow. The annual forecasts are revised monthly and
capital budgets are reviewed by management and adjusted as warranted by market
conditions. 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 nine
months of 2003 totaled $2.1 billion, an increase of 106 percent from $1.0
billion in the first nine months 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.
28
Stock Transactions
On September 12, 2003, the Company announced that its Board of Directors
voted to increase the quarterly cash dividend on its common stock to 12 cents
per share from 10 cents, effective with the November 2003 payment, and to split
its common stock two-for-one early in 2004, subject to shareholder approval of
an increase in the authorized number of common shares.
LIQUIDITY
The Company had $43 million in cash and cash equivalents on hand at
September 30, 2003, down from $52 million at December 31, 2002. Apache's ratio
of current assets to current liabilities at September 30, 2003 was 1.05 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 September 30, 2003, Apache's available borrowing capacity under
its global credit facility was $1.2 billion.
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 increased our inventory of exploitation opportunities.
29
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.
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 September 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 87 percent of the Company's
debt. At September 30, 2003, total debt included $323 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 13 percent of its total debt
outstanding at September 30, 2003. The impact on cash flow of a 10 percent
change in the floating interest rate would be approximately $100,000 per
quarter.
On September 30, 2003, the Company had open natural gas derivative
positions with a fair value of $(22) million. A 10 percent change in natural gas
prices would change the fair value by plus or minus $38 million. The Company
also had open oil price swap positions with a fair value of $(12) million. A 10
percent change in oil prices would change the fair value by plus or minus $17
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.
30
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.
31
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
None
ITEM 5. OTHER INFORMATION
None
32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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 September 30, 2003:
Item 5 - Other Events - dated September 12, 2003, filed
September 18, 2003
Apache announced (i) an increase in the cash dividend on its
common stock to 12 cents per share from 10 cents per share and
(ii) a split of its common stock two-for-one, subject to
shareholder approval of an increase in the authorized number
of common shares.
Item 5 - Other Events - dated September 26, 2003, filed
September 30, 2003
In a series of related transactions on September 26, 2003, the
corporation repurchased and retired preferred interests issued
by three of its subsidiaries for approximately $444 million.
The transactions involved the purchase of preferred stock
issued by two of the corporation's subsidiaries for
approximately $82 million and the retirement of a limited
partnership interest in a partnership controlled by a
subsidiary of the corporation for approximately $362 million.
The amounts included $1 million for accrued dividends and
distributions.
33
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 14, 2003 /s/ Roger B. Plank
-------------------------------------
Roger B. Plank
Executive Vice President and
Chief Financial Officer
Dated: November 14, 2003 /s/ Thomas L. Mitchell
-------------------------------------
Thomas L. Mitchell
Vice President and Controller
(Chief Accounting Officer)
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
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.